How did you manage Royce Premier Fund during the decline?
We absolutely took advantage of the price declines that took place over the last three months—that would be something we would always attempt to do. So we invested our cash. Our cash had gotten up to 9% in September, and we took it down to virtually zero. We ended up the year at 2%, but basically we were hard at work adding to existing positions and adding a few new names.
Watch the video here.
What existing positions did you add to?
We added to Kennedy Wilson, a great sort of real estate conglomerate, developer that we’ve had high success with for a long time. We have high confidence in it. We took advantage of its price coming down.
We added to Medidata (MDSO, Financial), which is a service company, a software company in the clinical trial space that has a great record. There had been some mild concerns about growth, and we took advantage of that. We also added to Manhattan Associates (MANH, Financial), which is a company helping retailers solve the Amazon problem.
What new holdings did you add?
Coherent. Coherent (COHR, Financial) is a market leader in display technologies. We’re all familiar with displays in our mobile phone, in TVs and everything. They have been a market leader. They are in high margins. This is a wonderful company that we’ve owned in other accounts for some time, and we think the timing is excellent. We’re taking advantage of the sort of disappointments at the moment as to where they are in their normal cyclical process. Lasers are growing at a very high rate in many, many areas and some of the areas that they serve. Perhaps we’ll have a double total addressable market in the next three or four years.
LCI (LCII, Financial) is a fantastic company in the component space in the RV industry in the mobile world, mobile home world. They have acquired many, many smaller companies. They have maintained very high returns on investment, and it is I think almost an ideal way to play this evolving leisure activity.
What’s causing the opportunity to add these stocks?
It’s usually disappointment. It’s certainly the market but usually a specific disappointment over some aspect of what’s going on. When I look at what happens after a decline, high quality doesn’t do the best out of the bottom, but it does well enough, and over the long term it does extraordinary well. We love the compounding effect of these high-quality companies. In the case of mobile homes, there are declining sales at the moment for the OEM end of things, which does back up and affect component manufacturing of course. In the case of Coherent, it is a similar activity with cyclical declines. So we want to take advantage of those kinds of moments.
These are perfect examples of something we hold near and dear: time arbitrage. We have the ability, because we’re long-term investors, to look out. When the market is focused on the short term, we want to double down on looking at the long term.
What’s your perspective on High Quality in this market environment going forward?
We think high quality is often an investment strategy for active managers. We would put ourselves in that bias, and we think we’re entering into a period where active management will do very well. We have higher rates. We have higher volatility. We have lower stock market returns. This is virtually the ideal environment.
Important Disclosure Information
All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.roycefunds.com. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.
The thoughts and opinions expressed in the video are solely those of the persons speaking as of January 9, 2018 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.
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.
