International Premier Quality Strategy—1Q21 Update and Outlook—Royce
article 04-22-2021

International Premier Quality Strategy—1Q21 Update and Outlook

Portfolio Manager Mark Rayner and Senior Analyst Mark Fischer update clients on our International Small-Cap Premier Quality Strategy’s performance and detail their long-term optimism.


How did the International Small-Cap Premier Quality Strategy perform in 1Q21?

Mark Rayner The first quarter offered a stark and frustrating reminder that the operational results of our companies can at times diverge from their stock price movements in the short run. Overall, the operational performance of our holdings remained robust in 1Q21, especially when viewed against the backdrop of COVID-19. This was perhaps most clearly signaled by a metric we use to gauge our companies' operating efficiency—return on operating assets, which is calculated as the latest twelve month’s earnings before interest, taxes and amortization divided by working capital plus property, plant, and equipment. The portfolio’s median of 45.8% on this metric compares very favorably with 13.8% for the index (Source: FactSet). This superior operating efficiency was not evident in share price performance, however, making it a disappointing quarter for us.

Which areas of the portfolio hurt 1Q21 performance most?

MR Seven of the portfolio’s nine equity sectors detracted from first-quarter results. The Information Technology and Health Care sectors made by far the biggest negative impact, followed by Communication Services. At the industry level, each of the three largest detractors came from these three respective sectors: IT services, health care providers & services, and interactive media & services.

Which position detracted most from 1Q21’s results?

MR That would be Australia’s Bravura Solutions Limited, which provides software solutions for the wealth management and funds administration industries. The company’s primary product is Sonata, a front-to-back-office software platform that handled everything from new product creation and distribution to compliance and auditing, administration, valuations, and modeling. While Bravura is still winning new business, its results for the fiscal first half of 2021 reflected lower project work in the United Kingdom for both implementation and subsequent go-live work as a result of the ongoing effects of the pandemic. This led to recent analyst views turning sharply negative in February, though on a short-term basis. We’re still quite confident in its long-term prospects, which is underscored by a conversation we had with the company’s CEO in March, in which he described how Bravura continues to expand its addressable market via new product introductions and innovation while shifting its revenue model to an even more predictable, subscription-based model.

What were the top contributors at the sector and industry level?

Mark Fischer Industrials, which is our largest sector weighting, also made the largest positive contribution to first-quarter performance. Interestingly, we also got a solid contribution from Real Estate, which is one of the Fund’s lowest weightings. You could see the dominance of Industrials at the industry level. Four of the five top-contributing industries all came from this sector, including the top three, which were trading companies & distributors, building products, and professional services.

Which of your holdings contributed most to 1Q21’s performance?

MR It was another company headquartered in Australia, Hansen Technologies. Hansen is a leading global provider of billing software and customer care technologies for utilities and the telecom industry. Its share price gained sharply in March after it announced that it had executed a Master Agreement with Telefonica’s German operations. This news resulted in analyst upgrades of approximately 20% to Hansen’s 2021 EBITDA. This was not the only positive development, however, as this announcement followed one in February in which Hansen reported earnings for the first half of 2021 that were stronger than expected, which saw like-for-like EBITDA increase by 44% year over year, with margins that far exceeded full-year expectations.

How did the Fund perform versus the MSCI ACWI ex-US Small Cap in the first quarter?

MF The Fund lagged its benchmark, with most of the first-quarter underperformance coming from stock selection—sector allocation decisions were only marginally negative. Stock selection detracted most in three sectors—Information Technology, Industrials, and Materials. On the other hand, the combination of a much lower weighting and savvy stock picks gave us an advantage in Real Estate, as did having no exposure to Utilities and Consumer Staples, each of which lagged within the MSCI ACWI ex-US Small Cap for the quarter.

What is your outlook for this Strategy?

“We have been taking advantage of the temporary dip in share prices within the small-cap quality universe as the current market environment is offering us opportunities to identify and invest in what we see as high-quality businesses that have escaped the attention of other investors.” — Mark Rayner

MR We employ a bottom-up investment process, which is designed to identify high ROIC (Return on Invested Capital) businesses around the world in order to harness the power of compounding. Of course, over the shorter-term factors other than ROIC can, and normally do, drive stock prices. In our 2020 commentary, we mentioned that many investors were gravitating towards companies offering either ‘thematic growth’ (those benefiting from the COVID-19 pandemic) or latterly to ‘cyclical value’ (those set to benefit from the post pandemic economic re-opening). As these themes often pay little regard to the underlying or long-term profitability of businesses, the preference created a difficult backdrop for our strategy to generate outperformance. These trends extended into 2021’s first quarter, creating something of a paradox. Whilst the Fund lagged in the first quarter (indeed, it had one of its worst quarterly relative performances since inception), we believe that our holdings have arguably never possessed higher quality. We have been taking advantage of the temporary dip in share prices within the small-cap quality universe as the current market environment is offering us opportunities to identify and invest in what we see as high-quality businesses that have escaped the attention of other investors. In the first quarter, for example, we made three new additions to the portfolio.

While we don’t know when the market will shift back to favoring the operating performance of our portfolio companies, we do note that previous periods of underperformance in 2014 and 2016 were followed by marked outperformance in 2015 and 2017, as ‘mathematics’ again trumped ‘thematics’. Meanwhile, we will continue to look for and patiently invest our clients’ money in high-quality businesses, which offer reasonable or better-than-market valuations.




Important Disclosure Information

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

International Premier -2.46 48.16 9.63 13.10 8.73 8.79 12/31/10
MSCI ACWI x USA SC 5.53 69.82 6.61 10.40 6.32 6.36 N/A

Annual Operating Expenses: Gross 1.58 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 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, 2021.

Mr. Rayner and Mr. Fischer’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 3/31/2021 (%)

  Royce International 
Premier Fund

Bravura Solutions Limited


Hansen Technologies




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.

Return on Invested Capital (“ROIC”) is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock).

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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