2019 Performance Update for RYSEX—Royce
article , video 02-05-2020

How A Changing Environment May Impact Our Small-Cap Special Equity Strategy

Charlie Dreifus details what factors made 2019 challenging and how 2020 may be different.


What factors made 2019 so challenging?

2019 was disappointing. Some of this disappointment came about by self-inflicted challenges, wounds. I had several stocks that disappointed, one of which, certainly in the top five, I sold, another one that I’ve been reducing. The remaining three, I have confidence in, and I think those were one-off issues.

We also suffered from a market that wasn’t our kind of market. It was a market that was P/E driven and driven by concepts and thoughts that really are alien to our process, more growth driven, so biotech and tech did well. Biotech, we have no exposure. Tech, we had modest exposure. We think in 2020 there’s a setup for that to redeem itself. And so we think the prospects looking ahead into this year are much more encouraging.

Why do you think that 2020 might be better?

2020, I think, will improve because of several things. First of all, we’ve seen some indication of this already starting late August into September. The yield curve became normal again. The U.S. dollar started flattening to declining. Commodity prices started firming. So there were many indicators plus economic data from around the world that suggested the economy probably had bottomed. 

You have the major economies of the world increasing spending. So I think it’s just going to be additive, and on top of supply constraints, if demand improves, we’re going to notice that some commodities are going to be in much tighter supply conditions, and price improvements are going to occur.

Which portfolio companies should benefit from this improved environment?

We have companies in the portfolio that should benefit in that kind of scenario, supply-constrained, demand-induced scenario. One example would be a company called Huntsman. It’s a chemical company that, for many years, was run by a gentleman named Jon Huntsman. He passed away and his son, Peter, took charge. And Peter has done a metamorphosis at the company, really turned it upside down. He has gotten rid of much of the commodity—which is known in the chemical industry as “upstream”—areas, products, and has concentrated on “downstream,” which is the value added, the specialty chemical products. And, in that, you have much higher margin business. It should be less prone to the big price swings.

Another one which we think has some of those characteristics is a company called Verso. It’s a paper company. They are largely in the specialty-paper and coated-paper business which coated paper goes to magazines. There’s improvement coming in those industries. We also have seen a lot of European coated-paper capacity shut down. That has evolved now to a situation of a much more balanced supply/demand situation.

So, again, with the economy improving, advertising spending improving, all of these things going on, I think the outlook for coated paper has improved and Verso would benefit. So we’re hopeful on names like Verso and Huntsman.




Important Disclosure Information

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

Special Equity 7.63 12.63 3.07 4.88 8.65 7.09 10.32 8.62 05/01/98
Russell 2000 9.94 25.52 8.59 8.23 11.83 7.92 7.59 9.57 N/A
Russell 2000 Value 8.49 22.39 4.77 6.99 10.56 6.92 9.41 7.80 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 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 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 Spcial  
Equity Fund

Huntsman Corporation


Verso Corporation Cl. A


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.

The Price-Earnings, or P/E, Ratio is calculated by dividing a company's share price by its trailing 12-month earnings-per-share (EPS).

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.

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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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