Royce Dividend Value Fund Manager Commentary
article 06-30-2020

Royce Dividend Value Fund Manager Commentary

We are optimistic about the outlook for small-cap dividend-payers, and we believe small-cap value stocks appear well positioned to benefit from a reversion movement.

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Fund Performance

After beating its small- and mid-cap benchmarks in 2019, Royce Dividend Value Fund was down 15.6% for the year-to-date period ended 6/30/20, trailing the Russell 2000 and Russell 2500 Indexes, which fell 13.0% and 11.1%, respectively, for the same period. As was the case in 2019, dividend payers in each index trailed those companies that pay none.

What Worked… And What Didn't

Eight of the 10 equity sectors in which the Fund held investments detracted from performance for the year-to-date period ended 6/30/20. The portfolio’s two largest weightings—Financials and Industrials—made the most significant negative impact, followed by Consumer Discretionary and Energy. The only two sectors that contributed positively to the Fund’s first-half performance were Materials and Health Care.

The weakness of certain sectors could also be seen at the industry level, where energy equipment & services (Energy) and specialty retail (Consumer Discretionary) were the biggest detractors by a sizable margin. They were followed by airlines (also in Consumer Discretionary) and two groups from Financials: banks and capital markets. The position that detracted most from performance in the first half was TGS-NOPEC Geophysical, the world’s largest provider of seismic data to oil and gas developers. While categorized as an energy services stock, TGS-NOPEC’s business model is closer to that of a data services provider. It’s an asset-light company that doesn’t own the boats used to shoot seismic data; it gains high margins from repackaging the same data and selling it to multiple clients; and it has high variable costs, including vessel rental rates, which have been declining. We also see it as a company built to weather downturns thanks to consistently positive free cash flow. And while spending on seismic is among the first expenses exploration & production (“E&P”) companies cut in downturns, reserves remain the lifeblood of these companies. They must eventually be replenished in order to maintain value and meet demand when supply rebalances. We believe the seismic studies TGS provides are vital to reducing costs and improving success rates of E&P activity.


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Our confidence in the potential for TGS-NOPEC’s recovery did not extend to footwear maker and distributor Caleres. We exited our position based on the idea that many retailers—a large number of which were struggling prior to the pandemic—will continue to face daunting challenges in a post-coronavirus environment. This analysis also led us to significantly trim our stake in footwear maker Designer Brands. In addition, we reduced our position in Helmerich & Payne, which provides contract drilling of oil and gas wells and operates land rigs and platform rigs. Although the company is a long-time Royce favorite, we are concerned that the energy industry’s road to recovery is likely to be a long and winding one in the intermediate term. With the airline industry continuing to face substantial restrictions on travel created by the coronavirus, we also exited our position in low-cost carrier Allegiant Travel.

Contributing positively at the industry level were metals & mining, chemicals (both in Materials), pharmaceuticals (Health Care), and two groups from Industrials: road & rail and building products. Two of the Fund’s three top-contributing positions come from the metals & mining industry. Franco-Nevada is a Canadian company that owns royalties and streams in gold mining and other commodity and natural resource investments while Royal Gold is a Denver-based precious metals company with royalty claims on gold, silver, copper, lead, and zinc at mines in more than 20 countries. From the capital markets group, Canada’s Sprott is a global asset manager that specializes in precious metals strategies. Each of these positions benefited from investor expectations that massive central bank interventions will result in a supportive environment for gold prices.

Relative to the Russell 2000, the Fund was hurt by sector allocation—stock selection was positive in 2020’s first half. On a sector basis, our significantly lower exposure to Health Care, particularly market-leading biotechnology stocks, drove relative underperformance most. (There are very few dividend payers in this space.) Relative performance was also hindered by stock selection miscues, our lower weighting in Information Technology, and by stock picks in Consumer Discretionary. On the positive side, stock selection helped in both Materials and Financials while our lower exposure to Real Estate also boosted results versus the benchmark.


Top Contributors to Performance Year-to-Date Through 6/30/201 (%)

Franco-Nevada1.68
Sprott1.31
Royal Gold0.57
KKR & Co.0.53
Evercore Cl. A0.50

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/202 (%)

TGS-NOPEC Geophysical-1.24
Caleres-1.01
Helmerich & Payne-0.94
Allegiant Travel-0.82
Designer Brands Cl. A-0.81

2 Net of dividends

Current Positioning and Outlook

We are optimistic about the outlook for dividend-paying small-cap stocks. Given that markets usually rotate and mean revert, we think investors may want to ask themselves if what has led the market for the past 10 years seems likely to lead for the next 10. Small-cap value stocks, whose relative valuations are near all-time lows relative to both small-cap growth and large-cap stocks, appear well positioned to benefit from that reversion movement. We believe cyclically oriented businesses with conservatively capitalized balance sheets and strong industry positions look best equipped to survive the current uncertainty and thrive in a recovery.

Average Annual Total Returns Through 06/30/20 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR SINCE INCEPT. DATE
Dividend Value 21.83-15.59-9.251.203.618.427.107.30 05/03/04

Annual Operating Expenses: Gross 1.52 Net 1.34

1 Not annualized.

Important Performance, Expense 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. Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.34% through April 30, 2021.

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 June 30, 2020, 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 June 30, 2020 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 6/30/20, the percentage of Fund assets was as follows: Franco-Nevada was 4.4%, Sprott was 2.9%, Royal Gold was 2.0%, KKR & Co. was 3.8%, Evercore Cl. A was 1.1%, TGS-NOPEC Geophysical was 0.7%, Caleres was 0.0%, Helmerich & Payne was 0.1%, Allegiant Travel was 0.0%, Designer Brands Cl. A was 0.5%


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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