Chris Clark on Developing Investment Talent and PM Elevations—Royce
article 04-30-2021

Chris Clark on Developing Investment Talent and PM Elevations

CEO and Co-CIO Chris Clark outlines how Royce approaches developing investment talent and the most recent Portfolio Manager elevations.

TELL US
WHAT YOU
THINK

Can you tell us how Royce approaches developing investment talent?

Investment talent is the life blood of our business and a distinguishing characteristic of our firm. While we have a large and deeply experienced team of investment professionals, the effective development and recruitment of investment talent is vital to sustaining superior long-term investment results. It really is the quintessential competence measure of investment management firms. Our own approach to these matters is grounded in several key principles: our investment culture, which is crucial; our long-term focus; our thoughtful and methodical approach to all we do; an ethos of constant improvement in our capabilities; and the need to expect surprises.

“Our own approach is grounded in several key principles: our investment culture, which is crucial; our long-term focus; our thoughtful and methodical approach to all we do; an ethos of constant improvement in our capabilities; and the need to expect surprises.” — Chris Clark

How do these priorities manifest in your actions?

Francis Gannon, my Co-CIO, and I look at each product and strategy on a periodic basis to evaluate how best to optimize the investment performance of our teams. We think about the potential need for increased resources and/or succession planning. When appropriate, we develop plans to increase responsibilities for certain investment team members as we identify the competencies we think will complement those specific teams. We are always mindful of maintaining a deep and strong bench in order to have the capability to react to opportunities or unexpected events very quickly.

Why is the topic of investment talent particularly relevant now?

There are two reasons: First, each year on May 1st we update our open-end fund prospectuses—which is when we typically announce any adjustments to our portfolio management team. We have several portfolio manager elevations that we’re announcing that have all been planned for some time. Second, the recent departure of members of an investment team has led clients and consultants to ask us about our process for managing investment talent and ensuring appropriate continuity.

Can you first talk about the changes to Royce Total Return Fund’s portfolio management team?

Portfolio Manager Miles Lewis, CFA®, who joined Royce a year ago with the express purpose of ultimately leading our dividend-oriented strategies, becomes Royce Total Return Fund’s lead portfolio manager effective on May 1, 2021 while Chuck Royce becomes portfolio manager on the Fund. Miles came to Royce from American Century having demonstrated his expertise and proven investment capability managing a small-cap value approach that emphasized quality businesses—attributes closely aligned with those of the Total Return Fund.

Was this part of the plan when Royce hired Miles?

Absolutely. Miles assuming the lead role on the portfolio was part of a plan that we first envisioned when he joined Royce in May 2020. Chuck will remain involved to offer Miles his investment perspective and expertise, but Miles now leads the strategy. The two of them have worked closely together over the last year, and we are highly confident in his ability to drive strong investment outcomes in this unique discipline.

Is the Fund’s process or approach changing?

Miles and Chuck have refined, rather than changed, our existing small-cap dividend process, which dates back to an institutional product we first managed in the late 1970s. The focus remains on finding high-quality, undervalued, dividend-paying small caps, with the intention of delivering a distinctively low volatility risk profile among small cap strategies, one that’s well suited to investors with a lower risk tolerance or who may be in the withdrawal stage of their investment lifecycle. So while the process has evolved, it remains deeply rooted in the same fundamental principles that have driven its past success.

Aside from Miles becoming the lead portfolio manager, is anything else changing?

The biggest change is a reduction in the number of stocks, which has gone from a range of 190-290 over the past few years to a range of 100-130 going forward—the Fund held 107 positions at the end of March. There’s also been an even greater sensitivity to valuation, with the goal that the Fund be classified and evaluated as a small-cap value strategy. As part of this refinement, the Russell 2000 Value Index is now the Fund’s primary benchmark, consistent with the portfolio’s value orientation.

What can you tell us about the changes to Royce International Premier’s team?

We’re equally excited about this evolution. Mark Rayner, CA, who’s been the Fund’s portfolio manager since 2016, becomes lead portfolio manager while Portfolio Manager Mark Fischer joins him as portfolio manager on the fund. The latter Mark joined Royce in 2020 and has very quickly demonstrated an in-depth understanding and ability to execute on our highly disciplined, quality-oriented approach to investing in international small caps. We’re also very pleased that senior analyst Yutetsu Ametani, who joined Royce on 4/12/21, will be working with them with specific focus on the Japanese market and the Asian region generally. Like Mark Rayner, Yutetsu is based in London.

Are there also changes to the management team for Royce Pennsylvania Mutual Fund?

Yes—we elevated Andrew Palen from assistant portfolio manager to portfolio manager on the Fund. Andrew, who’s worked on Penn since 2018, joins Lead Portfolio Manager Chuck Royce, and Portfolio Managers Jay Kaplan, Lauren Romeo, Steven McBoyle, and Miles Lewis. Jim Stoeffel assists the team. Like Mark Fischer, Andrew is a great example of someone who joined Royce as an analyst, impressed us with his work, was elevated to assistant portfolio manager a few years ago, and is now a portfolio manager. He has already made strong contributions, and we are very excited about his increased involvement.

Is Chuck’s role at the firm or on any other strategies changing?

No – they are not. Chuck remains very actively involved in portfolio management. He is still the lead PM on two of our biggest portfolios—Royce Pennsylvania Mutual and Premier Funds—as well as leading the portfolio management of our three closed-end funds.

Do you have any other thoughts on the importance of developing investment talent?

Just to say how pleased I am that we’ve been able to actively recruit investment talent over the past year despite being largely in a work from home environment. We’ve hired five investment professionals at different levels of experience since May of 2020 and are recruiting others. We have found over the years that Royce’s reputation as a respected small-cap specialist has earned us enthusiastic responses from candidates. Talented and experienced investors want to work at Royce, and we will continue to resource our strategies to ensure we drive the best possible outcomes for our clients.

Can you comment on the recent change to the Opportunity Fund management team?

This change was a prime example of how important it is to develop a deep and talented investment bench. At some point, you need to respond quickly to negative surprises. While the departure of the previous investment team was sudden and unexpected, arguably the most important member of the team remained at Royce—Buzz Zaino. Buzz was the architect of the strategy and successfully managed it for decades prior to taking a step back late in 2018 and becoming a senior adviser. Joining him on the team are three deeply experienced portfolio managers: Jim Stoeffel, Brendan Hartman, and Jim Harvey. They are all seasoned professionals, and we have the utmost confidence in their capabilities to manage this highly process-oriented investment discipline.

VIEW FUND PERFORMANCE

 

Important Disclosure Information

Average Annual Total Returns as of 3/31/21 (%)

  Average Annual Total Returns (%) Annual
Operating
Expenses (%)
  QTD 1YR 3YR 5YR 10YR 15YR 20YR 45YR/Since
Incept.
Date Gross Net
International Premier -2.44 48.51 9.90 13.37 8.92 N/A N/A 8.98 12/31/10 1.26 1.19
Opportunity 25.06 151.72 18.53 20.28 12.24 9.64 11.75 13.16 11/19/96 1.23 1.23
Pennsylvania Mutual 13.48 85.72 13.71 15.42 10.05 8.27 10.63 13.26 N/A 0.95 0.95
Total Return 17.12 74.37 10.37 12.31 9.52 7.69 9.48 10.77 12/15/93 1.25 1.25
Russell 2000 12.70 94.85 14.76 16.35 11.68 8.83 9.76 N/A N/A N/A N/A
Russell 2000 Value 21.17 97.05 11.57 13.56 10.06 7.38 9.53 N/A N/A N/A N/A
MSCI ACWI ex USA Small Cap 5.53 69.82 6.61 10.40 6.32 N/A N/A N/A N/A N/A  N/A

1For Royce Pennsylvania Mutual Fund, the average annual total return shown is for the 45-year period ended 3/31/21.

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 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. Investment Class shares redeemed within 30 days of purchase may be subject to a 1% redemption fee payable to the Fund (2% for Royce International Premier Fund). Redemption fees are not reflected in the performance shown above; if they were, performance would be lower. Current performance may be higher or lower than performance quoted. Current month-end performance may be obtained at www.royceinvest.com. All performance and expense information reflects results of each Funds’ Investment share Class. Price and total return information is based on net asset values calculated for shareholder transactions. Gross annual operating expenses reflect the Fund’s gross total annual operating expenses and include management fees, any 12b-1 distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Net annual 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 Royce International Premier Fund Investment 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 1.19% through April 30, 2022. 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.
Service Class shares bear an annual distribution expense that is not borne by the Funds’ Investment Class. If such distribution expenses had been reflected for Funds showing Investment Class performance, returns would have been lower. Investments in securities of micro-cap, small-cap, and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Certain Funds invest a significant portion of their respective assets in foreign companies that 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. (Please see “Investing in Foreign Securities” in the prospectus.) Therefore, the prices of securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of securities of U.S. companies. (Please see “Primary Risk of Fund Investors” in the prospectus.) Certain Funds generally invest a significant portion of their 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 of these stocks would cause their overall value to decline to a greater degree. A broadly diversified portfolio, however, does not ensure a profit or guarantee against loss.

Mr. Clark’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.

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 unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index along with the next smallest eligible securities as determined by Russell. The Russell 2000 Value Index consists of the respective value stocks within the Russell 2000 as determined by Russell Investments. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. 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. 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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