RYSEX Update & Outlook—Royce
article 01-19-2021

Special Equity Strategy—4Q20 Update and Outlook

Portfolio Manager Charlie Dreifus tells us what drove his Strategy’s impressive relative performance in 2020 as well as what his outlook is for 2021.


How did Royce Special Equity Strategy perform in 4Q20?

Royce Special Equity Fund gained 16.4% in the fourth quarter. We were pleased with this result on an absolute basis, though we lagged the Russell 2000 Value Index, which was up 33.4% for the same period. However, the Fund outperformed the small-cap value index for 2020, gaining 7.4% versus 4.6% for the small-cap value index.

Which areas of the portfolio made the biggest impacts on performance?

All nine equity sectors where the Fund held investments made a contribution to performance, with Consumer Discretionary, Industrials, and Information Technology making the most notable impacts. Those are also the portfolio’s largest sectors. The smallest contributions came from Communication Services, Consumer Staples, and Health Care, and these are some of our lowest portfolio weightings. At the industry level, the top contributors for the quarter were semiconductors & semiconductor equipment, which is in Information Technology, and household durables, a group in Consumer Discretionary.

Did any industries have a negative effect on 4Q20’s performance?

We had only two industry detractors in the fourth quarter—IT services (Information Technology) and hotels, restaurants & leisure (Consumer Discretionary).

Which portfolio holdings made the biggest impacts in 4Q20?

Our top-contributing position was Kulicke & Soffa Industries, a company that designs and manufactures capital equipment, related spare parts, and the packaging materials that are used to assemble semiconductor devices.

On the negative side, the biggest detractor was Computer Services, which provides banking, payment processing, and other related services. It had a pretty modest correction in the fourth quarter. Prior to that, it had been a strong performer through most of the year.

What hurt performance relative to the Russell 2000 Value Index in 4Q20?

Most of our underperformance came from ineffective stock selection, though sector allocation also played a role. At the sector level, stock selection hurt relative results in Industrials and Information Technology most. Our substantial cash holdings also hampered relative performance.

Were there any areas that helped performance versus the benchmark?

We benefited from having lower exposure to Real Estate, where our stock selection also helped to a lower degree. An underweight in Health Care and our lack of exposure to Utilities also gave us a relative boost as each of these sectors underperformed within the value index.

Looking at the calendar year, what sectors and industries drove the Fund’s results in 2020?

Six out of nine equity sectors contributed positively to performance. Consumer Discretionary and Information Technology—two of the Fund’s three largest—led by a wide margin. Household durables (Consumer Discretionary) and IT services (Information Technology) contributed most at the industry level while the recreational product manufacturer Johnson Outdoors was our top-contributing position.

Which areas detracted in 2020?

Communication Services detracted the most by far, followed by Real Estate and Materials. Among our industry groups, the top detractors were media (Communication Services), which led by a substantial margin, and specialty retail (Consumer Discretionary). The position that detracted most was media conglomerate Meredith Corporation.

Where were the Fund’s advantages and disadvantages versus the Russell 2000 Value in 2020?

Our outperformance came from sector allocation decisions—stock selection was a negative. At the sector level, our lower exposure to Financials, along with a modest contribution from stock selection, no exposure to Energy, and a combination of our underweight and savvy stock picks in Real Estate all helped versus the benchmark. On the other hand, ineffective stock picking and our overweight in Communication Services hampered relative performance. The positive effect of our higher weight in Materials was undone by poor stock selection while our lower exposure to Health Care overwhelmed the success of our stock picks in the sector.

What is your outlook for 2021?

We’re certainly mindful that over the next several months we could be in for tougher times because of the recent spike in coronavirus cases. However, once more of the population is vaccinated and barring any new, unexpected ‘black swan’ event, we should see economic improvement coinciding with easy earnings comparisons in the second quarter versus 2020’s. In our view, however, this has already been amply priced into most earnings estimates and thus into valuations. In markets that are fully or highly priced, risk-taking that’s driven by low risk-free returns leaves every market vulnerable to shocks. Assets with high valuations that resulted from being discounted at near zero interest rates will therefore not be immune to the laws of gravity. Using the same consistent methodology for picking stocks and determining cash levels in the portfolio, our tried-and-true indicators are predicting lower market returns, as they have accurately done in the past (though admittedly not always in a timely manner). We’re advising caution and raising cash.




Important Disclosure Information

Average Annual Total Returns as of 12/31/20 (%) 

Special Equity 16.43 7.43 2.93 9.24 7.49 7.68 9.88 8.57 05/01/98
Russell 2000 Value 33.36 4.63 3.72 9.65 8.66 6.92 8.54 7.65 N/A
Russell 2000 31.37 19.96 10.25 13.26 11.20 8.91 8.74 7.82 N/A

Annual Operating Expenses: 1.21

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.

Mr. Dreifus’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 12/31/2020 (%)

  Royce Special
Equity Fund

Kulicke & Soffa Industries


Computer Services, Inc.


Johnson Outdoors Inc. CI. A


Meredith Corporation


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.

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.

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 invests primarily in small-cap stocks which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) As of 12/31/20, the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than 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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