Opportunistic Value Strategy—2Q21 Strategy Update and Outlook—Royce
article 07-14-2021

Opportunistic Value Strategy—2Q21 Strategy Update and Outlook

The portfolio management team for Royce Opportunity Fund and our other opportunistic value strategies is led by Buzz Zaino, along with Portfolio Managers Jim Stoeffel, Brendan Hartman, and Jim Harvey. In this piece, the team updates clients on the portfolio’s strong performance and their optimistic outlook.


How did Royce Opportunity Fund perform in 2Q21?

Buzz Zaino The Fund enjoyed a solid quarter on both an absolute and relative basis, advancing 4.6%, essentially tied with its primary benchmark as the Russell 2000 Value Index also gained 4.6%. Opportunity narrowly beat the Russell 2000 Index, which rose 4.3% for the same period. Although returns across the market were lower than what we saw over the previous couple of quarters, we were very pleased with our results.

How has the Fund done versus its benchmarks over longer-term periods?

Jim Stoeffel We’re very pleased with the longer-term results this Fund has been able to deliver for our investors. For the year-to-date period ended 6/30/21, the Fund’s relative edge was even more pronounced. It climbed 30.9%, ahead of both the Russell 2000 Value (+26.7%) and Russell 2000 (+17.5%) Indexes. Opportunity also beat both indexes for the one-, three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 6/30/21.

Can you give us some details on the Fund’s sector results in 2Q21?

Brendan Hartman Nine of the portfolio’s 11 equity sectors made a positive impact on 2Q21’s performance. Information Technology and Health Care did the most to help results, followed by Energy, which was a resurgent sector through the entire U.S. market. Consumer Staples, which is our third-lowest sector weighting, was the only sector that detracted—and did so marginally. The Utilities sector was flat and Communication Services eked out a small positive contribution. These last two were also among our lowest sector exposures for the second quarter.

What happened at the industry level during the second quarter?

Jim Harvey Health care providers & services, which is in Health Care, was the top contributing industry by a wide margin. Next came oil, gas & consumable fuels from the Energy sector and technology hardware storage & peripherals from Information Technology. Of course, some industry performances worked against us as well. Our three biggest detractors at the industry level in 2Q21 were airlines, which are in Industrials, biotechnology from Health Care, and diversified consumer services from Consumer Discretionary. Compared to our contributors, each had a pretty mild effect on performance.

What position contributed most for the second quarter?

BZ A company called Lydall was our top contributor. We’ve owned shares on and off—but mostly on—for more than 20 years. The company develops and manufactures engineered specialty papers, automotive heat shields, acoustical barriers, and medical filtration and bioprocessing components. Its shares skyrocketed in late June when it agreed to be acquired at an 85% premium.

Which holding detracted most for 2Q21?

BH One of our four holdings in the airline industry at the end of June, Mesa Air Group, was the top detractor. Mesa is a regional carrier that operates as American Eagle and United Express Airlines. Like most carriers, its business was hurt badly by increasing oil prices, as that is an important part of airlines cost structure—but we like its long-term prospects. As the appeal of air travel returns, we expect Mesa will be able to recoup cost increases with higher ticket prices and increased volume.

How did the Fund stack up relative to the Russell 2000 Value Index in 2Q21?

JS The Fund finished the second quarter with a marginal nine basis point advantage over the small-cap value index, and this slight edge came from our stock selection. Sector allocation was modestly negative. We benefited from both a much lower weighting and good stock picking in Financials, a sector that lagged within the Russell 2000 Value. Health Care was another sector where stock selection boosted our relative strength, though our higher weighting in the sector also helped.

BH Not everything worked, of course. Our lower weighting and our stock picks hurt in Communication Services—though I think it’s fair to note that this sector benefited greatly by the inclusion of AMC Entertainment, one of trendiest meme stocks in 2Q21. Our cash position also hampered relative results.

Turning to the year-to-date period ended 6/30/21, which sectors had the greatest impact on the portfolio?

JH All 11 equity sectors made a positive contribution to year-to-date performance. Industrials and Information Technology, which are the portfolio’s two biggest weightings, led. Consumer Discretionary and Health Care came next while we got the smallest contributions from lower-weighted sectors—Utilities, Consumer Staples, Communication Services, and Real Estate—which was the same pattern we saw in the second quarter.

What was notable about year-to-date performance at the industry level?

BZ We got outsized positive impacts from two areas—semiconductors & semiconductor equipment in Information Technology and health care providers & services from Health Care. Metals & mining, part of Materials, rounded out the top three.

JH We were very happy that only two industries detracted from year-to-date performance, and each did so pretty modestly: biotechnology in Health Care and road & rail in Industrials. The entertainment industry, from Communication Services, finished flat for the six-month period ended 6/30/21.

What position contributed most in the first half of 2021?

JS Our top contributor was Avid Technology, which develops software and systems for digital editing, newsroom computer systems, and digital audio systems for a growing global customer base. Avid raised guidance in May due to robust end market demand during the first quarter and management’s expectation that this demand can last through the end of 2021. In the same announcement, the company also reported impressive growth in its key recurring subscription revenues.

Which holding detracted most for the same first-half period?

BH Specialty wood flooring maker Lumber Liquidators hurt performance most in the first half. The company reported solid results in May—with increased revenues and same-store sales growth. However, as the price of lumber dropped sharply in the second quarter, investors became concerned about the effect this drop would have on profits, and the stock continued to slide into the end of June. Its shares recovered nicely in the second half of 2020, and we think its stock can recover.

What sectors did the most to help or hurt the Fund’s year-to-date results vis-à-vis the Russell 2000 Value?

JH Our year-to-date advantage came entirely from stock selection—sector allocation had a small negative effect. Stock picking drove results in the two sectors where the portfolio had the biggest edge over its small-cap value index: Information Technology and Health Care. Our higher weighting also helped us a bit in the latter sector. The combination of our lower weighting and effective stock selection was additive in Financials. The Fund’s cash position hurt us most versus the benchmark for the year-to-date period, as did a combination of lower exposure and ineffective stock picking in both the Energy and Communication Services sectors.

What’s your outlook for the portfolio?

JS We’re pretty bullish, with an important caveat. The combination of steep increases in private sector business reopenings with aggressive fiscal and monetary stimulus has created obvious stresses around supply chains. These stresses, which are encompassing both production and labor, have accelerated long absent inflationary pressures. We’re confident, however, that supply chains will ultimately react, and labor will level set after generous unemployment benefits normalize, both of which should make the inflationary spike temporary. In the short term, we’ve made tactical sales in industries such as restaurants that seem more susceptible to inflationary pressures without the offsetting ability to pass through pricing. Even among homebuilders, where the long-term demographic trends still look favorable, we’ve seen increased consumer resistance related to sharp price increases—even as interest rates sit near historical lows. Aside from these hopefully short-term issues, we continue to populate the portfolio with companies that we believe successfully navigated the steep economic contraction and have since positioned themselves to benefit as more typical levels of business activity resume.

BH We’ve also been finding interesting opportunities in technology, building our exposure to the retail sector, and seeing opportunities in aerospace— in this last instance as companies benefit from reopenings and the reintroduction of Boeing’s 737-Max. We continue to source opportunities where businesses have a strong chance of surpassing expectations while still trading at valuations we find attractive. We are optimistic about both select companies’ earnings and the wider economic outlook and are positioning the portfolio to maximize this upside potential.




Important Disclosure Information

Average Annual Total Returns as of 6/30/21 (%) 

Opportunity Fund 4.64 102.05 17.76 21.11 13.19 10.42 11.24 13.23 11/19/96
Russell 2000 Value 4.56 73.28 10.27 13.62 10.85 7.90 9.17 9.92 N/A
Russell 2000 4.29 62.03 13.52 16.47 12.34 9.51 9.26 9.45 N/A

Annual Operating Expenses: 1.23

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. Zaino’s, Stoeffel’s, Hartman’s, and Harvey’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 (%)




Mesa Air Group


Avid Technology


Lumber Liquidators


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. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)



Sign Up