Performance Update for RIPNX—Royce
article , video 02-04-2020

2019 Review & Outlook For Our International Premier Quality Strategy

PM Mark Rayner on what worked and what didn’t for our international approach, and where he’s been finding opportunities.


Steve Lipper: International Premier Strategy really had a terrific year in 2019. Why don’t you walk us through what contributed to the success?

Mark Rayner: We were very pleased with the absolute returns. I think the first thing to say it was a very good year for international smaller companies as an asset class. I mean, the index was up over 20% in the year. So if you’re a stock picker, that’s a very good platform on which to be picking stocks. But we still managed to outperform the index. That is, I think, testament to the philosophy and process which we employ, which is, you know, we like companies with high returns on invested capital, compounders.

In terms of country, the most important, in terms of contribution, was Japan. Probably not surprising because from the Fund’s point of view, it’s one of the most important markets. We find a lot of interesting companies there, and often, actually, at valuations which are better than the ones that we find in Europe. 


If we look at industry, it was actually professional services. If you think about it, these are companies which are providing low-cost, high-value services to their clients, which, if they’re well managed, should lead to, you know, healthy double-digit operating margins. And then if you ally that with a naturally small balance sheet, these are inherently high-ROIC companies.

On a stock basis, it was actually a Brazilian ERP software company, which provides software to SMEs in Brazil. We’ve had to be patient on it. The share price had suffered for a while because they’re changing their business model slightly from selling perpetual licenses, where you get the money up front, to a subscription-based model. Now, to our mind, that improves the business model because it increases the customer captivity and the lifetime revenues from those customers. But during that transition, it can be quite painful for margins. So we had to be patient, but when those margins started to improve again, the stock responded very favorably—I think helped a little bit by also an improvement in the Brazilian economy.

SL: Even in a great year, not everything can work out. What were the factors that detracted from performance?

MR: On a country basis, the only country actually we lost money in last year was India, though I have to say that was relatively constrained because India, in terms of the strategy, is less important when you compare it, for example, with Japan. So I think only 2% of the fund was in India last year. So although we made some losses, they were relatively small.

On an industry basis, it was construction & engineering. There was a particular stock, a Swiss stock, which provides engineering services to clients in the field of electrical installations. They had some new entry into their market which, to be honest, we hadn’t expected, and that put some pressure on margins and that hit earnings, and that was our poor performer in that industry.


And on a stock basis, it was a U.K. company called Consult Medical, which is actually a very good business. What they do is they manufacture drug-delivery devices, things like inhaler for asthma. The problem with that business, which we didn’t identify at the outset, was they had a relatively narrow product range and a relatively narrow customer profile. So when some of those customers delayed some product launches, that hit earnings, and it hit the share price. So we, unfortunately, lost patience, and a couple of months later were able to watch the stock of the company getting taken over. So it was a valuable lesson in terms of original analysis, and also the value of patience in small-cap stock picking.

SL: Where are the areas that you’re finding most interesting in terms of adding to the portfolio?

MR: It’s always important to say that we are process-driven stock pickers. So if you see any clustering of companies in terms of industry or in terms of country, that’s really from a bottom-up process.

But having said that, there were some interesting things that happened, I think, in 2019. Take, for example, the autos industry. The global auto demand has been weak for a couple of years. Now, we don’t invest directly in auto companies. But we do have companies with a certain exposure to the auto market, companies that maybe have 15 or 20% of their sales. The stock market tends to look at those in certain periods as auto companies. If the auto component is weak in those revenues, the share price gets driven by that bad news. So we took the opportunity to look at the robustness of the business model long term, and we topped up on some of those weak share prices in the autos area.

A country that we find increasingly interesting, actually, is Sweden. It’s beginning, in our view, to rank with Switzerland as the most interesting small-cap market in the world on a per-capita basis. The currency is also quite interesting because we’re dollar investors, and the Swedish krona has been one of the weakest developed-market currencies over the last three, four, five years. So if we’re buying in dollars into a weak, local currency, that’s also good news for us.




Important Disclosure Information

Average Annual Total Returns as of 12/31/19 (%) 

International Premier 15.33 34.22 17.86 13.49 8.59 12/31/10
MSCI ACWI x USA SC 11.01 22.42 9.65 7.04 5.06 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.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of January 13, 2020 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.

Percentage of Fund Holdings As of 12/31/2019 (%)

  Royce International
Premier Fund

Consult Medical


Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

Return on Invested Capital is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock).

Operating Margin is a simple weighted average of each security’s operating income divided by its sales.

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.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

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. 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. 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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