Royce's Golden Anniversary: Celebrating 50 years of Small-Cap Excellence

As we celebrate five decades of small-cap investing, we invite you to join us as we look back at some of the major events that took place over the last half century.

1979

1979: The Death of Equities?


Last updated January 24, 2023

“Although it was clear by the early 1980s that equities of all sizes were alive and well, recognition of the success enjoyed by risk-conscious small-cap approaches would proceed at a slower pace.”

Even the savviest market observers can be forgiven for believing that stocks, if not dead, were rapidly losing ground to other investment options at the time this piece was originally written.

Even otherwise very intelligent people occasionally get things wildly wrong. However, those who may be counted (or count themselves) among the cerebral elite usually don’t have to worry about their mistaken observations winding up on the cover of a major U.S. news weekly—which then goes on to compete with “Dewey Defeats Truman” as one of the most obvious things-gotten-wrong that journalism has ever witnessed. Just such an instance took place less than a decade into our firm’s existence—and we still breathe an occasional, collective sigh of relief that we were uninvolved. To be sure, the annals of investing offer only a small handful of happenings that match or exceed the sheer folly of Business Week’s now legendary cover story from August 1979—which proclaimed with a confidence bordering, in retrospect, like a summer’s worth of overheated hubris that we were witnessing “The Death of Equities: How inflation is destroying the stock market.” To paraphrase Mark Twain, reports of the stock market’s death proved to be an exaggeration—and then some.

Yet even the savviest of market observers might be forgiven for believing that stocks, if not dead, were rapidly losing ground to other investment options by the time the piece was originally written. For example, the S&P 500—then as now often seen as a proxy for market as a whole—had average annualized returns for the 3- and 5-year periods ended 12/31/78 of 7.0% and 4.4%, respectively. In addition, as the article emphasizes, inflation was running high, and smaller investors were abandoning stocks in droves, in large part because equity investments may not be able to keep pace with cost-of-living increases. This may help to explain why younger investors in particular were apparently not interested in equities. The piece concludes with the following nugget: “Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared. Says a young U.S. executive: “Have you been to an American stockholders’ meeting lately? They’re all old fogies. The stock market is just not where the action’s at.”

There was action in one place not mentioned in the piece, though the asset class may have been at the back of its author’s mind when he wrote, “Unfortunately, hyper-growth stocks are not big enough to attract big institutional money.” Of course, we were not investing in hyper-growth stocks in the late 1970s, though the majority of our holdings were small. And the average annualized returns for what was then Pennsylvania Mutual Fund for the 3- and 5-year periods ended 12/31/78 were 29.0% and 20.7% respectively.

Equities as a whole also began to recover soon enough. While the S&P 500 rose only 6.6% in 1978, it did better 1979, advancing 12.4%. While still not as lofty as Penn’s 25.6% gain in 1979, it was clear by the early 1980s that equities of all sizes were alive in well. Recognition of the success enjoyed by risk-conscious small-cap approaches, however, would proceed at a slower pace…

You can read the original Business Week piece here.




1976

1976: The Bicentennial Year Sees Early Attention on Our Flagship Portfolio

“I used to chase all the hot stories, but now I’m chasing financial health… I’ll miss a lot of the big winners, but I’ll stay out of hot water.”
—Chuck Royce

As the U.S. celebrates its 200th birthday, the aftermath of the “Nifty Fifty” decline sees strong returns for stocks—and a certain small-cap stock portfolio.

The three years leading up to the U.S. bicentennial in 1976 were among the most challenging and eventful in our nation’s history, marked by a series of major events, including the Watergate hearings, the end of the Vietnam War, runaway inflation, the OPEC oil embargo of 1973, President Nixon’s resignation, and the unfortunate advent of stagflation—that highly unpleasant combination of contracting economic growth, rising unemployment, and higher prices. Largely fueled by the energy crisis—which saw oil prices increase 350% in 1973, the inflation rate doubled in that same years before reaching double digits in 1974. The U.S. economy was in recession from November 1973 until March 1975, a span that included five consecutive quarters of negative GDP growth.

The stock market was no exception to these grim developments and experienced back‐to‐back negative returns in 1973 –74, followed by a rebound in 1975. Much of the market in these years was driven by the rise and fall of what was known as the “Nifty Fifty.” This was a group of companies that many investors and market observers thought of as the highest-quality and fastest-growing businesses in the country—an assessment borne out by generally excellent results from the late 1960s into the early ‘70s. Among this select few were such stalwarts of the era as AT&T, Eastman Kodak, Exxon, General Motors, and IBM—which together accounted for about 25% of the U.S. stock market at their peak. Most were leaders in their respective fields and tended to have strong balance sheets, high profit rates, and double‐digit growth rates. Yet they were not immune from the effects of the destructive forces that were then plaguing the U.S. economy.

Chuck was among the many professional investors sent reeling from the tumult. Upon first taking the reigns of what was then called Pennsylvania Mutual Fund (“Penn”), he did not see himself as a value investor—or one primarily concerned with risk or underlying company quality. But the Fund fell 48.5% in 1973 and 46.0% in 1974 as its assets plunged from $6.9 million when Chuck took over in November 1972 to just $1.6 million at the end of 1974. As is often the case with ultimately successful investors, then, it took the painful experience of losing money to help shape his investment outlook. As he told New York magazine in 1977, “I used to chase all the hot stories, but now I’m chasing financial health… I’ll miss a lot of the big winners, but I’ll stay out of hot water.” He uncovered most of these financially healthy companies within the small-cap space. The reorientation of his approach, which at the time included a focus on a company’s cash flows and returns on equity, helped him to engineer a remarkable turnaround as Penn gained 121.1% in 1975 and 49.0% in 1976. While these impressive performances did not immediately create much institutional interest in either small-cap stocks or risk-averse investing, they did garner early notice for this approach. As Chuck noted in the same interview, “Others are joining us… and I think the trend will last for many years.” He was probably not thinking about 50 years at the time.




1972

1972: A New Manager Takes the Helm of Pennsylvania Mutual Fund

“In 1972, few investors were thinking about small-cap as an asset class where one could find companies that boasted rock solid fundamentals and strong long-term growth potential that were trading at attractive valuations.”

A year that saw the Watergate break-in, terrorist attacks at the Munich Olympics, and the Dow passing 1,000 also saw Chuck Royce take on sole portfolio management responsibilities for what is now Royce Pennsylvania Mutual Fund.

By any measure, 1972 was an eventful year. It began on a mostly positive note when in February President Richard Nixon visited Mao Zedong in Beijing, China, setting the two countries on a course toward normalized relations in what was described at the time as “the week that changed the world.” Following this momentous meeting, the USSR and 70 other countries agreed in April to ban biological weapons. Additional positive developments followed throughout the year. For example, the Senate ratified the Anti-Ballistic Missile Treaty with the Soviet Union, limiting the use of missile systems that could defend against nuclear weapons. However, darker events also occurred. In May, a break-in at the Democratic National Headquarters at Watergate Complex in Washington, D.C. would soon snowball into a political scandal ultimately spelling the end of the Nixon presidency. Later in the year, amid the triumphs of U.S. swimmer Mark Spitz and Soviet gymnast Olga Korbut in Munich, the Olympic Games were rocked by the horrific kidnapping and subsequent deaths of 11 Israeli athletes by Black September, an affiliate of the Palestine Liberation Organization. Five of the eight terrorists were also killed, along with a West German police officer.

The stock market experienced a far less tumultuous path. The S&P 500 rose 18.8% in 1972, while the Dow Jones Industrial Average surpassed 1,000 in November 1972, a milestone that came 76 years after the index’s inception in 1896. In that same month, a young analyst named Chuck Royce took on sole portfolio management responsibilities for an open-end mutual fund that was then called Pennsylvania Mutual Fund. Chuck started his Wall Street career as an equity analyst in the 1960s, and while he had studied with value investing guru David Dodd at Columbia Business School, he was not initially the valuation sensitive, risk averse investor he became. That orientation would come later. The market he entered as sole manager of our firm’s flagship portfolio was dominated by the “Nifty Fifty,” a group of large, mostly multinational firms that many perceived as the safest and surest route to growth. Few investors were thinking about small-cap as an asset class where one could find companies that boasted rock solid fundamentals and strong long-term growth potential that were trading at attractive valuations. In Chuck’s own case, that approach would emerge in the aftermath of the Nifty Fifty’s precipitous decline in 1973–74. Through that challenging and difficult period, the painful experience of losing money led him to evolve his investment outlook into what it has become today.

More articles coming soon

Important Disclosure Information

Average Annual Total Returns as of 12/31/2022 (%)

  QTD1 1YR 3YR 5YR 10YR 45YR DATE ANNUAL
OPERATING EXPENSES
NET               GROSS
Pennsylvania Mutual 10.24 -17.06 4.91 5.71 8.73 12.18 N/A  0.92  0.92
Russell 2000
6.23 -20.44 3.10 4.13 9.01 N/A N/A  N/A  N/A
1 Not annualized.


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.royceinvest.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 and other expenses.

Mr. Royce’s thoughts and opinions concerning the stock market are solely his own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.

Percentage of Fund Holdings As of 12/31/22 (%)

  Pennsylvania Mutual

AT&T

0.0

Eastman Kodak

0.0

Exxon

0.0

General Motors

0.0

IBM

0.0

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.

The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor’s based on market size, liquidity, and industry grouping, among other factors, and includes reinvested dividends. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. The Dow Jones Industrial Average, often referred to as “the Dow,” is a stock market index of 30 prominent companies listed on U.S. stock exchanges. Sector weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor’s based on market size, liquidity, and industry grouping, among other factors, and includes reinvested dividends. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money.

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