FUND PERFORMANCE
Royce 100 Fund was down 0.1% for the year-to-date period ended June 30, 2015, trailing its smallcap benchmark, the Russell 2000 Index, which gained 4.8% for the same period.
The Fund’s difficulties began with the new year—it uncharacteristically lost more than its benchmark during the bearish January. As the first quarter moved on and share prices began to recover, the Fund was unable to keep pace with the small-cap index in large part because of the more growthoriented nature of small-cap leadership. For the first quarter 100 Fund was up 0.5% compared to a 4.3% gain for the Russell 2000.
Small-cap share prices then retreated somewhat in April, and we were pleased to see the Fund hold its value more effectively than the small-cap index, if only briefly. When the markets rebounded, however, the Fund fell back. Royce 100 Fund was down 0.6% for the second quarter while the Russell 2000 gained 0.4%. It took only one day—the second-to-last of June—for the Fund’s quarterly gain to disappear into negative territory. Needless to say, it was a frustrating quarter. Royce 100 Fund outperformed the Russell 2000 for the 10-year period ended June 30, 2015. The Fund’s average annual total return since inception (6/30/03) was 10.1%.
WHAT WORKED… AND WHAT DIDN’T
While Health Care led all of the portfolio’s sectors by a wide margin in the first half, it did so within small-cap to an even larger degree. This was the primary factor in the Fund’s first-half underperformance versus the Russell 2000. Results for the small-cap index were driven overwhelmingly by biotech stocks, an area to which the portfolio had no exposure (and has had little if any historically). These businesses, attractive as they have been to other investors over the last couple of years, generally lack the solid fundamentals and sturdy earnings profiles that we seek for our holdings. Two of the sector’s names were among the portfolio’s best performers. Bio-Rad Laboratories (BIO, Financial), which provides life science research products, clinical diagnostics, and analytical instrumentation, experienced margin improvement, which aided its profitability. Lannett Company (LCI, Financial) is a generic drug manufacturer that continued to exceed expectations in large part due to aggressive pricing and limited competition on certain key drugs.
ManpowerGroup (MAN, Financial) was the Fund’s top contributor. Its shares climbed on signs of a pickup in demand for temporary staffing in Europe, its largest revenue geography, coupled with solid growth from its high-margin permanent placement activities. The firm also signaled optimism by raising its dividend by 63% and announced two staffing acquisitions that expanded or solidified its status in Europe and the Australasia region. Cal-Maine Foods (CALM, Financial), the nation’s largest producer and distributor of eggs, benefited from a robust market for lower-cost proteins, greater numbers of quick-service restaurants serving breakfast, and low grain prices, a key input for egg production. In addition, supply was meaningfully limited by an outbreak of bird flu in the Midwest, which led to a sharp increase in price.
The Consumer Discretionary sector detracted most from firsthalf results, with modest net losses also coming from Energy and Materials. Within the first of these, the most significant declines came from the specialty retail and diversified consumer services groups. Tax preparation business Liberty Tax disappointed investors, including ourselves, as the firm failed to open as many new offices as had been expected and overestimated the amount of incremental volume the Affordable Care Act and its associated tax filings would add to its business. We finished selling our shares in June. Specialty retailer Genesco (GCO, Financial) struggled to turn things around for its Lids licensed sports cap and Lids Locker Room licensed sports apparel businesses, which depressed profitability and overshadowed excellent results from one of its other brands, teen retailer Journey. Ongoing margin pressure from both Lids franchises makes it unlikely that Genesco gets out of the penalty box in the near term, but we like its longer-term potential to get back in the game.
The stock of long-time holding Unit Corporation (UNT, Financial) first began to suffer in the second half of last year when oil prices plummeted. Unit, which is involved in several energy businesses, including oil and natural gas exploration, oil and gas property acquisition, contract drilling services, and natural gas processing, saw its shares fall further in the first half of 2015 as the energy industry has not yet recovered. The company has executed effectively through this difficult period, primarily by cutting costs and boosting efficiency. In addition, its newly introduced drilling rig received a warm welcome from the market, which should enhance the firm’s competitiveness in that end of its business.
Top Contributors to Performance:
- ManpowerGroup (MAN, Financial)
- Cal-Maine Foods (CALM, Financial)
- Orbotech (ORBK, Financial)
- Bio-Rad Laboratories Cl. A (BIO, Financial)
- Lannett Company (LCI, Financial)
Top Detractors from Performance:
- Unit Corporation (UNT, Financial)
- Liberty Tax (TAX, Financial)
- Genesco (GCO, Financial)
- Oil States International (OIS, Financial)
- Greif Cl. A (GEF, Financial)
CURRENT POSITIONING AND OUTLOOK
After stalling briefly in the first quarter, the economy appears to have resumed its steady pace of growth. This should benefit small-caps as a whole, particularly those in more economically sensitive areas of the market such as Industrials and Materials—the Fund was overweight in both at the end of June. Against this backdrop, our focus remains on companies that we believe are poised for profit margin expansion as their revenue growth normalizes in concert with a faster-moving U.S. economy.
