Royce Total Return Fund Manager Commentary
article 12-31-2019

Royce Total Return Fund Manager Commentary

Though the Fund generated a very strong absolute return in 2019, it lagged its benchmark. Looking forward, we believe the current backdrop looks favorable for solid to strong small-cap performance.

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Fund Performance

Royce Total Return Fund delivered a very strong absolute return in 2019, up 23.5%. It lagged the Russell 2000 Index, which gained 25.5% for this period, though it beat the Russell 2000 Value Index, which was up 22.4%. The Fund followed this performance pattern of beating the Russell 2000 Value, but trailing the Russell 2000, for the three-, five, and 15-year periods ended 12/31/19. For the 20-, 25-year, and since inception (12/15/93) periods, the Fund beat both indexes.

What Worked… And What Didn’t

Ten of the Fund’s 11 equity sectors made a positive impact in 2019. Financials was the largest contributor, followed by Industrials and Information Technology. Communications Service was the only sector that declined for the year while Consumer Staples and Energy made the smallest contributions. Capital markets and banks (both in Financials) were the leading industries, followed by machinery (Industrials), while media (Communications Services), oil, gas & consumable fuels (Energy), and diversified telecommunication services (Communication Services) were the biggest detractors.

Part of the capital markets group, Ares Management, an asset manager that focuses on tradable credit, direct lending, private equity, and real estate, was the portfolio’s top contributor in 2019. Investors became more optimistic about the company’s ability to sustain mid-teens, high margin earnings growth for an extended period. The company also converted to C-corp. status, which broadened ownership, supporting an increase in its valuation. Although its share price peaked in July, property and casualty insurer Erie Indemnity was the second-best contributor in 2019. Erie has an attractive and uncommon corporate structure. Erie Insurance Exchange, an affiliated policyholder-owned company, issues and owns the policies, while Erie Indemnity provides management services to the Exchange. This gives it little direct liability, so it has low capital requirements and high returns on capital. Erie’s stock advanced strongly through July as the company reported consistent growth and expanding margins in 2019’s first half before retracing somewhat after reporting disappointing margins in the third quarter. Headquartered in Toronto, TMX Group operates global markets and provides data and analytic solutions to businesses, traders, and investors. Part of the capital markets group, TMX benefited from its global expansion efforts and effective execution, both of which helped it to raise its dividend and post record revenues and earnings in the third quarter.


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Meredith Corporation, a diversified publishing and broadcasting company, was the portfolio’s largest detractor in 2019, hurt by declining revenues and earnings as the company struggled to navigate an ever-shifting media landscape. We chose to sell our shares in Total Return’s portfolio in October. Following on the list of detractors was Virtu Financial, which uses its technology to act as a market maker and liquidity provider to the global financial markets. Its business slumped through most of the year, as the company typically does best when global trading volumes are heavy and/or in highly volatile markets, which were mostly absent during 2019. Believing that volatility is more likely, we built our position. We made the opposite decision with coal producer Alliance Resource Partners, moving on after two consecutive quarters of declining earnings.

The Fund’s relative underperformance for the calendar year was entirely the result of sector allocation—stock selection was additive. Information Technology was the largest source of underperformance due entirely to our underweight in this sector, as stock selection was a plus. The Fund typically has much lower exposure to this sector, where dividend-paying small-caps are rare. Consumer Staples also detracted. This was largely driven by ineffective stock selection, notably in the food products industry, where shares of supermarket operator Village Super Markets and specialty food supplier Lancaster Colony both declined. In contrast, Financials saw superior stock selection boost relative performance, as our larger sector weighting was a modest hindrance. In addition to Ares Management, REIT specialist asset manager Cohen & Steers was a top relative contributor. Outperformance in Industrials was driven by overweighting this strongly performing sector and savvy stock selection.


Top Contributors to Performance 20191 (%)

Ares Management Cl. A1.37
Erie Indemnity Cl. A0.72
TMX Group Ltd.0.72
Cohen & Steers0.68
First Citizens BancShares Cl. A0.62

1 Includes dividends

Top Detractors from Performance 20192 (%)

Meredith Corporation-0.48
Virtu Financial Cl. A-0.28
Alliance Resource Partners L.P.-0.16
ATN International-0.14
ArcBest-0.14

2 Net of dividends

Current Positioning and Outlook

The backdrop looks quite favorable to us for solid to strong small-cap performance overall. We have previously cited four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and ample access to capital, which all remain present and suggest that small-cap returns can go higher. We see a global economy that’s showing signs of renewed life, an ISM Manufacturing Index that’s been incrementally rising (despite December’s setback), and, most important, valuations that range from reasonable to attractive among the many small-cap cyclical areas that we typically like best. During the second half of 2019, we increased investments in asset-light cyclicals, including professional services firms and M&A advisory businesses, which appear well positioned to benefit from a growing economy. We also added contrarian investments in selected energy services companies whose valuations we see as reflecting excessive pessimism.

Average Annual Total Returns Through 12/31/19 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Total Return 6.8123.4523.457.097.4910.367.499.4510.48 12/15/93

Annual Operating Expenses: 1.20

1 Not annualized.

Important Performance and Disclosure Information

Important Performance and Expense Information

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.

Current month-end performance may be obtained at our Prices and Performance page.

Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2019, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Royce’s investment intentions with respect to those securities reflect Royce’s opinions as of December 31, 2019 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.


As of 12/31/19, the percentage of Fund assets was as follows: Ares Management Cl. A was 2.1%, Erie Indemnity Cl. A was 1.5%, TMX Group was 1.5%, Cohen & Steers was 1.2%, First Citizens BancShares Cl. A was 1.7%, Meredith Corporation was 0.0%, Virtu Financial Cl. A was 0.8%, Alliance Resource Partners L.P. was 0.0%, ATN International was 0.6%, ArcBest was 0.0%


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.

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. 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 Index is an 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 Russell Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The returns for the Russell 2500-Financial Sector represent those of the financial services companies within the Russell 2500 index. 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 Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks.The MSCI ACWI ex USA Small Cap Index is an index of global small-cap stocks, excluding the United States.The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information.

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to:

-the Funds’ future operating results,

-the prospects of the Funds’ portfolio companies,

-the impact of investments that the Funds have made or may make, the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

-the ability of the Funds’ portfolio companies to achieve their objectives.

This discussion uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Royce Funds have based the forward-looking statements included in this commentary on information available to us on the date of the commentary, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

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.)

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