2021 saw Royce International Premier Fund underperform its benchmark after four consecutive years of outperformance. The Fund advanced 5.8% in 2021, trailing its benchmark, the MSCI ACWI ex-USA Small Cap Index, which was up 12.9% for the same period. The Fund beat the benchmark for the 3-, 5-, 10-year, and since inception (12/31/10) periods ended 12/31/21.
What Worked… And What Didn’t
Four of the portfolio’s nine equity sectors made a positive impact on 2021’s performance, led by Industrials, Materials, and Real Estate, while Health Care, Information Technology, and Consumer Discretionary made the largest detractions. The Fund’s top-contributing position in 2021 was IMCD (XAMS:IMCD, Financial)—a leading distributor of specialty chemicals. Based in the Netherlands, IMCD offers more than 40,000 products to a diverse range of industrial and life sciences customers in areas that range from personal care to food and pharmaceuticals. Its shares rose steadily in 2021 and gained nearly 75% for the year. Results for the first nine months of 2021, announced in November, saw strong organic growth stemming from the company’s pricing power (a key attribute in inflationary periods) and ability to gain market share. IMCD also announced 10 acquisitions in 2021, consistent with its proven ability to acquire businesses at attractive prices.
Next came Australia’s Hansen Technologies (ASX:HSN, Financial), which provides billing software and customer care technologies for utilities and the telecom industry. Its shares gained sharply in March on the announcement that it had executed a Master Agreement with Telefonica’s Germany operations before rallying again in June after the company announced it had received an unsolicited proposal to be acquired by private equity firm BGH. The stock then gave back much of those gains when BGH unexpectedly withdrew its proposal in September. As investors then re-focused on the company’s fundamentals, the stock was mostly flat through the rest of the year as sentiment fluctuated between optimism around long-term performance and concerns about cost inflation and the achievement of the company’s short-term organic growth targets.
The top detracting position was Australia’s Bravura Solutions (ASX:BVA, Financial), which offers software solutions for the wealth management and fund administration industries. Its stock fell by almost 40% from mid-August through the end of the year, triggered by the release of full fiscal year 2021 results that, while in line with management’s guidance, reflected weaker results of “just” mid-teens growth. The company also announced the unexpected retirement of a popular long-time CEO, who was succeeded by the company’s COO. The market’s adverse reaction to his departure was exacerbated by the company’s limited communication about the departure, which followed an earlier management departure and the pending retirement of the company’s CFO. Our call with the company’s outgoing CFO, however, underlined Bravura’s strong ongoing customer retention, M&A pipeline, and positive long-term outlook supported by recovering client demand.
The second biggest detractor was Japan’s OBIC Business Consultants (TSE:4733, Financial), an accounting software company with a leading market share among small- to medium-sized businesses. OBIC allows these companies to digitize and more efficiently conduct mission critical accounting processes. We suspect that 2021’s underperformance came from profit taking, as the year saw a broad reversal in the Japanese equity market. This reversal was particularly pronounced in the IT sector, where several companies that were in top performers in 2020 wound up correcting in 2021.
In 2021, non-U.S. small-cap companies in the top quintile of leverage underperformed those in the bottom quintile—and our holdings carry little to no debt. As such, our disadvantage came from stock selection in 2021, with the Information Technology, Health Care, and Financials sectors making the most significant negative impact on that basis while Industrials, Consumer Staples, and Real Estate contributed most to relative performance—mostly the result of sector allocation decisions.
Top Contributors to Performance20211 (%)
1 Includes dividends
Top Detractors from Performance20212 (%)
|OBIC Business Consultants||-0.66|
|NICE Information Service||-0.47|
2 Net of dividends
Current Positioning and Outlook
During 2021, ultra-low interest rates, substantial asset purchases by central banks, and unprecedented levels of COVID support packages from governments combined to soak financial markets with liquidity. At the same time, we believe the volatile nature of the pandemic continued to affect commerce and social behaviors, providing investors with both the means and the opportunity to bet on shorter-term stock market outcomes. The result, in our view, was a more speculative three-way tug of war between ‘growth at any price,’ ‘cheap re-opening plays,’ and ‘inflation hedges.’ Given that our investment philosophy is rooted in the focus on long-term value creation rather than the pursuit of short-term price appreciation, the market backdrop was difficult, to say the least. While the stock market hasn’t so far, in our view, correctly priced in the value that our portfolio companies created in 2021, we continue to believe that our approach will be rewarded with correlated price appreciation in the long run. Of course, we cannot predict when the market will refocus on ‘mathematics’ rather than ‘thematics.’ However, we do believe that such a moment is long overdue, and that, in the meantime, our companies continue to create additional shareholder value.
Average Annual Total Returns Through 12/31/21 (%)
|MSCI ACWI x USA SC||0.62||12.93||12.93||16.46||11.21||9.46||6.56||N/A|
Annual Operating Expenses: Gross 1.57 Net 1.44
1 Not annualized.
The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2021, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Royce’s investment intentions with respect to those securities reflect Royce’s opinions as of December 31, 2021 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.