David Nadel and Mark Rayner, managers of the Royce International Premier Fund, rarely see their offices in New York and London, respectively.
That’s because they’re on the road visiting smaller companies — a combined 150 countries a year between the two of them. They could be in Switzerland or India, Austria or Singapore. The Royce International Premier Fund RIPNX, +0.48% buys mainly non-U.S. companies with market capitalizations of $3 billion or less.
The reward for investors: The fund has returned 32% this year, about double that of the benchmark Russell Global ex-U.S. Small Cap Index.
RIPNX, +0.48% Royce International Premier, which has received four out of five stars from fund researcher Morningstar, invests “exclusively in local markets,” Nadel said, meaning it doesn’t buy shares traded on U.S. exchanges. “The shareholders of our holdings tend to be locals. We have to go to these markets to meet with them.”
The managers typically invest in companies “that are deeply customer-focused, with the philosophy being that if the customer is served well, the shareholders will be served well over time,” Nadel said.
That leads to a portfolio with many companies that primarily serve one country. That’s a way to diversify from big-name conglomerates that operate all over the world in a sometimes overly complex way. RIPNX, +0.48%
Beating the benchmark
Investors who have put their money in the large-cap S&P 500 Index have been richly rewarded since the start of the bull market in early 2009. Still, more than eight years of increases may have left the benchmark index overvalued, according historical measures of forward price-to-earnings ratios.
So investors would be wise to consider diversifying outside the U.S. and in small- and mid-cap companies.
Before reviewing the fund’s performance, look at how well the benchmark large-cap S&P 500 SPX, +0.22% has performed since it bottomed on March 9, 2009, against the S&P 400 Mid-Cap Index MID, +0.25% and the S&P Small-Cap 600 Index SML, +0.19% :
So it’s obvious that investing in an S&P 500 index fund, or ETF, has been easy money. And Barry Ritholz makes a good argument that the bull market is only about four and a half years old.
Let’s split the difference and look at how well the S&P 500 has performed over the past five years, against two international indices that exclude U.S. companies:
You can see that the performance for the Russell Global ex-U.S. Small Cap Index RGXUSUSD, +0.27% has been nearly as good as that of the S&P 500, but it includes a completely different set of stocks, so there is an opportunity for diversification.
Now check out the performance of the Royce International Premier Fund against the Russell Global ex-U.S. Small Cap Index, the fund’s benchmark:
|Total return – 2017, through Oct. 2||Total return – 1 year||Average return – 3 years||Average return – 5 years|
|Royce International Premier Fund||31.9%||23.3%||13.6%||11.8%|
|Russell Global ex-U.S. Small Cap Index||15.4%||19.0%||11.1%||13.5%|
|Source: Morningstar Direct, FactSet|
The Royce International Premier Fund is about 51% invested in European stocks, with only 7% of the fund in emerging-market stocks. So it provides even more diversification — this time away from emerging-market economies that feature explosive growth, but also a high level of volatility.
Nadel broke down three companies held by the fund.
VZ Holding AG VZN, +1.70% was the fund’s largest investment as of June 30. The Zurich-based company provides wealth-management services mainly to customers in Switzerland, while also providing insurance, estate planning and tax services.
“They have an unbroken record of profitable growth, going back to the founding of the business 17 years ago. This includes the economic crisis. Their target market is homeowners in Switzerland who are 50 years or older,” Nadel said.
He added that the company’s client base of about 30,000 represents “less than 15% of their addressable market” in Switzerland of people with “north of $2 million in assets.”
Mayr-Melnhof Karton AG MMK, +0.45% is headquartered in Vienna. The company recycles paper to manufacture cardboard packaging.
“They are what we would call a cost leader,” Nadel Said. He emphasized that he and Rayner “shy away from capital-intensive businesses,” but in the case of Mayr-Melnhof, that can be an advantage.
“Their peers tend to be financially levered. When the demand cycle turns against them, they have their back to the wall, and Mayr-Melnhof, with their superior balance sheet, is able to absorb that excess capacity,” Nadel said.
He described the company as “a green play” with an attractive dividend yield of about 2.5%, about average for the fund.
Cochlear Ltd. COH, +1.26% is based in Sydney and has about a 60% share of the international market for cochlear implants, according to Nadel, who described the market for the ear implants as “an oligopoly.”
“The market is growing about 8% a year, driven by global aging and the emerging middle class in emerging markets,” he said. “While a poor family might have accepted having a child with hearing loss, a family now might address it.”
Cochlear returns 70% of its operating income to shareholders in the form of a divided, Nadel added.
Here are top 10 holdings of the Royce International Premier Fund as of June 30:
|Company||Ticker||Country||Industry||Total return – 2017, through Oct. 2||Total return – 3 years||Total return – 5 years|
|VZ Holding AG||VZN, +1.70%||Switzerland||Investment Managers||3%||107%||208%|
|Mayr-Melnhof Karton AG||MMK, +0.45%||Austria||Containers/ Packaging||25%||59%||91%|
|Partners Group Holding AG||PGHN, +0.08%||Switzerland||Investment Managers||41%||183%||282%|
|Meitec Corp.||9744, -1.07%||Japan||Personnel Services||28%||97%||276%|
|USS Co. Ltd.||4732, -0.48%||Japan||Misc. Commercial Services||25%||51%||224%|
|Santen Pharmaceutical Co.||4536, -1.68%||Japan||Pharmaceuticals||24%||53%||171%|
|Relo Group Inc.||8876, -1.08%||Japan||Real Estate Development||55%||264%||903%|
|Vakrangee Ltd.||511431, +0.03%||India||Information Technology Services||82%||300%||699%|
|Thermador Holding SA||THEP, -0.38%||France||Wholesale Distributors||30%||56%||129%|
|Bajaj Finance Ltd.||500034, +1.77%||India||Finance/ Rental/ Leasing||119%||568%||1,534%|
|Source: Morningstar Direct|