InvestmentsDec 14 2015

Fund Review: Legg Mason IF Royce US Smaller Companies

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Lauren Romeo is at the helm of this $203m (£135m) fund investing in US smaller companies, which she defines as stocks with a market cap of less than $5bn.

Ms Romeo says: “The fund’s investment objective is long-term capital appreciation, which we try to achieve by buying high-quality, primarily US smaller-cap companies that we believe can compound business value at above-average rates of return for at least the next three to five years.”

The fund was launched in 2004 and the manager points out one of its strengths is its consistent investing discipline, regardless of the market environment. Ms Romeo runs a concentrated portfolio of just 69 holdings as a result. She explains: “We try to identify and invest in companies that have defensible, sustainable business models and competitive positions enabling them to generate above-average or improving returns on capital.”

Strong balance sheets and good free cashflow generation are also common attributes of the stocks held in the portfolio. The manager adds: “By buying when firms are out of favour for what we believe are temporary cyclical or company-specific reasons, we try to build in a margin of safety on the downside that yields an attractive risk-reward return profile for the individual stocks and the portfolio as a whole.”

While Ms Romeo and her investment colleagues “pay attention” to wider macroeconomic issues, she admits these concerns do not end up playing a major role in the security selection process. She notes: “The fund uses an intensive research process focused on individual companies and their industries to select stocks. We believe this focused approach allows us to uncover investment insights that other macro-oriented investors may miss.”

This year Ms Romeo has been increasing the vehicle’s weightings in consumer discretionary and financials stocks, although industrials and IT remain the biggest sector weightings. This is on the basis that these sectors continue to offer the most attractive valuations among “quality” US small caps. “They are cyclical but steadily profitable and should drive faster sales and earnings growth on an absolute and relative basis as economic growth improves,” she adds.

The key investor information document for the clean fee X-accumulation share class shows an ongoing charge of 0.98 per cent applies to the fund, which is ranked at level six on a risk-reward scale and is considered a higher-risk investment as a result.