RYTRX: 1Q22 Update and Outlook—Royce
article 04-20-2022

Royce Total Return—1Q22 Update and Outlook

Miles Lewis and Chuck Royce detail recent performance for Small-Cap Quality Value Strategy as well as current opportunities and their outlook for the portfolio.


How did Royce Total Return Fund perform in 1Q22?  

Miles Lewis The Fund fell 2.5% in the quarter, narrowly lagging its benchmark, the Russell 2000 Value Index, which was down 2.4% for the same period. While our 1Q22 results were disappointing, longer-term results were better on both an absolute and relative basis: the portfolio outperformed its benchmark for the 1-, 5-, 15-, 20-, 25-year, and since inception (12/15/93) periods ended 3/31/22.

How did the portfolio perform on a sector basis during the quarter?

Chuck Royce Five of the portfolio's 10 sectors finished 1Q22 in the red, with the largest detractions coming from Financials, Industrials, and Consumer Discretionary. Conversely, our largest positive contributors were Energy, Materials, and Communication Services.

Turning to industries, which ones stood out as detractors and contributors?

CR At the industry level, insurance and banks, both in Financials, and building products in Industrials created the largest drag on performance while containers & packaging in Materials, energy equipment & services in Energy, and software in Information Technology were most additive during 1Q22.

Which portfolio holding detracted most for 1Q22?

ML Full-service insurance management company Trean Insurance Group, which focuses on workers compensation insurance, was the largest detractor for the quarter. In 4Q21 and full year results that were announced in early March, Trean reported earnings per share that fell considerably short of both our own and Wall Street's expectations. The miss was primarily attributable to a much higher loss ratio than had been anticipated, which came from three programs that the company has had for quite a while (the oldest dating back to the 1990s). Following this news, the stock was trading at a substantial discount to our estimate of its current worth, which gave us a wide margin of safety to add to the position with a much lower cost basis.

Can you discuss the top contributor?

ML Industrial packaging company Intertape Polymer Group, which makes Water Activated Tape, the black tape on Amazon boxes, contributed most. When we first invested in the company, we saw it as an industrial packaging company that was effectively a backdoor play on e-commerce at a very deeply discounted multiple. About 60% of their business is in tapes, and they also have wovens, films, and protective packaging businesses. About 27% of their revenues, as of the end of 2020, were from e-commerce. After initiating a position in December 2021, we continued to add shares amid weakness in its stock price because our research and due diligence process led us to believe that the stock was significantly mispriced. This was validated in early March when Intertape agreed to be taken private by a private equity buyer at a significant premium of 82% to its prior close.

“We continued to add shares amid weakness because our research and due diligence process led us to believe that the stock was significantly mispriced. This was validated in early March when Intertape agreed to be taken private by a private equity buyer at a significant premium of 82% to its prior close.” — Miles Lewis

What factors drove the Fund’s underperformance versus the Russell 2000 Value in 1Q22?

CR The portfolio’s disadvantage vis-à-vis the benchmark was caused by stock selection in the quarter, with Financials making the most significant negative impact because of ineffective stock picks. Energy and Industrials also created a drag on performance due to our respective underweight and stock pickings. On the positive side, Materials, Health Care, and Information Technology contributed most to relative quarterly results, with the first and last benefiting from savvy stock selection while Health Care was aided by our lower exposure.

Can you talk about current opportunities and your outlook for the Fund?

CR Macro events dominated the headlines in 1Q22, and the direction of oil prices and interest rates, the war in Ukraine, and persistent inflation are creating enough uncertainty to warrant a measure of caution in the near-term. Now more than ever, then, we believe this is a time to focus on high quality (primarily companies with high returns on invested capital (ROIC)) and low valuations—two attributes that are hallmarks of our approach. Quality businesses have pricing power and have often provided downside protection, while cheaper valuations are less susceptible to the impacts of rising rates.

In that context, where have you been finding opportunities?

ML We found many opportunities in 2021 because of multiples compressing, particularly in companies where we’ve done research on the fundamentals and we’re confident in their near- and medium-term outlooks. An example is Hackett Group, an IT consultant with a unique business model centered around its proprietary benchmarking data sets, which contributed to 1Q22 performance. After years of growth headwinds from shifting their on-premises data center mix to cloud computing, we think the company is well situated for durable growth. Their offerings align well with IT budget priorities and the firm should be able to continue to creatively monetize its proprietary data.

Hackett Group (Nasdaq, HCKT) 3/31/21-3/31/22

3/31/21: $16.39. 3/31/22: $23.06

Past performance is no guarantee of future results

We also built our position in Healthcare Services Group, a provider for housekeeping and dietary services predominantly to skilled nursing facilities, where it has a dominant market share. Though it lagged for year-to-date performance ended 3/31/22, we see this as a high confidence holding. The pandemic has been particularly challenging for this industry, thus limiting the company’s ability to grow its business. Labor shortages have also been particularly acute within the nursing space, which has adversely affected margins. We see it as a classic example of a great business that’s experiencing transitory issues and think its long-term growth outlook remains very attractive.

Healthcare Services Group (Nasdaq, HCSG) 3/31/21-3/31/22

3/31/21: $28.03. 3/31/22: $18.57

Past performance is no guarantee of future results




Important Disclosure Information

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

Total Return -2.51 4.71 12.12 8.87 9.95 7.46 8.58 10.55 12/15/93
Russell 2000 Value -2.40 3.32 12.73 8.57 10.54 6.91 8.55 10.01 N/A
Russell 2000 -7.53 -5.79 11.74 9.74 11.04 7.99 8.72 9.12 N/A

Annual Operating Expenses: 1.25

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, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

Mr. Lewis's and Mr. Royce'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 3/31/2022 (%)

Total Return

Trean Insurance Group


Intertape Polymer Group


Hackett Group


Health Care Services Group


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. The Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in 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. 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 Foreign Securities" in the prospectus.)



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