Royce: Finding Opportunities In ‘Fallen Angels’

Johnny HopkinsChuck RoyceLeave a Comment

In their latest podcast titled – Small-Cap Quality, Value, and Fallen Angels, the team at Royce Investment Partners discussed finding opportunities in ‘Fallen Angels’. Here’s an excerpt from the podcast:

It has been an interesting environment. There are a host of risks from inflation to recession, but the good news is that we think a lot of that is discounted in the market or at least in individual stocks, and to your point about volatility, that creates tremendous opportunity for long-term investors, like those of us here at Royce and for Total Return specifically.

So what we’ve been doing, as I mentioned, the market peaked in mid November and troughed in mid-June. Sometime around May we began to make some slight, what I’ll call tactical shifts in the portfolio, and that was to position the portfolio for an eventual recovery in the market. And why did we do that?

Clearly, we’re not trying to time the market. We simply can’t do that. But Royce’s research has shown that statistically the odds of having good attractive forward returns from that point in the market cycle were very much in our favor, and so what we did was, we began to trim, and in some cases exit, our more defensive holdings.

These are names that just mathematically became bigger positions within our portfolio because they held up well on a relative basis. They either went down less than the market or in some cases they went up.

And so in the absence of us taking any action within the portfolio, these more defensive holdings would’ve been some of our biggest weights right at, or near the market bottom. And that’s not how we want to be positioned.

So we used those as a source of cash and then used the proceeds to add to names that had really sold off in the market where we thought the risk / rewards was highly attractive and very asymmetrically in our favor.

We also found a number of new opportunities to include in the portfolio. I’d say that if there was a theme that emerged there, it would be something that we call Fallen Angels.

Fallen Angels are what we think of as really high-quality companies. Oftentimes they have compounder like attributes, but the valuations have compressed meaningfully into a zone that we think is attractive. All the while their long-term fundamentals and prospects in our opinion are largely unchanged. And so those are some opportunities that we saw.

You can listen to the entire podcast here:

Royce: Small-Cap Quality, Value, and Fallen Angels

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