Royce International Premier Fund gained 0.8% for the year-to-date period ended June 30, slightly trailing its benchmark, the Russell Global ex-U.S. Small Cap Index, which rose 1.0% for the same period.
During the first quarter, results for non-U.S. small caps were mixed. Those in developed Europe –Â the strongest international small-cap group in 2015Â –Â corrected most sharply. Considering that more than half of the portfolio’s net assets were invested in companies headquartered in this region, we were not surprised that the fund fell behind its international small-cap benchmark for the quarter when International Premier lost 1.2% versus an advance of 0.9% for the benchmark.
The second quarter was moving along in a less volatile, more bullish fashion until the Brexit decision upended many markets, particularly those in the eurozone. By the end of June, most had still not recovered, unlike many of their counterparts in other regions of the globe. The fund managed well during this highly volatile period, outpacing the Russell Global ex-U.S. Small Cap in the second quarter, up 2.0% compared to a 0.1% advance for its benchmark.
We were also pleased that the portfolio held on to its longer-term relative performance edge. International Premier outperformed the Russell Global ex-U.S. Small Cap for the one-, three-, five-year and since inception (Dec. 31, 2010) periods ended June 30.
What worked and what didn't
Five of the fund’s eight equity sectors made positive contributions to first-half results. Health Care led by a wide margin, followed by a strong net gain for Financials while the Materials, Consumer Discretionary and Energy sectors were the detractors. Two industry groups in Health Care made outsized net gains – health care equipment and supplies and health care providers and services. Among the industry groups that detracted, the biggest net losses came from pharmaceuticals (also in Health Care), chemicals (Materials) and oil, gas and consumable fuels (Energy).
Health Care was the fund’s second-largest sector weighting at the end of June. A large and diverse area, it is also home to many companies that fit the most desirable of our four business models – what we call “perennials,” businesses with high levels of recurring revenues and reasonable to attractive valuations.
OdontoPrev (BSP:ODPV3, Financial) is a dental benefits and technology company in Brazil, which has one of the largest dentistry markets in the world. Its business was helped by strong earnings and increased membership as well as the recovery of Brazil’s stock market and currency during the first half. We took some gains in June as its price climbed.
Carl Zeiss Meditec (XSWX:AFX, Financial) is a German medical technology company with a global business that focuses on ophthalmological treatments and therapeutic systems. Currency tailwinds and strong growth in its surgical ophthalmology segment helped its shares to rise in the first half. We reduced our stake in the second quarter.
Virbac (XPAR:VIRP) is a French firm that makes vaccines, antibiotics and other veterinary medications. Its shares suffered mostly from the negative results of a 2014 FDA investigation of its U.S. plant in St. Louis that were released earlier this year. We were confident that the company dealt effectively with these issues – it was the portfolio’s 15th-largest position at the end of June.
Gaztransport Et Technigaz (XPAR:GTT.PA) is a French engineering company that specializes in cargo containment systems and land storage for liquefied natural gas carriers. Its shares looked less attractive when the Fair Trade Commission of South Korea – a major hub of its business – announced it would investigate whether or not the company was in violation of fair trade laws, which led us to sell our shares in the first quarter.
We also parted ways with Motherson Sumi Systems (NSE:MOTHERSUMI), an Indian business that makes mirrors, wiring harnesses and other automotive components due to what we saw as more compelling opportunities elsewhere.
The fund’s most significant disadvantage versus its benchmark was its lack of exposure to the metals and mining group while we had stock selection advantages in the two aforementioned health care industries, capital markets (Financials) and electronic equipment, instruments and components (Information Technology). The countries with the greatest positive impact on first-half results were Switzerland, Brazil and Japan; holdings in France and the U.K. detracted most.
Top contributors to performance
- OdontoPrev 1.29%.
- Carl Zeiss Meditec 0.68%.
- MISUMI Group (TSE:9962) 0.62%.
- Partners Group Holding (XSWX:PGHN) 0.50%.
- Fidessa Group (LSE:FDSA) 0.45%.
Top detractors from performance
- Virbac (-0.77%).
- Gaztransport Et Technigaz (-0.67%).
- Motherson Sumi Systems (-0.51%).
- Victrex (LSE:VCT) (-0.50%).
- Azimut Holding (MIL:AZM) (-0.46%).
Current positioning and outlook
At the end of June, our largest country exposures were to Japan, the U.K., Switzerland, and Germany and our biggest sector weightings were in Industrials, Health Care, Information Technology, and Financials. In the wake of Brexit, our core discipline, which emphasizes companies with notable strengths in industry structure, competitive positioning, operational efficiency, financial track record, and corporate governance, remains unchanged. We believe that the U.K. is more likely to move, however slowly and fitfully, toward Norway’s model – with negotiated access to the common market. In addition, after initial stumbles, political matters in the country are coming together more effectively. So while volatility – both in the U.K. and the eurozone – seems likely to remain high in the short run, our confidence in the long-term prospects for our European (and other) holdings remains strong.
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