How did Royce’s small-cap opportunistic strategy perform in Q4 2022?
Jim Stoefel: The Royce Small Cap Opportunity Fund was up 12.3% in the quarter, while the benchmark Russell 2000 Value Index was up 8.4% and the Russell 2000 Index was up 6.2%. , the same period.
How has performance been in 2022 and beyond?
Jim Harvey: The portfolio lagged the 2022 Russell 2000 Value, -17.1% vs. -14.5%. More importantly, he funded both 3 years, 5 years, 10 years, 15 years, 20 years, 25 years, and for the period from inception (November 19, 1996) to December 31, 2022. was above the index of
Which portfolio sector had the greatest impact on Q4 2022 results?
Brendan Hartman: Nine out of ten equity sectors had a positive impact on performance. His three largest sector weights of industry, information technology, and consumer discretionary made the largest positive contribution. Health care was the only negative impact, with financials and staples contributing the least.
What Happened at the Industry Level in Q4 2022?
Kavitha Venkatraman: The top three positive factors were machinery in the industrial sector. Oil, gas and consumable fuels from energy. Aerospace and defense are also included in the industrial sector. Healthcare Equipment & Consumables in Healthcare, Electrical Equipment in Industry, and Chemicals in Materials suffered the most declines in the fourth quarter.
What factors had the biggest impact relative to the benchmark at the sector level in Q4 2022?
JH: Our advantage over the Russell 2000 Value was driven by sector allocation and stock selection in Q4 2022, with nine equity sectors positive against the index. The significantly higher weighting and weaker stock selection impact had the greatest impact on the industrials sector, but the lower exposure to health care and information technology stock selection also contributed significantly to the benchmark. made a positive impact. On the other hand, the lack of exposure to Utilities and Consumer Discretionary stock selection dampened relative quarterly results. As expected in a strong quarter, our cash holdings have also negatively impacted our relative performance.
Looking at calendar years, what were the most significant sector impacts in 2022?
BHs: Eight of the ten equity sectors in the portfolio will negatively impact 2022 performance, with consumer discretionary, information technology and industrials having the biggest negative impacts. Energy and Materials had a positive impact, but Consumer Staples had the least negative impact.
What about industry level?
JH: Specialty retailers in the Consumer Discretionary and two groups in information technology (semiconductors and semiconductor equipment and software) were the biggest detractors, but oil in energy, gas and fuels consumed, metals in materials and mining, and energy in energy. Equipment and services contributed the most. calendar year.
Which sectors had the most impact on performance compared to Russell 2000 values in 2022?
BHs: Our disadvantage to the benchmark was due to the 2022 sector allocation. Stock selection was additive, but not strong enough to produce an outperformance this year. Our higher weighting and, to a lesser extent, consumer discretion undermined stock selection. Our significant underweight and stock selection also negatively impacted Treasury’s relative results. In information technology, the positive effect of stock selection could not overcome the negative effect of significantly higher weights on the benchmark. Conversely, stock selection was materially additive, as was lower exposure to both real estate and healthcare in 2022.
What are the long-term prospects for your strategy?
KV: A continued decline in the money supply combined with easing supply chain constraints (partly due to an overall slowdown in demand) has led to a significant drop in inflation, which is expected to continue into 2023. Its eyes are squarely on the labor market, which has held up so far in this period of rapid rate hikes. Rising labor costs and managing availability are likely to continue to challenge businesses in 2023. Time to turn around and the business cycle to turn around. Meanwhile, supply chain improvements should help small-cap stocks that have faced higher costs or been allocated to inventory and had to sacrifice earnings.
JS: Based on Kavitha’s point, I think the last two years were the beginning of the end of globalization. Reshoring, nearshoring, and onshoring are real trends that many companies will benefit from. Additionally, the Omnibus Spending Bill outlines his 10% increase in defense spending, poised to benefit certain assets. From a longer-term perspective, free money and growth will come to an end anyway as interest rates normalize away from his 0% paradigm of the last decade. In our view, this is definitely a positive outcome for small caps in general, especially for management teams who are good capital allocators and disciplined value investors like us.
Mr. Stoeffel, Mr. Harvey and Mr. Venkatraman’s thoughts and opinions regarding the stock market are solely their own and, of course, cannot be guaranteed as to future market movements. There is no guarantee that the above historical performance trends will continue in the future.