Performance Review and Outlook for RYTRX—Royce
article , video 02-20-2020

Performance Review And Outlook For Total Return

PM Jay Kaplan recaps investors on how our Dividend Value Approach performed in 2019 and how 2020 may be better.


What factors made 2019 challenging for the strategy?

Total Return underperformed the Russell 2000 by a little, outperformed the Russell 2000 Value by a little, but it was a pretty big up year, and in a year where the indices are up north of 20%, and we’re also up north of 20%, that’s not a terrible outcome. Not perfect, but not a terrible outcome. So it was another year where small-cap growth led small-cap value. That’s been going on for about a decade. So we’ve seen that pretty much steadily, except in the fourth quarter of ’18. In the fourth quarter of ’18, we had a flip. Growth stocks did terribly. Value stocks did very well. We outperformed in that period. We had an opportunity for the first time in a long time to show people that the hypothesis we have is pretty solid, and that is we have pretty good downside protection, hopefully, when things don’t go so well.

But back to 2019, the biggest mover in the market was technology. Technology stocks went straight up. Not a lot of dividends there, so you’re going to find that we are underweight in technology most of the time, and that was pretty challenging. The market was afraid of a recession. The market moved away from cyclical stocks. We have a lot of cyclical exposure. That’s also a little bit tricky.

What are the indications that 2020 may be better?

In 2019, there’s no sign of a recession. In 2020, I still think that’s the case. The Fed, which had cut rates because they were afraid of a recession, they may have gotten that wrong and the market moved up and rallied on that, but they’re on hold now. And the yield curve which had been slightly inverted is now steep. So when you put that together, that can be really good for some of the areas that we focused on.

Number one, financials. Financials can do very well with that kind of yield curve. And, by the way, you know, when we say financials, people think it’s just banks, but it’s more than that. It’s banks. It’s insurance companies. It’s alternative asset managers. It’s stock exchanges all over the world. So very broad exposure, and that can do very, very well. Also, our industrial cyclical exposure we think can do very well if there is no recession and the economy keeps growing. Even if it grows slowly, as long as it grows, that’s a good tailwind for us.

Where are you finding value today?

One of the interesting out-of-favor areas that I am working on right now is the energy patch. Energy was by far, the worst-performing sector last year, and it’s a minefield. It really is. Prices have come down. Oil prices have come down some, but they’re trading within a reasonable range. Natural gas prices are very, very low. So companies with a focus on natural gas, that’s a problem. In small-cap energy, you have a lot of bad balance sheets. A lot of the high-yield world is small-cap energy companies. So we found some companies where the balance sheets are good. The focus is a little bit more on oil than gas, and if oil prices stay in the neighborhood where they’re trading, we can make some money, because the companies are profitable, business is fine. Balance sheets are fine, but the valuations are very, very low, and I think there’s really good upside.




Important Disclosure Information

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

Total Return 6.81 23.45 7.09 7.49 10.36 7.49 9.45 10.48 12/15/93
Russell 2000 9.94 25.52 8.59 8.23 11.83 7.92 7.59 9.03 N/A
Russell 2000 Value 8.49 22.39 4.77 6.99 10.56 6.92 9.41 9.78 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 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, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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.

There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

Cyclical and Defensive are defined as follows: Cyclical: Communication Services, Consumer Discretionary, Energy, Financials, Industrials, Information Technology, and Materials. Defensive: Consumer Staples, Health Care, Real Estate, Utilities.

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.

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.

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