Portfolio Manager Charlie Dreifus looks at Royce Special Equity Fund's first-quarter performance while discussing what contributed to its stronger performance.
Special Equity Fund's First Quarter
My Special Equity Fund for the first quarter of 2016 performed well, which was essentially a reversal of what happened in 2015 where it didn't work well.
In fact, 2015 was the worst year in that I can recollect in my investing career in that I declined more than the index declined. In my closing remarks to last year I said something to the effect that I thought it was an outlier.
It was a very narrow market last year. If you didn't own the very few stocks that did well, you did poorly, and your mistakes therefore were magnified.
Portfolio makeup
Starting in mid-February, of course, the market turned and we had greater interest in cyclical stocks, fears of the recession of a recession declined and oil advanced.
So, while cyclical stocks did well, not all cyclical stocks did well. Looking in my holdings of cyclical stocks and adding to the ones that I feel have underperformed and therefore have been underappreciated while not necessarily taking more exposure to the sector because I am reducing some that either have advanced a great deal or in the case of, for example, some distributors where the business model has been more challenged and I think I'd rather own the manufacturer than the distributor.
I have also increasingly been adding to and finding new names in furniture retailing and furniture manufacturing. I come to that bottom-up – as bullish as I may be about a market segment, if I can't justify it on my valuation and other criteria, I won't own it. These appear on that basis and they happen to have a macro background.
The background for the furniture industry is that more people are working; they are working more hours and they are starting to get paid more. So the discretionary income of the individuals plus obviously inflation still, as of now, is tame – energy prices, while up, are still down year over year. So the consumer has money to spend and housing overall should continue to improve.
One segment of housing that has particular impact on furniture companies is household formations, and we have seen a dramatic spike up in household formations, after a long period of decline. That has to do – again it ties back into the economy – recent college grads who were unable to find work and moved in with friends and/or their parents finally got work and I am sure their friends and parents are delighted that they've moved out.
So they have moved on to an apartment or whatever and the people who were residing in the place they've moved into have now moved elsewhere. It's the turnover – turnover causes purchasing of furniture so I feel, as long as the consumer is in good health, I feel that the outlook for that part of the economy looks pretty good.
Important Disclosure Information
he thoughts and opinions expressed in the video are solely those of the persons speaking as of April 12, 2016 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.
This material is not authorized for distribution unless preceded or accompanied by a currentprospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)
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