Can you provide a timeline of how you began to re-position Royce Value Plus Fund (RVP) to take advantage of the current economic environment?
We first recognized the need to reposition the Fund's portfolio around the end of the third quarter of 2010, which was the first quarter in which the Fund really underperformed its benchmark, the Russell 2000 Index. The first step in identifying the most significant issues involved examining the factors that were driving—or failing to drive—performance.
There were a series of issues that affected the entire second half of 2010 and continued into 2011. Coming out of the financial crisis, we invested heavily in special situations and turnarounds, seeing what we thought were a lot of attractive opportunities in banks, semiconductor companies and in natural gas businesses. When the market then began to rally following the March 2009 lows, these companies, while attractively valued, were still not attracting investors, who may have had shorter-term investment horizons. Although we were comfortable that many of the managements of these businesses had effective long-term plans, it was taking longer than we would like for the companies to rebound, especially those investments that didn't have the strongest fundamentals. Candidly, my stock selection, which had been a driver of performance in previous periods, did not produce the desired results.
In addition, between late 2008 and 2011 RVP had hardly any home runs or outsized performers due to companies being acquired or re-valued. As any small-cap manager knows, you'll get a few home runs and a few landmines in any given year, but that period seemed to be more lopsided toward landmines.
How did you begin to reposition the portfolio?
With the economy recovering slowly, the last several years have not seen an enormous number of great growth stories, but we drilled down and uncovered many smaller companies that were generating above-average growth that also looked like good fits for the portfolio.
We saw the need to rethink positioning in the last quarter of 2010. We also recognized that it would take time before the results would improve, probably three or four quarters at least. These moves didn't involve any major strategy change or abandonment of Royce's investment discipline. It was more a matter of modifying the existing process and repositioning the portfolio. We remain long-term investors, and the Fund remains a growth-oriented portfolio with an overlay of value, so it was more of a shift in emphasis away from turnarounds and toward stronger, higher-quality growth.
Continue reading.
We first recognized the need to reposition the Fund's portfolio around the end of the third quarter of 2010, which was the first quarter in which the Fund really underperformed its benchmark, the Russell 2000 Index. The first step in identifying the most significant issues involved examining the factors that were driving—or failing to drive—performance.
There were a series of issues that affected the entire second half of 2010 and continued into 2011. Coming out of the financial crisis, we invested heavily in special situations and turnarounds, seeing what we thought were a lot of attractive opportunities in banks, semiconductor companies and in natural gas businesses. When the market then began to rally following the March 2009 lows, these companies, while attractively valued, were still not attracting investors, who may have had shorter-term investment horizons. Although we were comfortable that many of the managements of these businesses had effective long-term plans, it was taking longer than we would like for the companies to rebound, especially those investments that didn't have the strongest fundamentals. Candidly, my stock selection, which had been a driver of performance in previous periods, did not produce the desired results.
In addition, between late 2008 and 2011 RVP had hardly any home runs or outsized performers due to companies being acquired or re-valued. As any small-cap manager knows, you'll get a few home runs and a few landmines in any given year, but that period seemed to be more lopsided toward landmines.
How did you begin to reposition the portfolio?
With the economy recovering slowly, the last several years have not seen an enormous number of great growth stories, but we drilled down and uncovered many smaller companies that were generating above-average growth that also looked like good fits for the portfolio.
We saw the need to rethink positioning in the last quarter of 2010. We also recognized that it would take time before the results would improve, probably three or four quarters at least. These moves didn't involve any major strategy change or abandonment of Royce's investment discipline. It was more a matter of modifying the existing process and repositioning the portfolio. We remain long-term investors, and the Fund remains a growth-oriented portfolio with an overlay of value, so it was more of a shift in emphasis away from turnarounds and toward stronger, higher-quality growth.
Continue reading.
