Three Industry Shifts Helping 4 Quality Holdings—Royce
article , video 11-16-2021

Three Industry Shifts Helping 4 Quality Holdings

PM Steven McBoyle details four Premier companies that are benefiting from industry trends.

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What’s an industry trend that’s helping a key holding?

A recent industry trend that has helped a key holding perhaps would be the fact that institutional investment in real estate has broadened considerably over the last number of years. Here you can think of a simple example of the sovereign wealth fund now in a structured product investing in U.S. multi-family real estate. Today, we have what we’re referring to as the institutionalization of real estate, and this increased demand towards alternative investments in global real estate. We think that is a secular trend.

In Premier we have a holding by the name of Kennedy Wilson. Kennedy Wilson is an exclusive asset manager focused on real estate that we think is going to benefit from this shift. Importantly, Kennedy Wilson’s history is actually in property development and ownership and has a 30-plus year history investing globally with some remarkable returns. With that position of strength, it’s not all that surprising that Kennedy Wilson has identified large, liquid global players that have alternative mandates in real estate and is beginning to build a very powerful investment management business that we think is underappreciated.

What’s a technology trend that can benefit your companies?

When you think of technology, we’re all aware of the fact that the miniaturization of semiconductors and specifically that Moore’s law is becoming stale. There’s a limitation that’s at play, which is to say specifically that the doubling of transistors on a chip every two years has hit a wall. What is new is the fact that in addressing that limitation, the industry is increasingly moving towards what’s referred to as advanced packaging. What is becoming critical is actually what we do with the chips on the back-end, which is how do we actually layer and package them?

So within Premier, we have MKS Instruments, who recently has made a rather material acquisition in material sciences that will allow them to specifically address this technology trend. In addition to that, we’ve made an important investment in Form Factor. And they are the dominant provider of test and measurement for semiconductor wafer equipment. So, with Form Factor, you have the fact that the complexity of the chips is always increasing, which drives the test intensity, in addition to the complexity of the chip also driving the customization of that test. And customization importantly not only resides at the customer level but all the way down to the individual chip level.

And so, Form Factor, dominant provider, capital light model, highly customized solution, long sale cycle, very sticky model and we’re addressing a secular growing industry, and importantly we’re addressing a customer complexity issue.

What’s another industry shift that’s helping a key holding?

We’re always hyper focused on industry dynamics, and specifically competition. As we all well know, profit pools are dynamic. So, when we can identify a protected business with Premier attributes that is going through a new growth strategy that we think has legs, and the competitive landscape that they serve is structurally altering to their benefit, we think that’s a powerful combination.

A name that comes to mind is a regional bank processor by the name of Computer Services. Now Computer Services is a Premier business model. They have a differentiated sales model, a 95% plus recurring revenue model, a very loyal customer base. And more recently, they’ve actually taken the strategic step of no longer being 100% midwestern focused in their sales footprint and rather going to market nationally.

On top of that, you have the competitive landscape, and the intensity has declined materially because their large competitive bank processors have entered into large mergers because broadly they’re all strategically shifting towards payments. And that all inures to the benefit of Computer Services who remain laser focused on their customer target. You have favorable industry competitive dynamic structurally altering. You have an enhanced growth strategy, geographical expansion. We think that’s a powerful combination for Computer Services.

 

ROYCE PREMIER FUND

 

Important Disclosure Information

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

  3Q211 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Premier -3.20 33.89 9.77 13.91 12.00 9.63 11.55 11.70 12/31/91
Russell 2000 -4.36 12.41 10.54 13.45 14.63 9.16 10.29 10.08 N/A

Annual Operating Expenses: Gross 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.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of November 2, 2021 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

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
Premier Fund

Kennedy Wilson

2.5

MKS Instruments

2.3

Form Factor

0.5

Computer Services

2.0

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 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. 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.) The Fund may invest up to 25% of its net assets (measured at the time of investment) in securities of companies headquartered in foreign countries, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)

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