RIPNX 1Q20 Update & Outlook—Royce
article 05-05-2020

International Premier Quality—An Update and Outlook

We recently asked Portfolio Manager Mark Rayner for an update and his latest outlook for our International Small-Cap Premier Quality Strategy.


How did the International Small-Cap Premier Quality Strategy perform in 1Q20?

Royce International Premier, the mutual fund that we manage in the Strategy, fell 23.8% in the first quarter. It held up better than its international small-cap benchmark, the MSCI ACWI ex-USA Small Cap Index, which declined 29.0% for the same period. We were pleased that the Fund’s ability to better preserve capital in the tumultuous bear market also helped it to keep its performance advantage over the benchmark. The Fund beat the international small-cap index for the one-, three-, five-year, and since inception (12/31/10) periods ended 31st March.

However, each of the nine equity sectors in which the portfolio held investments made a negative impact on first-quarter results. Industrials, the Fund’s largest sector, detracted by far the most—more than three times the negative effect of Information Technology, which followed in second place. The Real Estate and Consumer Discretionary sectors detracted least for the quarter.

What were the sources of the portfolio’s outperformance in 1Q20?

Relative to the MSCI ACWI ex-USA Small Cap, the portfolio benefited from both stock selection and sector allocation, with the former having the bigger positive effect. On the sector level, our stock selection in Financials and a significantly lower weighting in Consumer Discretionary helped most versus the benchmark, as did our cash holdings. Conversely, our relative performance was hurt most by the lack of exposure to Consumer Staples, a defensive sector that held up relatively well within the index, and a combination of poor stock picks and a low weighting in Communication Services, another sector that escaped the quarter in relatively decent condition.

What kind of changes did you make to the portfolio in the first quarter?

Most important, we’ve remained consistent and disciplined in our approach—that’s very significant at times of market stress and extremes. We have been adding to existing positions, as well as cautiously and selectively buying a few new names. Some are old friends in sectors that we think will ultimately prove to be the most productive in a recovery—such as Industrials, Health Care and Information Technology—and whose price declines offered us ample opportunities to reinvest. Altogether, we added seven new positions in the first quarter.

Can you give us some examples?

Ossur is a new position that’s been in our database of potential purchase candidates for five years. It’s an Icelandic company, one of the two global leaders in the design and manufacture of prosthetic limbs and whose price became more and more attractive as the markets fell in the first quarter. We are especially attracted to the ‘customer for life’ relationship it has with its clients and also to the significant product upgrades that are taking place over time as the market gradually moves from carbon fibre to bionic limbs. We also see it as a way to gain entry into the diabetes-treatment area, which is growing rapidly—diabetes, unfortunately, often leads to amputations.

Nemetschek is a Germany company that makes software for the architecture and construction industries. We owned shares between 2011 and 2012, shortly after we launched the mutual fund, so it’s a company that we’ve known for a while. When its shares fell by 50% between the middle of February and mid-March, we saw an opportunity to buy what we think is a very high-quality company—one that in retrospect I wish we’d never sold.

What’s your outlook for your Strategy?

We believe the Fund entered this period of COVID-19-induced market volatility relatively well positioned, mostly due to our consistent and disciplined focus on high-quality small-cap companies—those with high returns on invested capital and conservative balance sheets. Equally important, all of our holdings exhibit certain characteristics rooted in a well-defined set of criteria, which we believe suggest that they will be able to sustain these superior long-run returns on invested capital. One byproduct of our discipline is that the Fund had little or no direct exposure to many of the sectors hardest hit by the economic lockdown. For example, we owned no airlines or retailers, and only one energy company (Norway’s TGS-NOPEC Geophysical).

That being said, the impact of the pandemic has of course affected portfolio companies that we would have considered quite sheltered from economic downturns in less extreme times. In addition, some of the selling has, we think, been quite indiscriminate. But even in these most exceptional times, we believe that our discipline allows us to view stock price volatility as an opportunity that will hopefully reward patient investors.




Important Disclosure Information

Average Annual Total Returns as of 3/31/20 (%) 

International Premier -23.81 9.85 4.49 6.37 5.22 12/31/10
MSCI ACWI x USA SC -29.01 -21.18 -4.89 -0.81 1.11 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 and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.

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 3/31/2020 (%)

  Royce International 
Premier Fund

Ossur HF




TGS-NOPEC Geophysical


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.

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.

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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