Fund Highlight: Royce Global Select Fund
The Royce Global Select Fund (RSFTX) seeks long-term growth of capital by investing in both long and short positions in equity securities. The long portion of the fund’s portfolio is invested in a limited number (generally less than 100) of U.S. and foreign micro-cap, small-cap, and mid-cap companies that management believes possess excellent business strengths and/or growth prospects, high internal rates of return, and low leverage. The fund may also place up to 35% of its net assets in short equity positions, and may employ leverage. David Nadel, who has 18 years of industry experience, including three at Royce, manages the fund.
The Global Select Fund invests largely in securities from outside of the United States. In fact, the United States accounted for only about 9% of net assets as of the end of the June, 2010 quarter. Royce management uses the same investment criteria for international holdings as it does on the domestic front. It focuses on small companies with strong balance sheets that generate high rates of return. More specifically, it targets companies with returns on invested capital of at least 20% and equity-to-total capital ratios of at least 50%. Management favors face-to-face meetings with company management.
As of the end of the second quarter, the Global Select Fund had nearly 60% of its net assets in the natural resources, health, and industrial products segments. The portfolio ‘s top-10 stocks accounted for roughly 25% of assets, while it had 67 holdings. Also, regarding countries, only Canada accounted for more than 10% of net assets. This is a reasonable amount of diversification. The fund’s operating expenses are only 0.75% of assets, which is quite low relative to the competition (it is also based on the total return of the fund, something which is unique among its peers).
Currently, management is seeing a lot of opportunity in markets like Finland, Austria, and Switzerland, which are world-class exporters that are achieving growth via sales to emerging markets. Management also remains committed to natural resource laden countries such as Canada, Germany, and South Africa. Brazil is also noted as an attractive market, though equity-market valuations are a bit pricey for management’s taste.
Many Western European markets are down 15%-20% year-to-date, which has resulted in much “bad press” about this region. Because Royce focuses on companies with strong balance sheets, it has been difficult to find suitable investments in the region, particularly Spain and Portugal, two countries that have been largely debt-financed. The fund has limited exposure to Greece and Italy, however management notes that the latter country’s strong brand names are alluring.
Broadly speaking, management believes that European companies offer many advantages compared to their American counterparts. First, the portfolio can gain industry exposure that’s not available on the domestic front. In fact, certain European industries can’t be found in the United States at all. For example, the only pure-listed veterinary drug companies are in France. There are also some unique French and Italian luxury goods companies, and certain specialist engineering companies that are found only in Germany. Secondly, many European companies have a more international scope. The U.S. has a sizable market (300 million people). Thus, in many cases, a domestic company can increase its revenues by focusing just on the home front. However, a company based in Switzerland, for example, will likely have to look internationally to increase its market presence, as the country has a population of only about 7 million. Therefore, a Swiss company has to deal with differences in language, customs, cultural tastes, and preferences. Management believes that to overcome these variables a company has to be highly innovative compared to a company that operates exclusively on the domestic front. Also, many European countries tap into emerging markets, which can be a very lucrative, though risky, venture.
Through June 30th the Royce Global Select Fund has handily outpaced its benchmark MSCI World Small Core Index since its inception in June of 2005. The fund has returned just over 11%, while the benchmark has managed to eek out a gain of just 1.7%. This year, through June, the fund has posted a slight loss -0.6%, compared to a nearly 4% deficit for the benchmark index. We believe the Royce Global Select Fund is a solid choice for investors seeking a low-cost way to gain exposure to international small- and mid-cap growth companies.