Charles M. Royce, President & Co-Chief Investment Officer of Royce & Associates, LLC, Interviews with The Wall Street Transcript: Investing in Nonbank Financial Services

Wall Street Transcript

67 WALL STREET, New York - May 1, 2013 - The Wall Street Transcript has just published its Investing in Financial Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Financial Services - Interest Rates and Loan-Growth Strategies - Regulatory Outlook Gains Clarity - Long-Term Investing - Large Cap Investing - Longer-Term Investing

Companies include: Spherion Corp. (SFN), TD AMERITRADE Holding Corporat (AMTD), AllianceBernstein Holding L.P. (AB), Federated Investors, Inc. (FII), State Street Corp. (STT), T. Rowe Price Group, Inc. (TROW), Northern Trust Corporation (NTRS), Apollo Group Inc. (APOL), The Blackstone Group (BX) and many more.

In the following excerpt from the Investing in Financial Services Report, an expert money manager discusses his portfolio-construction strategy and his investment philosophy:

TWST: You've been overweight in capital markets names, as you've just alluded to.

Mr. Royce: The capital markets group includes money managers, as well as regional brokers like Stifel Financial Corp. (SFN) and TD Ameritrade Holding Corp. (AMTD) It would also include many of our favorite money managers, from AllianceBernstein (AB) to Federated (FII), to some offshore money managers, such as Jupiter (JUP.L).

TWST: In your end-of-the-year commentary, that group housed eight of the fund's top 10 contributors and seven of the 10 most significant detractors. What is the environment around that group as you look ahead?

Mr. Royce: The capital markets area remains one of our favorite industries within financials. Many times over the past several years, money managers have been trading at extremely attractive valuations. They are not capital-intensive. They are a classic service business. They're customer-centric and product-centric. The fees have relatively high margins. Many have solid, underlevered balance sheets, so they can afford to pay dividends. They are currently underappreciated in the investment spectrum, largely because markets remain extremely risk-averse.

TWST: Why is the focus on small and midcap stocks overall, and what advantages and/or disadvantages do you think that focus presents when you look at the financial services sector?

Mr. Royce: That is our DNA. As a firm, we focus on companies with market caps under $5 billion. To us, this is an asset class that is filled with opportunities. The investment universe of small companies is both large and diverse. Small-cap equities form the largest domestic equity universe, accounting for approximately 82% of all publicly traded companies in the U.S.

The universe includes more than 4,100 companies and represents more than $1.6 trillion in total market capitalization. The Royce Financial Services Fund has a median market capitalization of roughly $2.5 billion at the end of the first quarter 2013. We've kept it small, but we do own things like State Street (STT), T. Rowe Price (TROW) and Northern Trust (NTRS). They are all larger, but are companies that we know quite well.

TWST: It looks like the fund tends to outperform in down markets when compared to the Russell 2000. Why do you think that is?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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