Can you tell us how Royce approaches developing investment talent?
Investment talent is the life blood of our business and a distinguishing characteristic of our firm. While we have a large and deeply experienced team of investment professionals, the effective development and recruitment of investment talent is vital to sustaining superior long-term investment results. It really is the quintessential competence measure of investment management firms. Our own approach to these matters is grounded in several key principles: our investment culture, which is crucial; our long-term focus; our thoughtful and methodical approach to all we do; an ethos of constant improvement in our capabilities; and the need to expect surprises.
How do these priorities manifest in your actions?
Francis Gannon, my Co-CIO, and I look at each product and strategy on a periodic basis to evaluate how best to optimize the investment performance of our teams. We think about the potential need for increased resources and/or succession planning. When appropriate, we develop plans to increase responsibilities for certain investment team members as we identify the competencies we think will complement those specific teams. We are always mindful of maintaining a deep and strong bench in order to have the capability to react to opportunities or unexpected events very quickly.
Why is the topic of investment talent particularly relevant now?
There are two reasons: First, each year on May 1st we update our open-end fund prospectuses—which is when we typically announce any adjustments to our portfolio management team. We have several portfolio manager elevations that we're announcing that have all been planned for some time. Second, the recent departure of members of an investment team has led clients and consultants to ask us about our process for managing investment talent and ensuring appropriate continuity.
Can you first talk about the changes to Royce Total Return Fund's portfolio management team?
Portfolio Manager Miles Lewis, CFA®, who joined Royce a year ago with the express purpose of ultimately leading our dividend-oriented strategies, becomes Royce Total Return Fund's lead portfolio manager effective on May 1, 2021 while Chuck Royce (Trades, Portfolio) becomes portfolio manager on the Fund. Miles came to Royce from American Century having demonstrated his expertise and proven investment capability managing a small-cap value approach that emphasized quality businesses—attributes closely aligned with those of the Total Return Fund.
Was this part of the plan when Royce hired Miles?
Absolutely. Miles assuming the lead role on the portfolio was part of a plan that we first envisioned when he joined Royce in May 2020. Chuck will remain involved to offer Miles his investment perspective and expertise, but Miles now leads the strategy. The two of them have worked closely together over the last year, and we are highly confident in his ability to drive strong investment outcomes in this unique discipline.
Is the Fund's process or approach changing?
Miles and Chuck have refined, rather than changed, our existing small-cap dividend process, which dates back to an institutional product we first managed in the late 1970s. The focus remains on finding high-quality, undervalued, dividend-paying small caps, with the intention of delivering a distinctively low volatility risk profile among small cap strategies, one that's well suited to investors with a lower risk tolerance or who may be in the withdrawal stage of their investment lifecycle. So while the process has evolved, it remains deeply rooted in the same fundamental principles that have driven its past success.
Aside from Miles becoming the lead portfolio manager, is anything else changing?
The biggest change is a reduction in the number of stocks, which has gone from a range of 190-290 over the past few years to a range of 100-130 going forward—the Fund held 107 positions at the end of March. There's also been an even greater sensitivity to valuation, with the goal that the Fund be classified and evaluated as a small-cap value strategy. As part of this refinement, the Russell 2000 Value Index is now the Fund's primary benchmark, consistent with the portfolio's value orientation.
What can you tell us about the changes to Royce International Premier's team?
We're equally excited about this evolution. Mark Rayner, CA, who's been the Fund's portfolio manager since 2016, becomes lead portfolio manager while Portfolio Manager Mark Fischer joins him as portfolio manager on the fund. The latter Mark joined Royce in 2020 and has very quickly demonstrated an in-depth understanding and ability to execute on our highly disciplined, quality-oriented approach to investing in international small caps. We're also very pleased that senior analyst Yutetsu Ametani, who joined Royce on 4/12/21, will be working with them with specific focus on the Japanese market and the Asian region generally. Like Mark Rayner, Yutetsu is based in London.
Are there also changes to the management team for Royce Pennsylvania Mutual Fund?
Yes—we elevated Andrew Palen from assistant portfolio manager to portfolio manager on the Fund. Andrew, who's worked on Penn since 2018, joins Lead Portfolio Manager Chuck Royce (Trades, Portfolio), and Portfolio Managers Jay Kaplan, Lauren Romeo, Steven McBoyle, and Miles Lewis. Jim Stoeffel assists the team. Like Mark Fischer, Andrew is a great example of someone who joined Royce as an analyst, impressed us with his work, was elevated to assistant portfolio manager a few years ago, and is now a portfolio manager. He has already made strong contributions, and we are very excited about his increased involvement.
Is Chuck's role at the firm or on any other strategies changing?
No – they are not. Chuck remains very actively involved in portfolio management. He is still the lead PM on two of our biggest portfolios—Royce Pennsylvania Mutual and Premier Funds—as well as leading the portfolio management of our three closed-end funds.
Do you have any other thoughts on the importance of developing investment talent?
Just to say how pleased I am that we've been able to actively recruit investment talent over the past year despite being largely in a work from home environment. We've hired five investment professionals at different levels of experience since May of 2020 and are recruiting others. We have found over the years that Royce's reputation as a respected small-cap specialist has earned us enthusiastic responses from candidates. Talented and experienced investors want to work at Royce, and we will continue to resource our strategies to ensure we drive the best possible outcomes for our clients.
Can you comment on the recent change to the Opportunity Fund management team?
This change was a prime example of how important it is to develop a deep and talented investment bench. At some point, you need to respond quickly to negative surprises. While the departure of the previous investment team was sudden and unexpected, arguably the most important member of the team remained at Royce—Buzz Zaino. Buzz was the architect of the strategy and successfully managed it for decades prior to taking a step back late in 2018 and becoming a senior adviser. Joining him on the team are three deeply experienced portfolio managers: Jim Stoeffel, Brendan Hartman, and Jim Harvey. They are all seasoned professionals, and we have the utmost confidence in their capabilities to manage this highly process-oriented investment discipline.
Mr. Clark's thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.
The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.
