Last updated: Dec-13-2018

    
 
A GRADE RBC U.S. SMALL-CAP VALUE EQUITY FUND BULLISH ON INDUSTRIALS
12/14/2018 5:01:25 PM
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THE FUND INSIDE
Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.
 



By Olev Edur  | Tuesday, January 16, 2018




Lance James, Managing Director and Senior Portfolio Manager at RBC Global Asset Management (U.S.), believes the RBC U.S. Small-Cap Value Equity Fund is well positioned to benefit from the changing U.S. investment environment resulting from reduced corporate taxes, ongoing deregulation, and rising interest rates.

For one thing, the fund’s portfolio is loosely based on the Russell 2000 Value Index and so is heavily weighted in financials (about 30% plus 10% in real estate investment companies with financial characteristics). The value index is a subset of the Russell 2000 Index, and consists of 1,350 value-oriented American securities of companies with market capitalizations averaging US$2 billion.

“We’re very positive on the small-cap financial market because the cost of regulation hits small banks proportionately more than large ones,” says James. “Smaller banks tend to be domestically oriented, so they’ll also be prime beneficiaries of the tax cuts. And further interest rate increases would be very positive for banks in general.”

James believes the rate cuts and deregulation will also be a boon for industrial goods and services companies (17% and 8% of the fund portfolio respectively), perhaps even more so than financials. “Industrials could really surpass and outperform all other sectors,” he says, citing economic data that show the level of manufacturing, as well as employment in the sector, has been increasing since the summer of 2017.

“Last year we were concerned that [the sector’s] next move would be a decline, but it’s gone upward instead,” James says. “Manufacturer data is at a multi-year high, and there’s a lot of momentum going forward. We’re most bullish on industrials and as with banks, smaller companies will be the bigger beneficiaries of tax cuts and deregulation.”

As for finding value in an equity market that has gotten expensive lately, James and his team rely on a combination of fundamental research and footwork. “We have six people, including myself, on the research team, and each specializes in a certain sector, such as financials or industrials,” says James. “They’re all well experienced, familiar with the sectors as well as the players.

“We look for companies that have superior long-term business fundamentals and strong franchises, but that are misplaced in the market, that have been neglected by institutional investors and the big brokerages,” says James. “We’re value investors, though, so we don’t go into speculative areas like biotechnology.

“Collectively, we do about 1,000 face-to-face meetings with company management every year,” James adds. “We talk not only about their own companies, where there’s obviously going to be some bias, but they’re also a good source of information about changing dynamics in their industry, what their competition is doing, what the suppliers are doing – on that we get a less biased viewpoint.

“The other element in our section process is a special quantitative screen relative to the market, to other participants in that market, as well as to the company’s own history,” says James. “If we see a company whose value has been discounted, we ramp up our fundamental research, do an in-depth examination, and finally we take each idea to the whole team to discuss the pros and cons based on intensive research. Vetting by the full team helps avoid some hiccups, although you can’t avoid them all.”

As one favored pick, James cites Elkhart, Indiana-based Patrick Industries Inc. (NASDAQ: PATK): “They’re a major supplier of interior elements to the RV industry and the manufactured housing market, and now the marine market. They’re very successful consolidators with earnings growth of 20% a year. And the RV market is burgeoning. The average age of RV buyers has decreased from 59-60 years down to 50, meaning a lot of 30- and 40-year-olds are making their first purchase. And people who buy RVs upgrade every four or five years, so there’s a lot of growth potential.”

Another favorite is Gray Television Inc. (NYSE: GTN.A): “They own stations in university towns and smaller state capitals,” says James. “They’re rated number one among local broadcasters, so they get the lion’s share of advertising, but I don’t think their success with cable opportunities has been appreciated. The broadcast business was very cyclical, but now their revenues are growing year by year. They’ve performed well, and their stock is up 40%-50%, yet they’re trading at 10 times price/earnings.”

The fund is relatively new, having debuted only in September 2015, so performance history is short. However, the fund has delivered a 2-year average annual compounded rate of return of 13.6% to Dec. 31, 2017. And as shown in the graph below, in that short period, it has outperformed by a considerable margin the Fundata Prospectus Risk Index (Medium to High) of funds with the same prospectus risk rating.

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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