A Wall Street Transcript Interview with David Nadel, the Portfolio Manager and Director of International Research for The Royce Funds: Finding Investable High-Quality Small Caps Abroad

Wall Street Transcript

67 WALL STREET, New York - January 8, 2014 - The Wall Street Transcript has just published its current Value Investing and Other Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Small Cap Investing - Contrarian Approach to Investing - Quality of Business - Value Oriented Strategy - High-Quality Companies - Long-Term Intrinsic Value - Asset-Heavy Companies - Multicap Contrarian Investing

Companies include: International Small Cap High Quality Winners

In the following excerpt from the Value Investing and Other Strategies Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Can you start with an overview of the Royce International Fund Smaller-Companies Fund?

Mr. Nadel: Sure. The Royce International Smaller-Companies Fund was launched in 2008 actually in the middle of the year just before the global economic crisis and the whole market meltdown. It is a diversified portfolio of about 100 high-quality companies. We have so far managed to produce quite good risk-adjusted performance. There are 30 countries that are represented in the fund, led by Japan; the U.K.; Hong Kong, which is a proxy for China; France; and India. Each of those five countries has greater than a 5% weighting.

I think one distinguishing factor with this fund is the disciplined stock-selection process. The holdings in peer funds tend to have weaker balance sheets and lower returns on invested capital than in our investments. I think when it comes to international investing, it's actually in the small to midcap zone that you find the highest quality and the most agile companies, I think more so than in large caps. So that is a reason for going with an active manager in the international equity area.

TWST: When you say an active manager, are you distinguishing your style of management or the fund's style of management with, say, an ETF?

Mr. Nadel: I think that's right. Certainly ETFs have become available to investors often at lower costs in theory than the actively managed funds. But that comes with a price tag, because typically the international ETFs aren't focused purely on smaller companies. And again it's in that zone of smaller companies where I think you find the cleanest businesses internationally. If you're lucky enough to find an ETF focused just on smaller international companies, most likely it will include whatever is in the index, and unfortunately the vast majority of small companies are really not very high quality, and many of them are money-losing. So it's really only with an active manager that you're going to be able get a very carefully selected portfolio at good valuations. That's where the active management comes to play. So the differential in fee I think is more than trumped by the quality of exposure that you get.

TWST: Given the state of the global economy and perhaps the U.S. economy, why is this asset class positioned to do well and what might the headwinds be going forward?

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.

Rates

View Comments (0)