Deep Value Opportunities in Semiconductors—Royce
article , video 05-06-2019

PM Bill Hench on Opportunities for Royce’s Deep Value Strategy

Bill Hench details where he is finding opportunities in an uncertain economy.


How have you navigated the market over the past six months?

The first part of the last six months was very, very difficult. You had a market that started to discount what was going to be very good growth, about 3% probably, to looking at you know, probably a severe recession. For us, it was critical that we get a handle on that. Was it going to be that bad? And all the data that we had, all the company meetings that we had, didn't suggest a severe recession, especially that quickly. So we did what we normally do, which is we take advantage of those things that really are mispriced, get beat up the most, and in small- and micro-cap land, there's no shortage of things like that.

We sell those things that perhaps haven't worked out as well as we thought, and also those things that have worked out well but are pretty much closer to what we think is a normalized value. Take that money and really put it into things that we think are going to perform best when the market does turn.

And that liquidity that so hurts you on the way down becomes your friend on the way up. Fundamentals turned out to be a lot better than the outlook that had started to gain some steam in the end of the fourth quarter there about a recession. And in point of fact, things looked a little bit better, I think, than many had thought. So the portfolio did well.

In what areas did you thin out and add to the portfolio?

Some of the areas we thinned out: aerospace & defense and actually in auto and truck part components as well. On the, aerospace & defense side, things have been about as good as they've been in a long, long time, right? So you've had excellent private sector order books and you've had government spending or defense spending that's been extremely strong as well. Many of those stocks hit our target and as we always do, we pare them back when they get to what we think is a normal valuation.

Auto and truck parts stocks have done well but, our problem was more where could they go from here, right? The drop in auto sales and commercial vehicles that everybody thought would happen still hasn’t happened. So the cycle’s been extremely long, but we thought that was a really good place to take money off the table and put it to some other things that we liked, especially at the end of the fourth quarter.

We added in many, many different places. In some instances we were buying companies that we didn't have a position in at all. But I think the majority of things that we were doing was taking some of those names that we thought had great promise that were even more attractive after that selloff. A lot of semiconductors, a lot of semiconductor capital equipment, some infrastructure names, we thought very, very, beneficial at that point. Even some healthcare names, with the vast majority of those being in what we call ‘cost benders,’ or things that help bring down the cost of healthcare.

How do semiconductors and semiconductor capital equipment perform in this strategy?

The semiconductor & semiconductor capital equipment sectors for this strategy fit like a glove, right? They tend to do very well when people are excited about spending, and very poorly when people are concerned about it. It happens in real time, the news hits these stocks almost immediately.

They provide great opportunities for us because their statistics when they're down really are showing up as value names, but when people get excited when the order books start to grow they really perform as growth stocks. In this type of environment where the economy is still growing, these things, it would be very, very doubtful for these names not to do well in an environment where you have positive GDP growth.

“Semiconductors are everywhere, therefore if GDP’s got a plus sign on it, you're going to be hard-pressed not to find these things participating in a very, very positive way.” — Bill Hench

Semiconductors are everywhere, therefore if GDP’s got a plus sign on it, you're going to be hard-pressed not to find these things participating in a very, very positive way.

With the ongoing pace of growth uncertain, where are you finding opportunities?

Our strategy, really doesn't need huge economic growth to be successful. In our strategy, as you know, we tend to focus a lot on turnarounds and other companies that are having difficulties internally. So, it's still very possible and happens all the time, that our companies could do well in an environment that perhaps doesn't have a great, feeling about it, either because the economic data isn't what people thought or perhaps, the perception of the coming data is not going to be so good. So, we need a little bit of growth; we don’t need a lot of growth to be successful. And from everything we see, there's more than a little bit of growth out there for the next couple of quarters, at least.




Important Disclosure Information

Average Annual Total Returns as of 3/31/19 (%) 

Opportunity 14.31 -6.16 12.36 3.77 16.86 7.68 12.07 11.52 11/19/96
Russell 2000 14.58 2.05 12.92 7.05 15.36 8.04 8.44 8.32 N/A
Russell 2000 Value 11.93 0.17 10.86 5.59 14.12 7.24 9.40 9.14 N/A

Annual Operating Expenses: 1.18% 

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 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.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2019 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.

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 Index 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 Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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.

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. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)



Sign Up