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.

TELL US
WHAT YOU
THINK

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.

Important Disclosure Information

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

  1Q221 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
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.

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 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
Opportunity
Fund

Victoria's Secret

0.5

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. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It 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.

Share:

Subscribe:

Sign Up

Follow: