Closed-End Fund Opportunities: A Look at Royce Funds

Includes: FUND, RMT, RVT
by: Robert Lewis

Royce & Associates, headed by Chuck Royce, is a deep value manager specializing in small cap funds. They have been in business more than 35 years and manage approximatley $37 billion in assets. They have three closed end funds which sell at discounts and are extremely well managed.

It has been my experience that very few small companies survive as they are. They either grow, are acquired or disappear. There are many wonderful small cap companies but we live in a world of giants. To invest successfully in small cap stocks many firms must be analyzed and investigated. It takes specialized research and commitment to do this. Royce specializes in exactly this sector of the market and has been successful for many years.

All three of the company's funds are based upon their area of expertise but differ in their approach. In general, I am a purchaser when the discount hits 15%. I prefer not to pay up and will wait patiently for the discount to widen to meet my entry level target price. These are exactly the kind of investments suitable for the closed end structure as they are not terribly liquid and cannot readily be bought and sold based upon mutual fund sales and redemptions.

Royce Value Trust

This is the flagship fund with over $1.1 billion in assets as of December 31, 2010. The fund is 20% leveraged with preferred stock. At one time they had issued convertible bonds but find the preferred stock easier to manage. The portfolio consists of over 600 seperate securities that are almost exclusively common stock. Some of the companies are recognizable names but most are not. Although they are fine companies, there is no assurance as to which will continue to prosper, grow, be acquired or decline. This does represent a sector in which individuals should be invested. The concept is fine alone but with an attractive 15% discount it is even more appealing. Its symbol on the NYSE is RVT.

Since its inception in 1986 the fund has had an average annual return of over 11%. Over 80% of its assets are in the United States and last year it had a 30% turnover rate.

Royce Micro-Cap Trust

This fund was established in 1993 to invest in even smaller companies. Since inception, it has shown annualized returns in excess of 11% per annum. As of December 31, 2010, it had assets of $311 million spread out over 340 different securities. The fund trades on NYSE under the symbol RMT.

Again, I love the concept, respect the management and approve of the fund, yet I will only initiate purchases when the discount widens to 15%. Small cap funds go in and out of favor and you simply must wait for the opportunity.

No one realy knows which of these small companies will prosper and survive and so I recognize this shotgun approach as the proper method of investing in this sector. You pick fine outstanding companies and then hope and pray.

Royce Focus Trust

This last fund, established in 1996, has also shown annualized returns in excess of 11% since inception. It differs from the other funds in that this fund uses a rifle instead of a shotgun. The $172 million in assets is spread out in only 59 different securities. For that matter the top 10 holdings constitute 28.4% of total assets. The fund trades on NASDQ under the symbol FUND.

I am not a friend of this approach as you never really know which small companies will grow or decline. They simply lack the stability of larger firms. This could be the reason why the fund deviates from its mantra and owns such large cap companies as Berkshire Hathaway (NYSE:BRK.A) and Microsoft (NASDAQ:MSFT).

Disclosure: I am long RVT, RMT, FUND.