International Premier Quality Strategy—3Q21 Update and Outlook—Royce
article 10-20-2021

International Premier Quality Strategy—3Q21 Update and Outlook

Lead Portfolio Manager Mark Rayner and Portfolio Manager Mark Fischer update clients on our International Small-Cap Premier Quality Strategy’s performance and offer their long-term outlook.


How did the International Small-Cap Premier Quality Strategy perform in 3Q21?

Mark Rayner The mutual fund Mark and I manage in the Strategy, Royce International Premier Fund, gained 0.9% in what was a challenging third quarter. The Fund narrowly outperformed its benchmark, the MSCI ACWI ex-USA Small Cap Index, which was flat for the same period. The Fund trailed the benchmark for the year-to-date period ended 9/30/21, gaining 7.3% versus 12.2% for the index. However, as long-term investors, we were pleased that the Fund maintained longer-term relative advantages, beating its non-U.S. small-cap benchmark for the 3-, 5-, 10-year, and since inception (12/31/10) periods ended 9/30/21.

Which portfolio sectors had the biggest impact on 3Q21’s performance?

Mark Fischer Five of the Fund’s eight equity sectors made positive contributions to performance in 3Q21. Industrials—the portfolio’s largest sector weighting—led by a considerable amount, followed by Information Technology and Health Care. The three sectors that made a negative impact on quarterly results were Communication Services, Materials, and Consumer Discretionary.

What about at the industry level?

MF Two of our top three contributors came from Industrials: professional services and trading companies & distributors. Sandwiched in between was IT services (Information Technology). Software, also from Information Technology, detracted most in 3Q21, followed by interactive media & services (Communication Services) and health care equipment & supplies (Health Care).

Which position contributed most in 3Q21?

MR Our top contributor was Japan’s Benefit One, which specializes in providing benefit services to 8.7 million users from 12,000 Japanese corporations and healthcare support services to 1,500 corporations. We chose to sell our position after the stock had risen more than 80% year-to-date and nearly 50% in September. Despite the company’s attractions, its cap rate has risen above what we think is reasonable territory. We will continue to monitor its shares via our portfolio watch list should its valuation re-enter what we see as more reasonable ranges.

Which holding hurt performance most in the quarter?

MF The largest detractor was South Korea’s NICE Information Service. It’s often described as the “Experian of South Korea.” We like that NICE has a more than 30-year history that has made it the country’s leading credit bureau, with a 70% market share. It provides consumers and financial institutions a portfolio of value-added solutions, such as credit scoring, fraud prevention, debt collection, and data analytics. NICE released its semiannual report in mid-August, which showed solid revenue and earnings before tax growth of 6% and 17%, respectively. However, it seems as though investors were expecting more robust results because its shares sold off through the rest of the month.

How did the Fund perform versus the MSCI ACWI ex-US Small Cap in 3Q21?

MR Stock selection made the bigger positive impact relative to the benchmark, though sector allocation was also additive. At the sector level, our stock picking in Industrials made the biggest positive impact, as did our greater exposure, though not at as high a level. Our lower weighting in Consumer Discretionary—which was the biggest sector detractor in the benchmark—also helped relative results. Stock selection in Health Care was also a relative positive. By contrast, stock picking detracted from quarterly relative performance in Communication Services. Results vis-à-vis the benchmark were also hampered by our lack of exposure to Energy and our lower weight in Financials—each of those sectors was positive within the index.

Turning to the impacts made for the year-to-date period ended 9/30/21, which sectors and industries had the largest effect on performance?

MR Six of the nine equity sectors where we held investments contributed to performance, led by Industrials—again by a wide margin—followed by Information Technology and Real Estate. Communication Services, Energy, and Consumer Discretionary were the sectors that detracted from performance. The same two industry groups from Industrials, professional services and trading companies & distributors, were two of the portfolio’s top three contributors, with software (Information Technology) coming in second. The industries that detracted most for the year-to-date period were interactive media & services (Communication Services), IT services (Information Technology), and energy equipment & services (Energy).

Which position contributed most for the year-to-date period?

MF Our top contributor was Australia’s Hansen Technologies. They’re a leading global provider of billing software and customer care technologies for utilities and the telecom industry. Hansen reported stronger-than-expected earnings for the first half of 2021 back in late February. Then in early June, Hansen’s share price again went up sharply after the company received an unsolicited proposal from private equity firm BGH Capital to acquire 100% of the company’s outstanding shares at a 25% premium.

Which company detracted most year-to-date through the end of September?

MR That would be Japan’s TKC Corporation, a company that provides tax-related software and services to smaller companies and their tax accountants. 2021 has so far seen no material events that would reverse its previous positive trajectory. In fact, first-half results published in May showed operating profits that were well ahead of TKC’s projections, so its share price weakness was a bit hard to account for but mostly seems to be the result of profit taking after its shares surged through March of 2021.

How did the Fund’s year-to-date sector performance compare with that of it’s the MSCI ACWI ex-USA Small Cap?

MF Our stock picking hurt most relative to the benchmark—our sector allocation decisions were additive. Both stock selection and lower exposure hurt our relative results in Financials while stock picks detracted in Materials and Financials. On the other hand, our significantly higher weight in Industrials boosted relative results as did savvy stock selection and lower exposure in Real Estate, and our lack of exposure to Consumer Staples also helped.

“We see market volatility not as a risk but as an opportunity to build existing high-quality positions and selectively add from our extensive database of potential investments.” — Mark Rayner and Mark Fischer

What is your outlook for the Strategy?

We saw most of the major non-U.S. indexes retreat from their year-to-date highs during September amid increased price volatility—a pattern that’s continued thus far in October. It seems to us that investors are focusing more on global risk factors, including uncertainties around ongoing monetary stimulus, President Biden’s stimulus bills in the U.S., worries about a debt crisis in China, the recent elections in Japan and Germany, supply chain issues across many industries, and soaring energy prices—it’s quite a long list. As long-term investors, we try to filter out the short-term noise and keep our own focus on what our companies are doing and what their managements are telling us. We think that we have a portfolio robust, cash generative businesses with conservatively capitalized balance sheets. As is always the case, therefore, we see market volatility not as a risk but as an opportunity to build existing high-quality positions and selectively add from our extensive database of potential investments. Having trimmed some of our winners over the last few months, we find ourselves with cash levels slightly above the usual 3-5% range, with the result that we feel well positioned to take advantage of more attractive valuations as they arise.




Important Disclosure Information

Average Annual Total Returns as of 9/30/21 (%) 

International Premier 0.96 21/93 13.70 13.98 12.37 9.54 12/31/10
MSCI ACWI x USA SC 0.00 33.06 10.33 10.28 9.44 6.66 N/A

Annual Operating Expenses: Gross 1.26 Net 1.19

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 Investment Class and include management 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 & Associates has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the 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.
All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 1/22/14 reflects Service Class results. Service Class shares bear an annual distribution expense that is not borne by Investment Class shares.

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 9/30/2021 (%)

  Royce International 
Premier Fund

Hansen Technologies


Benefit One


NICE Information Service


TKC 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.

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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