Meet the manager
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
Q. Who are Royce?
Lauren Romeo: Royce has been a Franklin Templeton specialist investment manager since 2001 but our existence dates back to 1972 when it was founded by Chuck Royce, even before the main small cap indices were launched.
We are a dedicated US small cap specialist as opposed to a small component of a larger business. The totality of our 38 investment professionals are focused on the small cap space – so looking specifically at companies that have relatively small market valuations.
This has enabled us to build a unique domain knowledge of the asset class, which would be nearly impossible to replicate today.
Importantly, our portfolio managers have substantial ownership in the strategies they manage. Our officers, employees, and their families have approximately $117 million invested alongside our clients.
Q. What about the US small cap strategy?
Lauren Romeo: The FTF Royce US Smaller Companies Fund was launched in 2004 and is managed by myself, Lauren Romeo. I've been involved since inception. It is a Core strategy, which invests at the “intersection of Quality and Value”.
Q. How do you define quality?
Lauren Romeo: We define “quality” as companies that generate and sustain above average returns on invested capital (ROIC) – this basically measures how well a company uses the money it invests - have low financial leverage, and produce consistent free cash flow.
These financial attributes are typically reflective of a company with a superior business model built on discernible competitive advantages that create a durable, moat-like franchise.
However, a great company may not be a great investment if one overpays, so I seek to buy holdings in these high-quality companies at a reasonable valuation.
Q. When can quality be purchased at a reasonable price?
Lauren Romeo: This can occur when they are temporarily out-of-favour for cyclical or company-specific, but fixable reasons. Alternatively, when I believe a company’s enterprise valuation does not fully reflect its quality attributes and associated long-term earnings power. Enterprise valuation takes into account both the equity and debt commitments of a company.
Q. What is the genesis of the strategy?
Lauren Romeo: The FTF Royce US Smaller Companies Fund harnesses Royce’s Premier Quality approach, which the firm has been employing successfully for over three decades.
Historically, over the long-term, high quality small caps (as measured by ROIC) have outperformed the asset class and done so with less risk (see chart below).
Premier Quality Companies Outperformed
10-year average annualised return from 30/06/97 – 31/03/20231
1. Average of monthly rolling average annual total returns over specified periods.
2.The top decile of securities in the Russell 2000 Index, sorted by a combination of ROIC and stability of ROA (Return on Assets is a measure of a company’s efficiency in generating a profit from their total assets.) .
The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
Source: FactSet and Royce Investment Partners as of 31/03/2023.
Past performance is no guarantee of future results.
Q. On what insight is this investment approach based?
Lauren Romeo: We believe this approach reflects these companies’ ability to sustain above average ROIC for longer-than-average. This is down to the durability of their competitive advantages, as well as their opportunity to compound value through reinvestment at similarly high rates of return.
The fund’s strategy is also rooted in the fundamental insight that behavioural biases and business cycle factors create dislocations between the share prices and enterprise values of high-quality, small-cap companies.
We believe our long-term investment horizons and small cap focus means we are ideally positioned to capitalize on this disconnect to buy excellent companies at attractive prices.
Q. What are the fund’s key characteristics?
Laura Romeo: The fund is a high active share strategy, which uses a bottom-up driven stock selection approach to build a relatively concentrated portfolio of typically 60 to 80 stocks.
It invests with a long-term horizon in order to benefit from the compounding of returns over time by these premier companies. We’ve found that other investors often underestimate the sustainability of the returns of this select group of high-quality businesses.
Q. In brief, what key features of the fund would you highlight?
Lauren Romeo:
- It’s an actively managed fund that takes a business buyer’s approach.
- We focus on high-quality companies that we believe are ideally suited to take advantage of the attractive opportunity in US small cap stocks.
- The fund is built on an investment discipline practiced by Royce, a pioneer in Small Cap investing, for over 30 years.
- It has delivered solid long-term returns while sticking to its Small Cap Core mandate. For more information on performance, please click here.
Introducing the FTF Royce US Smaller Companies Fund
This US small cap strategy is managed by a pioneering group of US smaller company specialists and has a long track record of delivering solid returns.