Matthew Harrison

Global small-cap equity specialist Royce Investment Partners, part of Franklin Templeton, is entering the Australian retail investment market with the launch of a global small-cap fund.

The Royce Global Small-Cap Premier Fund, an unlisted Australian unit trust, is an actively managed, core equity fund. The strategy is driven by fundamental, bottom-up research.

Matthew Harrison, managing director of Franklin Templeton Australia & New Zealand, says: “We are very pleased to offer this Fund to Australian investors, as we believe now is the time to look at varied opportunities across the global small-cap sector. In our experience, many small-caps are lightly researched or misunderstood by the market which provides ongoing opportunities to invest in attractively valued stocks.

“Royce, as a specialist active manager across small cap investing, has developed unparalleled knowledge and experience gained through more than four decades of investing. As strong advocates for this asset class, we believe that including a meaningful allocation within a balanced portfolio to global small-caps can improve many investors’ outcomes,” notes Mr Harrison.

The Royce Global Small-Cap Premier Fund seeks to invest in high-quality businesses with three key differentiators:

• Exceptional franchises – companies with durable competitive advantages operating in favourable industry ecosystems
• Strong capital allocators – company management teams with histories of disciplined capital allocation
• Businesses with attractive reinvestment prospects – companies with opportunities to reinvest at high returns

The Fund will invest in a limited number of companies, typically between 60 and 85. Royce is targeting returns that exceed the MSCI All Country World Small Cap Index in Australian dollars over three to five years.

No more than 10% of the Fund’s NAV will be invested in any one company. The Fund will not invest in securities listed on the Australian Securities Exchange.

Royce Investment Partners Founder, Chuck Royce, says the firm’s outlook for small-cap companies is positive.

“Small cap stocks have historically outperformed large caps over the long term and have often done particularly well when economies are expanding.

“In the last year or so, the short but deep recession was followed by massive fiscal spending and extraordinary monetary accommodation. Based on our experience as small-cap specialists, we think it made sense that these developments led to the sort of strong move in small caps we’ve seen since the U.S. market trough in March 2020.

“Now we have considerable pent-up demand—which was already growing prior to the pandemic. Along with healthy global financial conditions, the sounder underlying state of the economy is a very strong sign for positive small-cap performance.

“We note that US small caps have so far posted very strong earnings this year, with a majority of companies reporting that they beat expectations and/or beat on the top line.”

Mr Royce is not overly concerned about the “inflation threat”, saying small-cap businesses are generally nimbler than their larger peers and can adjust more easily to inflation.

Founded in 1972, Royce Investment Partners is headquartered in New York. The firm employs 33 investment professionals and has US$17.6 billion in funds under management. In 2001, it became an affiliate of Legg Mason, which is now part of Franklin Templeton.

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