What Is a Quality Compounder?
article 03-19-2024

What Is a Quality Compounder?

Portfolio Manager Steven McBoyle details why this small-cap quality holding fits so well in Royce Premier Fund.


In the Small-Cap Premier Strategy that we use in Royce Premier Fund, we look for small-cap companies with high returns on invested capital that we believe can compound value by reinvesting their current earnings back into the business at high rates of return over the long run. A company with consistently high returns on invested capital (“ROIC”)—and consistency is critical—typically means that the management team is effectively allocating capital.

We would define UFP Industries (Nasdaq: UFPI) as one of these quality compounders, though the company may not appear that way at first glance. UFPI is the largest pressure treated lumber manufacturer in the U.S. The company was founded in Michigan in 1955 as a lumber supplier to the manufactured housing industry. Today, UFP has a multibillion-dollar business with subsidiaries around the globe that serve three markets: retail, packaging, and construction. Headquartered in Grand Rapids, Michigan and publicly traded since 1993, the company has 219 affiliated operations that supply tens of thousands of products to its three markets and employs more than 15,800 people.

“UFPI’s durable business model has given the company differentiated advantages by structurally transforming its business mix to the higher value-add products mentioned above. Meanwhile, the market continues to see it as a commodity manufacturer—which has so far kept its valuation in what we regard as a highly attractive range.”
—Steven McBoyle

What makes a pressure-treated lumber manufacturer a high-quality ‘premier’ company? UFPI is a relatively recent addition to Premier, though we have owned the company in other Royce portfolios for several years. The company realigned its management teams in 2019 to focus on business segments rather than geography, which the company believed would better highlight the breadth of its product offerings and allow for quicker introductions of new products. The ensuing boost to its ROIC helped make it a particularly attractive candidate for Premier’s portfolio.

Equally important through the lens of the Strategy’s search for high-quality companies with discernible competitive advantages, UFPI benefits from both formidable supply side advantages and differentiated demand side advantages. On the supply side, UFPI has relationships with roughly 90 lumber mills where it accounts for a majority of the offtake at each mill. In light of this leverage on purchasing, the company has managed vendor programs with these mills whereby it only takes lumber when needed. The upshot is that one of the world’s largest soft wood lumber owners is largely an asset light business.

On the demand side, UFPI has a scaled processing plant network with more than 200 locations that have attractive proximity to big box retailers. This network and its proximity to UFPI’s customers gives it differentiating pricing benefits compared to its competitors—who tend to have two-step distributions serving these same customers. UFP can thus use the benefit of one less margin stack as it pleases—by augmenting its own margins or passing the benefit on to its customer. This benefit gives UFPI a dominant market share at the big box retailers in the product categories it supplies. The company’s scaled supply advantages and demand advantages allow it to leverage its buying position in serving commodity channels at lower prices while strategically increasing the value-added mix of its products in higher-margin, non-commodity merchandise such as decking products, roof trusses, floor systems, and engineered wood products for national builders. It’s a unique model in this market structure.

UFPI has enjoyed more than 60 consecutive years of profitability and has a cash-rich balance sheet. Its durable business model has given the company differentiated advantages by structurally transforming its business mix to the higher value-add products mentioned above. Meanwhile, the market continues to see it as a commodity manufacturer—which has so far kept its valuation in what we regard as a highly attractive range.

Important Disclosure Information

Average Annual Total Returns as of 12/31/2023 (%)

NET               GROSS
Premier 12.57 22.53 6.42 12.51 8.19 11.25 12/31/91  1.18  1.18
Russell 2000
14.03 16.93 2.22 9.97 7.16 9.17 N/A  N/A  N/A
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. McBoyle’s thoughts and opinions concerning the stock market are solely his 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 12/31/23 (%)


UFP Industries


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.

Return on Invested Capital is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock).

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 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. 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.) 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 in Foreign Securities" in the prospectus.



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