Lead Portfolio Manager Brendan Hartman, Portfolio Managers Jim Stoeffel and Jim Harvey, and Assistant Portfolio Manager Kavitha Venkatraman detail how our Small-Cap Opportunistic Value Strategy performed in the fourth quarter and in 2024 while updating investors on their optimistic outlook.
How did the Small-Cap Opportunistic Value Strategy perform in 4Q24 and in 2024?
Jim Harvey: We were pleased with the way that Royce Small-Cap Opportunity Fund, the portfolio we manage in the Strategy, performed in both periods. The Fund advanced 3.6% in 4Q24, beating its primary benchmark, Russell 2000 Value Index, which was down -1.1%, and the Russell 2000, which gained 0.3%, for the same period. In 2024, the Fund advanced 10.3%, ahead of the Russell 2000 Value, which was up 8.1%, and trailing the Russell 2000, which was up 11.5% for the same period.
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How has the Fund done versus its benchmark over longer-term periods?
Brendan Hartman: We were very pleased with the results over longer-term periods. The Fund beat both benchmarks for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 12/31/24.
What were the Fund’s results on a sector basis in 4Q24?
Kavitha Venkatraman: Six of the portfolio’s 10 equity sectors made a positive impact on fourth-quarter performance, with Information Technology, Industrials, and Energy making the biggest positive contributions while the largest negative impacts came from Consumer Discretionary, Materials, and Health Care.
What happened at the industry level during the quarter?
Jim Stoeffel: At the industry level, energy equipment & services (Energy), communications equipment (Information Technology), and construction & engineering (Industrials) contributed most for the quarter, while chemicals (Materials), automobile components (Consumer Discretionary), and household durables (Consumer Discretionary) were the largest detractors.
How did the Fund perform relative to the Russell 2000 Value on a sector basis in 4Q24?
BH: The portfolio’s advantage over its benchmark was primarily attributable to stock selection in the quarter, though our sector allocation decisions were also additive. At the sector level, both our higher weighting and, to a lesser degree, stock selection in Information Technology, stock selection in Energy, and both stock selection and our higher weighting in Industrials made the most significant positive impact versus the benchmark. Conversely, our lower weighting in Financials, stock picks in Materials, and both stock selection and our higher weighting in Consumer Discretionary detracted most from relative quarter results.
How did the Fund perform at the sector level in 2024?
KV: Eight of the portfolio’s 10 equity sectors had a positive effect on calendar year performance, with Industrials, Information Technology, and Energy making the largest positive contributions. Consumer Discretionary and Real Estate detracted while Consumer Staples made the smallest contribution.
What were the biggest industry contributors and detractors in the calendar year?
JH: The biggest contributions came from construction & engineering (Industrials), energy equipment & services (Energy), and aerospace & defense (Industrials), and specialty retail (Consumer Discretionary), automobile components (Consumer Discretionary), and professional services (Industrials) were the biggest detractors.
How did performance stack up at the sector level versus the Russell 2000 Value in 2024?
JS: The Fund’s advantage over the Russell 2000 Value was almost entirely the result of stock selection in 2024. At the sector level, stock selection helped most in Energy and Industrials (where our overweight was also additive), while in Information Technology our much larger exposure and stock selection gave us a relative edge. Conversely, stock selection and, to a much lower degree, our higher weighting in Consumer Discretionary hurt relative results, as did our substantially lower exposure to Financials and stock picking in Materials.
What is your outlook for the Strategy?
BH: The market’s impressive gains in November were driven by the notion that a Trump victory would usher in an “America First” era as well as fewer regulations on businesses. This rally then reversed course in December as the uncertainty of what can actually be accomplished in Washington, combined with Fed Chair Powell’s hawkish press conference, began to weigh on market sentiment. While the devil is in the details regarding tariffs, regulatory relief, and actual policy implementation, we remain optimistic because the economy is generally healthy and inflation continues to recede. While reduced expectations for Fed rate cuts and the rise in 10-year Treasury yields have also tamped down sentiment, we remain constructive on our portfolio holdings, particularly technology and industrial companies while also adding to our domestic energy exposure, especially as it relates to natural gas and power generation. While ample uncertainty remains as we await the new administration, management teams have generally been positive about potential growth in 2025. Less regulatory interference should lift deal making activity, and we would expect this to benefit our portfolio, which has often held M&A takeover targets. We also hold several companies benefiting from increased spending by both the government and private sector, driven by the ongoing need to maintain and grow U.S. infrastructure, boost our chip-making capabilities, and re-shore manufacturing across several industries. After a difficult year for many Health Care companies, we continue to find new ideas with company-specific catalysts in the value-based care sector, where technology enabled process improvements are driving better outcomes at lower cost, a trend we suspect has a multi-year tailwind. In summary, we find many reasons to be bullish on select small-cap stocks in 2025
Article by Royce Investment Partners
