Deep Value Investing During The Market Downturn—Royce
article 03-17-2020

Deep Value Investing During The Market Downturn

We asked PM Bill Hench how he and his team, which includes assistant portfolio managers Rob Kosowsky and Suzanne Franks and analyst Adam Mielnik, have been dealing with the recent tumult in the market.

TELL US
WHAT YOU
THINK

Have you and your team changed anything about your investment process during the current sell-off?

Our Deep Value process has intensified, but nothing has fundamentally changed. Even with our team members working from home, our schedule and practice remain the same. We meet every morning to review the entire portfolio in order to assess the valuations of current positions, sizing, and potential additions and subtractions.

Have you been doing anything differently in this environment?

I’d say that we’re doing things more intensively rather than differently. During times of extreme volatility such as what we’re now experiencing, we concentrate on setting up the portfolio to capture the most upside when the market recovers. Our current day-to-day process now includes more time spent on determining how to best position the portfolio for a recovery. We’re using cash from names that are close to fair value as the means to buy those that can provide better returns over the cycle, and we will not get defensive.

Our opportunistic Deep Value process has been in place for more than 20 years, and the team has experienced many extreme markets—such as the 2008 Financial Crisis. During severe (and less severe) downturns, we have successfully taken advantage of falling share prices to enhance long-term results.

What are your thoughts on how small-cap and large-cap will perform in the downturn?

Outside of the human tragedy, the overall impact on equities has been, and continues to be, indiscriminate selling. As in the past, we expect that small-caps may decline more than other areas of the market because small- and micro-caps have less liquidity. We also think that a recovery would likely first favor large-caps before then broadening to encompass the small-cap companies.

How have you been investing so far?

As always, we make changes—some significant—by reducing positions where we think upside may be modest or limited and increasing or adding new positions that can maximize returns. It is common for us to add new names that show promise for significant appreciation as a result of increased volatility.

As I mentioned above, we have a lot of experience in markets such as the one in which we now find ourselves. The kind of small- and micro-cap stocks that make up our portfolios have historically tended to fare poorly in extreme down markets. This is not just because of liquidity but also the fact that many of these names are turnarounds or are facing other short-term issues that give most other investors pause. But we work to take advantage of these situations. Many of the positions that we’re adding to are priced far lower than what we think is fair value, so we are using this time to increase the spread between what we are paying and what we suspect these companies will eventually sell for.

Nearly everything in the small-cap market looks cheap these days, so we examine companies on a name by name basis. We do not think in terms of sectors but have more of what we like in housing, technology, and healthcare but not much that interests us in retail, energy, or banks.

As difficult as the current period is—for reasons that go beyond the stock market obviously—we’re investing actively knowing that the situation, for all its uncertainties, is finite. And we’re trying to position the portfolio to enjoy a strong rebound when the markets recover.

 

ROYCE OPPORTUNITY FUND

 

Important Disclosure Information

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

  4Q191 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Opportunity 9.93 28.21 7.74 7.02 11.09 7.77 10.43 11.68 11/19/96
Russell 2000 9.94 25.52 8.59 8.23 11.83 7.92 7.59 8.47 N/A
Russell 2000 Value 8.49 22.39 4.77 6.99 10.56 6.92 9.41 9.41 N/A

Annual Operating Expenses: 1.20

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.

The thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce Investment Partners, and, of course, there can be no assurances with respect to future small-cap market performance.

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. All indexes referenced are unmanaged and capitalization-weighted. The Russell 2000 Index is an index of domestic small-cap stocks that 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.

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.

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