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Tickers in this Article: RMT, RVT, FUND, MVC, WEYS, AB, PAAS, RS
In the world of investing, it sometimes pays to go with a specialist. By focusing funds on a single segment of the market, boutique firms can hone their stock-picking skills and analysis. Specialized firms offer regular Joes the chance to invest in hard-to-understand asset classes such as master limited partnerships or real estate investment trusts.

Currently, the case for small-cap stocks is compelling. The iShares Russell 2000 Index Fund (NYSEArca:IWM), which represents the small-cap universe, is currently down about 29% year-to-date. By finding an authority that concentrates on small company stocks, a manager can use his or her expertise to cherry-pick the best securities for investors' portfolios.

Enter Royce Associates
In 1972, Charles Royce pretty much invented small-cap investing when he took over at the helm of Quest Advisory Corp. Since then, assets under management have bloomed to over $30 billion - $123 million of which is personally invested by Royce Associates employees and their families - and the company has become a wholly-owned subsidiary of Legg Mason. Fund managers who eat their own cooking make for a very bullish sign.

Using a bottom-up value investing tilt, Royce operates 22 open mutual funds and two portfolios for the annuity market. Its closed-end offerings provide investors juicy opportunities. Here, long-term investors are given the chance to buy some quality assets at a discount. (Get acquainted with closed-end funds at Uncovering Closed-End Funds and Open Your Eyes to Closed-End Funds.)

Three Closed-End Jewels
Investors who want to take a chance on the smallest of the small can look toward the Royce Micro-Cap Trust (NYSE:RMT). The fund invests in companies with market capitalizations of less than $500 million. Due to the sector's size (an estimated 5,400 micro-cap companies exist) and limited Wall Street research, Royce believes it can find pricing inefficiencies and exploit them for long-term investors. (Learn more about thinking small at How to Evaluate a Micro-Cap Company.)

Currently, the fund holds 547 stocks and warrants. Top holdings include MVC Capital (NYSE:MVC) and shoemaker Weyco Group (Nasdaq:WEYS). With Charles Royce in charge, the fund has returned an annualized 9.73% of net asset value (NAV) since inception and is trading at an 18% discount to its NAV. The Micro-Cap Trust has a managed payout distribution plan of 9% and typically pays out around 30 cents per quarter. Fees and expenses for the closed-end fund run 1.56% per year.

The largest and most broadly diversified of Royce's closed-end funds is the Royce Value Trust (NYSE:RVT), which invests in companies below a $1.5 billion market cap ceiling using a value approach. The fund currently holds 645 micro-, small- and mid-cap stocks. Top holdings include AllianceBernstein (NYSE:AB) and Lincoln Electric (Nasdaq:LECO). The Royce Value Trust's top-10 holdings account for a little under 12% of the fund's assets, and the fund has an average weighted market cap of $967 million.

For over 20 years of operation, the Royce Value Trust has returned an annualized 9.8% of NAV. Based on Wednesday's closing, it trades at an 11.9% discount to net asset value. The fund also applies the same managed payout distribution plan as the Micro-Cap Trust and fees and expenses run an annual 1.38%

Of Royce's closed-end funds, Royce Focus Trust (Nasdaq:FUND) has the highest risk-to-reward ratio. The Royce Focus gives long-term investors a concentrated small-cap portfolio in order to enhance returns. It only counts 53 stocks and warrants among its holdings and fund manager W. Whitney George, using a value approach, selects stocks he thinks will outperform over a long time line. Current holdings include Pan American Silver (Nasdaq:PAAS) and Reliance Steel & Aluminum (NYSE:RS). George has recently made some open-market purchases of the fund and currently holds about 900,000 shares directly. As of Wednesday, the fund is trading at a slight discount to its net asset value of $3.73 and charges 1.31% in expenses. While the fund has performed well long-term, it is down about 45% year-to-date.

Bottom Line
Small-cap stocks historically have proved to be the catalysts of tomorrow's economy. In turbulent economic times, long-term investors can set themselves toward profitable futures by aligning their portfolios with a specialist such as Royce and can gain some much-needed insight into particular asset classes. The preceding three closed-end funds are a great place to start for small-cap stocks.

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