Finding Non-U.S. Small-Caps Built to Last—Royce
article , video 06-01-2022

Finding Non-U.S. Small-Caps Built to Last

Portfolio Manager Mark Fischer talks about his investment process, opportunities he’s finding amid a tumultuous market, and more.


Why do you think 2022 so far has been a rough year for non-U.S. quality small-caps?

My view is that we live in a world of growing uncertainty, and when uncertainties spike, time horizons shrink. Investors become less discerning about the business attributes in which they’re investing. So for example, if we look at the factors that were most influential in the first quarter of this year, the companies that did best were those with low multiples, low profitability, and high leverage.

It’s natural that investors crave instant gratification but, to be clear, doing so is speculating on the short term. If you want to be a long-term investor, it’s best to buy businesses that are built to last, and those are businesses with strong balance sheets, high and consistent returns on invested capital, and pricing power, and those are the only types of businesses that we invest in.

What opportunities are you seeing amid all the uncertainty?

So we have a relatively concentrated and high-conviction portfolio with low turnover, and many of our companies during the course of the quarter suffered from price decreases, making their valuations more attractive. So perhaps it’s not too surprising that during the quarter we deployed a significant portion of our capital into our existing holdings.

One of the areas in particular that I might mention is what I’ll call COVID hangover stocks. These are businesses that during the early stages of the pandemic attracted lots of investor attention, but now that the pandemic is waning, they’re thrown out with the bathwater. I’m talking about high-quality, reasonably priced businesses with durable income streams, pricing power, and that create shareholder value. So, for example, we added to GVS, one of the global leaders in high tech filters to the healthcare industry. We also added to DiaSorin, which is a provider of consumable reagents used in diagnostic testing.

Can you discuss a stock that’s a laggard and one that’s had success?

So one company that comes to mind is XP Power, which is a business that sells power converters which are embedded into its customers’ products. Now in March the company reported full-year results. It saw revenues up 10%. But the company is not immune to supply chain disruption, and so it saw shortages in electrical components, and it also saw freight costs much higher than it’s typically used to.

XP Power (XPP LN in US$) 12/31/22-5/23/22

12/31/11: $69.03. 3/31/22: $45.53

So as a long-term investor, we look at this and we say, well, XP Power has pricing power because it is selling low-cost but very mission-critical components, and it can raise prices over time. And so we took the opportunity and we topped up our position during the quarter.

So Hansen Technologies was one of our top contributors for the quarter, up some 12%. Hansen is an Australian company, and what is does is it provides software used by the telecom and the utilities industries to manage their own client interactions, everything from client acquisition to client service and billing.

So Hansen by many investors is viewed as a sort of sleepy, lower-growth business and, on top of that as an IT company, Hansen was also presumed to be subject to the same personnel-related pressures that a lot of businesses are subject to in this operating environment, including wage inflation, high employee turnover, and so there were relatively muted expectations for Hansen for the quarter.

Hansen Technologies (HSN AU in US$) 12/31/22-5/23/22

12/31/21: $3.89. 3/31/22: $4.30

And in the first quarter when it released results, it again earned its stripes by beating consensus expectations and also by winning a significant contract with a Fortune 100 company. Despite this good performance in the last quarter, we think it is attractively valued relative to its quality and its growth potential.




Important Disclosure Information

Average Annual Total Returns as of 3/31/22 (%)

  QTD 1YR 3YR 5YR 10YR Since
International Premier -13.92 -6.43 7.88 9.80 8.99 7.52 12/31/10
MSCI ACWI ex USA Small Cap -6.52 0.03 10.22 7.89 7.28 N/A N/A

Annual Operating Expenses: Gross 1.23 Net 1.19

The thoughts and opinions expressed in the video are solely those of the persons speaking as of May 9, 2022 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 3/31/2022 (%)

  Royce International 
Premier Fund





XP Power


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.

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.)



Sign Up