Which Small-Caps Look Set to Benefit from Inflation?—Royce
article , video 06-21-2022

Which Small-Caps Look Set to Benefit from Inflation?

Portfolio Manager Jim Stoeffel on the opportunities created by inflation, investing in energy, consumer areas, and more.


How are you and the portfolio team dealing with inflation?

I was one of the people that believed it was going to be transitory. Obviously, China is not open, which is continuing the problem, and then you had the horrific attack on Ukraine, and then on top of that, you had governments throwing a lot of stimulus into the system, both monetary and fiscal, and demand overwhelmed supply, and so now inflation has clearly become more embedded in the system.

So you just have this string of really difficult things that sort of get you untethered in terms of trying to make investment decisions. So we’ll see how it goes. I think a year from now we’ll be better off, but time will tell.

What investment opportunities have recent challenges created?

Fortunately, we were generally equal weight on energy where we’ve had a secular view that energy is a good place to invest because the companies are really focused on generating return on invested capital as opposed to chasing the next biggest thing. So we like that industry. So we’re heavily invested in the E&Ps and particularly natural gas.

I think as we transition to cleaner fuels, electric cars, you’re going to have to figure out a way to power the electric cars, and I still believe natural gas is sort of the natural transition, commodity. And then you have problem with Russia that Europe was highly, highly dependent on Russian natural gas. The Western world is not going to accept Russian natural gas. That’s got to come somewhere, and it’s going to come from us. So we’re going to send a lot of liquid natural gas to Europe as well. So we’re particularly upbeat about natural gas, more so than oil.

Where is the team investing around consumer areas?

On the consumer side, actually the fundamentals have been very strong, but just the fear of demand destruction has just been too much for them to overcome. There are a few areas that are interesting to us. One is just apparel retail. The retail industry has gone through significant change with the advent of the Internet and Amazon, and a lot of these companies have been forced to restructure their businesses. We term that self-help, and they’re trying to fix their businesses to go after an omnichannel strategy. So an example of that is you can buy it online and pick it up in the store if you want.

A company like Victoria’s Secret which, as we know, tended to market towards a very select group of the female population, and they’ve significantly expanded their target market and a huge increase in their addressable market, which is pretty interesting. So a lot of interesting restructuring is going on in the retail industry.

The other area where we’ve been exposed to for some time actually is on the housing companies. There’s a clear shortage of housing stock in this country. The companies have become much better companies and much better managed, highly focused on return on invested capital. And so we really enjoy the industry dynamic and think it’s properly structured.

I think it’s good for the equity markets over time to have a normal interest rate environment. So I think once we get to the point where mortgage rates get to wherever they’re going to be, whether it’s 6%, 5%, I think it’ll be a positive for the industry and create a much better supply-demand balance.

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

Opportunity Fund -4.71 -0.3 20.95 13.40 21.68 9.16 10.54 12.60 11/19/96
Russell 2000 Value -2.40 3.32 12.73 8.57 10.54 6.91 8.55 9.56 N/A
Russell 2000 -7.53 -5.79 11.74 9.74 11.04 7.99 8.72 8.72 N/A

Annual Operating Expenses: 1.23

1 Not annualized.

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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.

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Percentage of Fund Holdings As of 3/31/2022 (%)


Victoria's Secret


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