Opportunistic Value Strategy—4Q21 Strategy Update and Outlook—Royce
article 01-11-2022

Opportunistic Value Strategy—4Q21 Strategy Update and Outlook

The portfolio management team for our opportunistic value strategies is led by Portfolio Managers Jim Stoeffel, Brendan Hartman, and Jim Harvey, along with Assistant Portfolio Manager Kavitha Venkatraman. Here, the team details how the strategy performed and updates clients on their outlook.


How did Royce Opportunity Fund perform in 4Q21?

Jim Stoeffel The Fund enjoyed a solid quarter on both an absolute and relative basis, advancing 5.7%, and beating its primary benchmark as the Russell 2000 Value Index gained 4.4%. Opportunity handedly outpaced the Russell 2000 Index, too, which rose 2.1% 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 performance.

Over longer-term periods, how has the Fund done versus its benchmarks?

Brendan Hartman We’re equally pleased with the Fund’s longer-term results. For the calendar year vis-à-vis the portfolio’s primary benchmark, Opportunity boasted a strong return, up 30.8% versus 28.3% while also outperforming the Russell 2000 (+14.8%). Opportunity beat the value index for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 12/31/21.

How were the Fund’s sector results in 4Q21?

Jim Harvey Ten of the portfolio's 11 equity sectors made a positive impact on quarterly performance. Our largest positive contributions came once again from Information Technology, followed by Industrials and Materials. The only negative impact came from Energy while the smallest positive impacts came from Utilities, our lowest weighting, and Consumer Staples, our second lowest weighting, which was also a sector that didn’t perform well market wide.

What happened at the industry level during the fourth quarter?

Kavitha Venkatraman Semiconductors & semiconductor equipment, which is in Information Technology, was the top contributor by a wide margin. We’ve historically had higher exposure to this industry. Next came trading companies & distributors from the Industrials sector and household durables from the Consumer Discretionary sector. However, airlines in Industrials continued to be hurt due to travel restrictions. This led it to be the largest detractor for the quarter, followed by health care equipment & supplies in Health Care and diversified consumer services in Consumer Discretionary.

What position contributed most in the fourth quarter?

JS A company called BlueLinx Holdings was our top contributor. The company is a wholesale building and industrial products distributor that benefited from increased lumber prices that helped drive record quarterly net sales and gross margins in the high teens

Which holding detracted most for 4Q21?

JH Our largest detractor was CalAmp Corporation, which makes wireless communications products that enable anytime/anywhere access to critical information, data, and entertainment content. The company’s third quarter earnings, which were announced in December, missed both top- and bottom-line estimates as component shortages caused by supply chain issues hurt its business.

What was the source of the Fund’s advantage over the Russell 2000 Value Index in 4Q21?

JS Our relative advantage over the small-cap value index came from a combination of sector allocation and stock selection. Stock selection and our lower exposure helped in Health Care, which not only fared poorly in the Russell 2000 Value but was also the biggest detractor and the highest sector weighting in the Russell 2000, the Fund’s secondary benchmark, as a whole. Communications Services also boosted our relative strength as our effective stock picks and lower weighting were beneficial.

BH Not everything worked, of course. Our lower exposure to Real Estate hampered relative performance, as did our higher exposure to Consumer Discretionary. Finally, our stock picks in Industrials caused a drag on relative results—our higher weighting was positive, but not enough to outweigh the effects of stock selection.

Turning to the calendar, which sectors had the greatest impact on the portfolio?

JH All of the portfolio's 11 equity sectors made a positive impact on 2021’s performance. The sectors making the largest positive contributions were Industrials and Information Technology, our two highest weightings. Rounding out the top three was Materials. The smallest positive impacts came from Utilities, our lowest weighting, Consumer Staples, and Communication Services.

What worked at the industry level during 2021?

BH Semiconductors & semiconductor equipment in Information Technology, health care providers & services in Health Care, and chemicals in Materials contributed most.

KV On the other hand, biotechnology in Health Care, auto components in Consumer Discretionary, and diversified consumer services in Consumer Discretionary were the largest detractors during the calendar year.

What position contributed most in 2021?

JS We saw the largest contribution from Alpha & Omega Semiconductor, keeping in step with our preference for semiconductors & semiconductor equipment. The company designs, develops, and supplies a broad range of power semiconductors. In September, Alpha & Omega reported double-digit growth in each of their market segments, along with record revenue and high profitability for 2022’s fiscal first quarter to go with an optimistic long-term outlook

Which holding detracted most for 2021?

JH The largest detractor was LL Flooring Holdings, which is more familiar to people as Lumber Liquidators. The company is a retailer of hard-surface flooring including hardwood flooring, laminate flooring, vinyl plank flooring, tile flooring, bamboo flooring and cork flooring, as well as flooring tools and accessories. Its shares fell in May after the company reported fairly good results but removed guidance over COVID concerns. Its stock slid again in the fall due to pandemic-related supply and inventory replenishment issues and year-over-year sales declines.

What sectors helped or hurt the Fund versus the Russell 2000 Value in 2021?

BH Our calendar year advantage was entirely because of stock selection (sector allocation was negative). Materials, our largest relative contributor, benefited from savvy stock picks and higher exposure. Health Care and Information Technology followed due to stock selection and sector allocation, with our lower exposure helping in the former and our much higher weighting in the latter. On the other hand, stock selection and our higher exposure to Consumer Discretionary hurt relative performance, as did our cash holdings. Energy, which was hurt by our lower weighting and stock selection, was the final detractor. These were the only detractors from relative results in 2021.

What’s your outlook for the portfolio?

JS Over the last three months, neither positioning nor our outlook has shifted appreciably. We still generally expect better performance for B2B than B2C companies over the long run as consumers are likely to continue experiencing inflation. The portfolio’s opportunistic value strategy often leads us to places where few if any other investors are looking because the stocks have performed poorly. We believe select areas in consumer retail offer an example where many companies have everything investors want to hate in stocks: the resurgence of COVID, supply chain issues—where shortages are creating margin pressures—and higher energy prices, all of which are creating demand for certain retailers just as they've led us to add selective positions.

BH We’ve also been active in the aerospace & defense industry, which sustained a double whammy in 2021 with COVID and issues around the MAX 737. These have both created hiccups in production. While neither of these issues has corrected themselves to the extent that many had hoped, the industry appeared to be getting close at the end of 2021. We have purchased shares of companies where we see attractively low valuations and the capacity for growth. We continue to see opportunities in industries in temporary staffing and industrial distributors—both of which have benefited from the otherwise challenging issue of skilled labor shortages. Finally, we see what we think are very promising long-term opportunities in select areas of technology, where supply chain consolidation has helped certain companies gain market share.




Important Disclosure Information

Average Annual Total Returns as of 12/31/21 (%) 

Opportunity Fund 5.75 30.85 28.51 15.67 15.06 9.84 11.34 12.94 11/19/96
Russell 2000 Value 4.36 28.27 17.99 9.07 12.03 7.19 9.18 9.76 N/A
Russell 2000 2.14 14.82 20.02 12.02 13.23 8.69 9.36 9.15 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. Stoeffel’s, Mr. Hartman’s, Mr. Harvey’s, and Ms. Venkatraman'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 12/31/2021 (%)


BlueLinx Holdings


CalAmp Corporation


Alpha & Omega Semiconductor


LL Flooring Holdings


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.) The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss.



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