Fund performance
Royce Global Value Fund was up 2.5% in 2015, outperforming its benchmark, the Russell Global Small Cap Index, which was down 1.8% for the same period. The Fund gained 7.7% for the year-to-date period ended June 30, 2015, outpacing its benchmark, which gained 6.4% for the same period. The Fund then held up fairly well in the correction that rocked markets in the third quarter, losing 9.3% versus a decline of 11.6% for its benchmark. In the year’s final quarter, Global Value advanced 4.9% compared to an increase of 4.4% for the Russell Global Small Cap. The Fund also outperformed its benchmark since inception (Dec. 29, 2006) for the period ended Dec. 31, 2015.
What worked … and what didn't
Six of the Fund’s nine equity sectors finished 2015 in positive territory. The biggest net contributions came from Health Care, Financials and Industrials. Net losses at the sector level were decidedly modest and came from Materials, Energy and Consumer Discretionary. At the industry level, the capital markets group (from Financials) led by a considerable margin, followed by textiles, apparel and luxury goods (in Consumer Discretionary) and health care equipment and supplies.
Net losses came from multiline retail (also in Consumer Discretionary) and machinery (in Industrials). Global Value’s leading detractor at the position level came from the multiline retail group — Chinese retailer New World Department Store China (HKSE:0825), whose business has suffered with the deceleration of the mainland economy. Brazil’s Totvs (BSP:TOTS3), which supplies enterprise resource planning (ERP) software, bucked the trend of that nation’s economic and political challenges by exploiting its coveted brand and 70% market share to execute in Brazil’s fledgling software market, where only 13% of IT spending goes to software (compared to 26% in the U.S.). However, foreign currency posed a challenge for us as unhedged investors as the Brazilian real lost 47% of its value against the U.S. dollar in 2015, overwhelming the company’s more modest 13% share-price decline in local currency.
Value Partners (Trades, Portfolio) Group (HKSE:00806, Financial) is a Hong Kong-based firm that has focused on Asian markets for more than two decades. Its shares often closely parallel movements in the Hong Kong and Shanghai markets. Each climbed precipitously into May before cooling off with the bear market for Chinese stocks. Increasingly discouraging news out of China led us to take gains and reduce our position considerably between January and July, which helped it keep its place as the Fund’s best performer in 2015 in spite of a steep correction for its shares in the second half of the year. (We began to slowly add shares in the second half.) The share price of Swiss financial advisory business VZ Holding (XSWX:VZN) rose through most of the year. VZ exceeded earnings estimates twice in 2015, extending a record of profitable growth going back 14 years to its founding. The company’s ability to drive growth via recurring revenues and substantial barriers to entry — bundled in a highly profitable and relatively low-risk structure —exemplifies the qualities we seek in all of our holdings.
Top contributors to performance for 2015 (%)
- Value Partners (Trades, Portfolio) Group (0806) 1.25%.
- VZ Holding 0.70%.
- AVEVA Group (AVV, Financial) 0.54%.
- HellermannTyton Group (LSE:HTY, Financial) 0.52%.
- Nokian Renkaat (OHEL:NRE1V, Financial) 0.47%.
Top detractors from performance for 2015 (%)
- New World Department Store China -1.05%.
- Totvs -0.56%.
- Anixter International (AXE) -0.38%.
- Minerals Technologies (MTX) -0.32%.
- Rotork (ROR) -0.28%.
Current positioning and outlook
We have high confidence in our holdings given their prospects to grow acyclically, generate cash, self-fund and maintain or improve market share. Further, the countries on which our strategy focuses — the U.K., Japan, Switzerland and other European nations north of the Alps — have a high concentration of what we see as well-managed, high-quality businesses with ample room for growth. Valuations remain attractive to us in large part because many non-U.S. stocks underperformed over much of the last five years. We also see currency as a positive. So while U.S. dollar strength has created a performance headwind, U.S. dollar-based investors have substantially more purchasing power than they did when we launched the Fund five years ago because, unlike some of our peers, we do not hedge currency. At year end we had greater exposure to the U.K., Switzerland, Germany and France while at the sector level we had larger weightings in Industrials, Information Technology and Health Care.
