Three Questions with Steven McBoyle—Royce
article , video 12-08-2020

Three Questions with Steven McBoyle

In our latest podcast, Senior Investment Strategist Steve Lipper interviews PM Steven McBoyle on contrarian investments, companies accelerating their adoption of technology, and more.


Steve Lipper: Hello. This is Steve Lipper, Senior Investment Strategist at Royce Investment Partners. Thank you for joining us today for our podcast, Three Questions With. Our guest today is Steven McBoyle, Portfolio Manager and Principal. Steven works across three of our most prominent strategies, our Special Equity Strategy where he works with Charlie Dreifus, our Royce Premier Strategy where he works with Chuck Royce as well as Lauren Romeo, and our Global Premier Strategy where Steve works with Lauren as well as Mark Rayner.

Steven joined our firm in 2007 and he has over 30 years of industry experience. He previously was a partner at Lord Abbett & Co, where he was a Portfolio Manager of the Small Cap Value Fund and the Small Mid Value Fund. Prior to that, he worked in Mergers and Acquisitions at Morgan Stanley and Salomon Brothers. And Steven began his career in public accounting at Deloitte and Touche. Steven holds a bachelor's degree from the School Accountancy at the University of Waterloo in Canada and a Master of Business Administration from Columbia University. He is also a past chartered accountant, as well as CPA. Steven, thank you for joining us today.

Steven McBoyle: Thank you, Steve. Glad to be here.

SL: So Steve, one of the more notable changes in businesses responding to the effects of the pandemic, lockdowns, and work from home is an acceleration of their adoption of technology. How do you see this dynamic playing out and what opportunities do you see that it's creating?

SM: Companies realized that their technology infrastructure was critical to success, to actual business outcomes.

So we've been very conscious of two themes in this area. Those two themes are the digitization of the manufacturing process. What currently is often referred to as "Industry 4.0,’ and then also this idea, which I think is increasingly becoming more relevant and evident, is technology solution providers that are enabling other businesses to consume effectively more technology, so that they can foster and improve their value propositions with their customers and through different channels. I strongly believe the models that ultimately will help other businesses consume technology will be winning models.

We have a number of companies that play to this theme. So I think of Cognex, they provide machine vision sensors. The tagline there would be they replace eyes and brains on the plant floors with software and semiconductors. We have companies like JBT Technologies. They are increasingly providing automation to an underlying industry—that being food processing—that has not been so quick to adopt technology and are now doing so for a lot of other underlying, driving reasons.

As I relate to this idea of those solution providers that provide technology, enabling other businesses to consume more technology, the one company that epitomizes this idea is Manhattan Associates. Manhattan Associates provides a software enterprise software for the backend supply chain optimization and warehouse management systems.

So, buy online, pickup at store, order online, curbside pickup. Well, Manhattan effectively provides all that software to allow these industries to adapt this technology, to continue to connect with their customers in different ways. So Manhattan is a high-quality model. It’s asset light, has strong returns on invested capital, and cash rich, no debt, strong R&D pipeline exhibiting good growth.

SL: That's great. Let's turn our attention to the consumer and leisure. Here another change that we have seen as a result of the pandemic is that the consumers are changing how they allocate their leisure dollars. With travel and hotel spending curtailed, the recreational activities industry has seen a surge in demand. Now, I guess the question is how sustainable is this change?

SM: The RV industry, as well as the marine or boating industry, are just perfect examples of this dynamic. This is an odd dynamic that we're witnessing, to sit here today and view the current unemployment trends against the fact that the RV and marine industry have record retail demand, and importantly, are faced with multi-year visibility in terms of production. And yet, because the production in these industries was effectively closed for part of the year while demand peaked, people were not flying to Europe, the marine and RV players have visibility as far out as effectively the entire calendar year of ‘21.

These are relatively basic manufacturing models, but importantly, when you have that sort of line of sight in terms of production schedules, that is meaningful in terms of underlying profitability.

We recognize there's transitory factors, but our focus always is kind of finding great evolving business models that are underappreciated, that are serving these demands and dynamics. We have our favorites. Brunswick Corporation comes to mind on that score.

Its position is under appreciated. Brunswick and, and many of the listeners will recognize the underlying, key brand in Mercury Engines, but Brunswick has a leading boat engine and recently now boat club operator. What's unique to us is that Brunswick is fundamentally a different business than what it was, 10 years, even five years ago. This is what I refer to as kind of the classic example of 80% of the headlines are noise.

And in this case, it's actually even lower. The market continues to ascribe a boat manufacturing multiple as it has done in the past. And again, reflecting the concerns we're talking about, but the point is only 15% of their earnings are dependent upon actual boat sales. What's lost amongst all this noise is this increasing, annuity stream to the business.

Fifty percent of their earnings are after-market parts and engines. A full one in two boats are powered by a Mercury Engine in the United States. There is a strong pipeline of continued share gains in the categories they serve, and they're also entering new product categories. All that said, we also have a market kind of ecosystem that we like.

There's two dominant players. One is on the value end. We think the market is going to be rational. We see a market leader serving what we think are going to be very sustainable, demand levels for a period of time while transforming the business more towards a high recurring revenue model. And they're doing all that while they're paying down debt buying back stock.

SL: Yeah, that's great. There are other investments, however, that we've recently done, which are more contrarian. The one that I think might be most interesting to our listeners is around real estate. What do you think that we're seeing here that others may be overlooking?

SM: Well, in short, we've seen this playbook before. We obviously exhibited past real estate market cycles, and we obviously want to try to take advantage of them. Unquestionably, there are pockets of real estate where certain market reservations are clearly justified. There's just the debate around, large urban cities and complete asset classes of real estate. We think there are certain real estate names that, we can identify where there are highly aligned management teams. We have a favored name in Kennedy Wilson.

This is a founder led investment manager exclusive to real estate, and they have 30 years of experience using cycles to their advantage, to their beginnings, date back to the early real estate crises in the early part of the eighties. So, they have a remarkable record of investing counter cyclically. Their portfolio is 50-50 split of U.S. UK. and Ireland. The U.S. part of the portfolio is heavily weighted towards suburban multifamily developments in the Pac West and Mountain States, strategically these are tax friendly states. They're seeing strong population growth, positive employment trends.

In recent results, they're seeing strong rent collections and occupancy rates across their multifamily properties. They're strategically exposed to growing asset classes and geographies. Clearly tenured investment team, a remarkable track record. They're sitting on an awful lot of liquidity and being patient waiting for what is unique to their business model preferred kind of off market transactions.

Another preferred area within real estate that we find very attractive are what I'm going to call service or brokerage models. I think a great example would be Colliers. It's a global platform, outsourcing advisory, leasing capital markets, and most recently through acquisitions, investment management, as well as engineering and design, which looks very promising. I think the model is underappreciated. They've shifted their business towards service businesses with very high recurring revenue streams.

It's asset light, largely variable costs and orientation. Generating a lot of cash and deploying it in new growth areas as I mentioned. These are models that will not only survive. They will strengthen, they will invest counter cyclically as they have done in the past. And at some point in time, they will be favored again.

SL: That's great. That's terrific. A great summary of how contrarian our counter-cyclical investments on our part end up working out. Let's pivot outside of a direct investment questions to some other questions that we ask each of our guests. I know you're an interested and curious reader. What recent book, fiction or nonfiction, have you enjoyed?

SM: I've recently picked up for the second time a book called The Richest Man Who Ever Lived by Greg Steinmetz. And this is a biography of Jacob Fugger, who was a banker that lived in Augsburg Germany in the 16th century. And he was born of little means, but built fortunes in banking, textiles, mining. This was a man that built up an accounting methodology. He built industry monopolies. He even created fascinatingly a news service, the very first news service where couriers would run back and forth between cities, collecting market, and political information that served him.

He even had the Vatican alter church rules, so interest could be levied on loans. It's just a rich tale of how this individual operated, maneuvered within so many circles of power. This author, in my mind, just does this incredible job of bringing all these power circles and characters and their politics to life during a time that was obviously incredibly rich historically.

SL: That sounds like a great story about a person that I think few of us would have heard of, so thanks for that. Continuing on the sort of the reading and education theme, let's take you back to college. And we know that you did you focused or had the degree in accounting, but what non-financial college course really engaged you?

SM: So this is actually a tough question for me. Perhaps I would answer by saying my co-op terms, and so it may sound a little unusual. This degree was a cooperative degree, so meaning every four-month term, you alternate between academics and work. But the point is upon graduating from a five-year program, I would have had two full years of practical experience under my belt. And so what I can tell you is, I love being on campus. I loved the classroom, I enjoyed the academic pursuit, but it was the co-op terms that really engaged me. I worked at a large professional accounting firm. It was the real world. It was the professional work experience of interacting with clients and partners at such a young age. I found that to be great.

SL: Well, that's a great summary. So for our last question, more present day, what activity outside of business and time with family do you truly enjoy?

SM: I have had a great love affair with ocean kayaking. The last trip was off the coast of Belize, and in a situation like that on a multi-day ocean kayaking trip the last thing you're thinking about is work, if not even the world. The visual you have to consider here is it's an expansive open ocean with nothing in sight, but little specks of land, far off in the distance you hope to survive. I find it very peaceful.

SL: That's great. Thank you very much, Steve. Thanks for walking us through the various opportunities and from an investment standpoint the rationale that you see in the current context, as well as sharing with us a couple of perspectives about you outside of work. Thanks for joining us.

SM: My pleasure. Thank you, Steve.




Important Disclosure Information

Mr. Lipper and Mr. McBoyle’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. The thoughts and opinions expressed in the recording are solely those of the persons speaking as of November 18, 2020 and may differ from those of other Royce investment professionals or the firm as a whole.

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 9/30/2020 (%)

  Royce Pennsylvania
Mututal Fund
Premier Fund
Royce Special
Equity Fund

Cognex Corporation




John Bean Technologies Corporation




Manhattan Associates, Inc.




Brunswick Corporation




Kennedy-Wilson Holdings Inc.




Colliers International Group Inc. CIGI U




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.

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

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.

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.

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.)



Sign Up