Brexit And U.K. Election Impacts For RYIPX—Royce
article 12-26-2019

Mark Rayner On Brexit And The U.K. Election

PM Mark Rayner discusses the U.K.’s recent election and how Brexit may impact our International Small-Cap Premier Quality Strategy.


What were your general impressions about the Conservative victory from an investment perspective?

I think the Conservative Party’s resounding victory on 12th December had two impacts from an investment perspective: Brexit looks now certain to happen on 31st January 2020, and the country managed to avoid installing a hard-left Labour government, which to my eyes promised some profoundly business unfriendly economic policies. Of course, it will take a long time to see what the exact economic impact of Brexit will be on the U.K., but in the short term there appear to be a key positive and a potential risk.

The positive is a short-term boost to economic activity. Recent data suggests an economy in pause. In fact, From August through October, GDP growth in the U.K. was precisely 0.0%. This macro data is supported by company meetings we’ve been having with U.K. management teams. We’ve sensed for some time that Brexit-bred uncertainties have been delaying and curtailing investment decisions. Their removal may therefore lead to a spurt in economic activity.

There are also risks. It has to be remembered that the Withdrawal Agreement describes the terms under which the U.K. leaves the European Union. In February, while the country will no longer be part of the EU, little will have actually changed as the U.K. will then be in a transition period in which the long-term relationship between the U.K. and the EU will be negotiated. This transition period is scheduled to end in December 2020, and Prime Minister Boris Johnson has ruled out its extension. So the possibility exists that the U.K. could leave in 2021 without a trade deal. In that case, the U.K. would trade with the EU under World Trade Organization (WTO) rules. In the intermediate term, then, we are not yet out of the woods.

Do you anticipate that this will alter the strategy’s weighting in U.K-based holdings?

It’s possible, because the U.K. looks to us like a fundamentally attractive country in which to invest. Indeed, there are more U.K. stocks than any other country in our database of investable international small-cap companies, which we’ve been building for more than a decade.

However, although we are very much bottom-up stock-pickers, we were mindful going into the election not to expose the strategy to what we deemed was excessive U.K. political risk. So despite the U.K.’s weighting in the strategy being second only to that of Japan, it’s fair to say that we’ve been cautious and somewhat underweight when set against the potential to invest in U.K. companies based on the strong fundamental opportunity set. As the political risks have diminished, we’ve begun to reevaluate the opportunities for many U.K. companies both in and out of our database.

“As the political risks have diminished, we’ve begun to reevaluate the opportunities for many U.K. companies both in and out of our database.” – Mark Rayner

Are there any areas of the U.K. market that now look more interesting to you?

Our answer on this may seem counterintuitive, but it’s a good reminder of how stocks make their way into the portfolio. Logically, if U.K. stocks look somewhat less risky in the aftermath of the election, then companies with a high percentage of their profits generated within the U.K. would seem to deserve the most attention from investors. However, such a top down view is really not the way that we run the strategy. We have an uncompromising quality standard that’s required for a company to be eligible for this portfolio. The potentially positive ramifications of the recent election would not cause a medium-quality company to become a high-quality one. So rather than adding more U.K. stocks, it’s more likely that we’d increase the weighting of selected high-quality U.K. stocks that we already own.




Important Disclosure Information

Average Annual Total Returns as of 9/30/19 (%) 

International Premier -4.12 16.39 1.86 9.86 9.03 7.09 12/31/10
MSCI ACWI x USA SC -1.19 10.28 -5.63 4.64 3.98 3.96 N/A

Annual Operating Expenses: Gross 1.59 Net 1.44 

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 2% 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 Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce & Associates has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.44% through April 30, 2020.

Mr. Rayner’s thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce & Associates, LP, and, of course, there can be no assurances with respect to future small-cap market performance.

The MSCI ACWI ex USA Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. Index returns include net reinvested dividends and/or interest income.

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. The Fund may invest a significant portion of its assets in foreign companies which may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. These risk factors may affect the prices of foreign securities issued by companies headquartered in developing countries more than those headquartered in developed countries. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of the securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of the securities of U.S. companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) The Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. The Fund also generally invests a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.)



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