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Chart Talk: Legg Mason Royce US Small Cap Opp Fund February 3, 2012
We noted the 2011 performance of one of the younger US funds on the platform: Legg Mason Royce US Small Cap Opp Fund, and decided it was worth a Chart Talk to investigate its performance.
Author : Nick Tay


Untitled Document

Key points
- LM Royce US Sm Cap Opp A USD Acc is a fund with a 4-year track record and its volatile performance suggests the fund may be suitable for investors who wish to have exposure to an aggressive strategy that can outperform on the upside
- The fund’s underlying exposure is to small and micro cap stocks, of market cap < US$2.5b (as at 3 February 2012)
- On a calendar year basis, the fund beats the S&P 500 in 2 of 4 years
- On an annualised 4-year basis, the fund beats the S&P 500, returning -3.03% vs the -4.16% benchmark return
- The fund tends to outperform in up markets by a strong margin of 7.01pp, underperforms in down markets by -4.27pp, and underperforms in sideways markets by -6.04pp

This February, we examined US funds with 5-year track records (link). Somewhere in the midst of our examination, we came across a younger fund with interesting performance.

The fund is interesting because the fund’s performance is possibly the most volatile of all US funds we have on the platform, and the question becomes whether the fund has the potential to perform over the longer-term of 5-years.

The fund in question is Legg Mason Royce US Small Cap Opportunity Fund, and its performance is the subject of this month’s Chart Talk. The fund invests in small and micro cap stocks, defined as stocks with market capitalization of less than US$2.5billion (as at 3 February 2012).

Our deployed benchmark is the S&P 500 Index, and while this isn’t a small cap index, it can suffice as a broad benchmark index. Investors should note that the fund is a US small cap fund, and hence higher volatility is typical of the asset class.



As shown in chart 1, we examined the fund’s performance from end-June 2007 to end-2011, which is four and a half years of data. Initial observations tell us that during the down market from 3Q2007 to 1Q2009, the fund lost more than the index. From 2Q2009 to 1Q2010, the fund outperformed the benchmark quite significantly when the market turned up. The fund ran up again in 4Q2010, but underperformed in 3Q2011, before outperforming again in 4Q2011.

Like I mentioned in the first paragraph, this fund is volatile. But volatility must be considered in the context of returns. A fund, especially one that invests in small cap stocks, is exposed to the volatility of the underlying asset class, and hence, such volatility should not be entirely surprising to investors.

Having said that, the next measure we look at is historical performance.

Historical Performance

Table 1: Historical Calendar Year Performance, end-2007 to end-2011
Fund 2008 2009 2010 2011
LM Royce US Sm Cap Opp A USD Acc -47.69% 55.85% 22.48% -11.48%
S&P500 -37.08% 23.68% 5.13% 3.13%
Outperformance in bold. Source: iFAST compilations, in SGD, dividends reinvested.

 

Table 2: 4-yr Annualised returns, end-2007 to end-2011
Fund Annualised return
LM Royce US Sm Cap Opp A USD Acc -3.03%
S&P500 -4.16%
Source: iFAST compilations, in SGD, dividends reinvested.

From tables 1 and 2, we can confirm our initial observations made from chart 1. While the fund can outperform by large margins seen in 2009 and 2010, it also has underperformed by large margins in 2008 and 2011.

On a 4-year annualised basis, there seems some support for the long-term outperformance of the fund. The fund posts an annualised -3.03% return, versus the benchmark return of -4.16%. Annualised 4-year returns suggest some positive long-term bias of the fund’s strategy, which tends to outperform the benchmark strongly on the upside.

Performance across Up-Side-Down markets
On a quarterly basis, we divided our benchmark (S&P 500 Index) return into ‘up’, ‘side’ and ‘down’ on the following criteria: A quarterly return exceeding 2.5% is an ‘Up’ market; a quarterly return less than -2.5% is a ‘Down’ market; and a quarterly return between 2.5% and -2.5% is a ‘Sideways’ market.

2.5% is an arbitrarily chosen value, as there is no formal definition of what makes an ‘up’ market. We then looked at the performance of the fund across ‘Up’, ‘Down’ and ‘Sideways’ markets, and divided it into outperformance (fund return greater than benchmark return) and underperformance (fund return less than benchmark return).

Table 3: Performance across market conditions, end-2007 to end-2011
Market condition Up (>2.5%) Side
(-2.5%<>2.5%)
Down
(<-2.5%)
Total quarters 8 2 8
Outperforming quarters 7 0 2
Underperforming quarters 1 2 6
Average out/underperformance (pp) 7.01% -6.04% -4.27%
Source: iFAST compilations, in SGD, dividends reinvested.

Table 3 shows the out/underperformance of the fund across market conditions. The fund’s forte lies in its outperformance during up markets – with an average outperformance of 7pp – it’s a strong margin that will serve a portfolio well during a bullish market.

As we only have 2 quarters of side markets to examine, we would hesitate to draw any hasty conclusions of the fund’s performance, but initial observations suggest the fund tends to underperform.

During down markets, the fund does underperform, by an average of -4.27pp. Over longer periods, given the strong outperformance in up markets, the fund should make up for its relatively moderate underperformance in down markets.

Having said that, this fund is not for investors with low risk appetites, and high-risk, high-return investors are likely better positioned to ride out the fluctuations of this fund.

Fund Investment Information

Table 4: Fund info
Payment options Expense Ratios Min. Investments
CPFIS OA No LM Royce US Sm Cap Opp A USD Acc 2.00% Min. Initial S$2000
CPFIS SA No Peer average 1.84% Min. Subsequent S$1000
SRS No     Min. RSP S$1000
        Min. Redemption US$500
        Min. Holding US$1000
source: iFAST compilations, all data last compiled 2 February.

The fund is cash only. Its expense ratio stands at 2%, which is slightly higher than the peer average of 1.84%. Minimum initial investment of S$2000 is higher than the S$1000 of a typical equity fund, and its subsequent reinvestment is also S$1000, higher than the typical S$100 to S$500 of most equity funds. Minimum redemption is US$500 and minimum holding is US$1000.

If you’re an investor looking to get into this fund, be sure you have the stomach for the volatility of this fund’s performance.

Related articles:

Funds Promotion: Time For Some US In Your Portfolio 
What The Worst-Performing US Equity Fund of 2011 Has In Common With Warren Buffett

Nick Tay tweets randomly on Twitter, connects with people on Facebook or Google+, and loves all things investing, social media and Youtube. You can also leave feedback with a post on the forum. I promise to read all feedback, and will make every effort to respond where possible. If you know of anyone who can benefit from this article, do a favour and share it with them– but only if you think it’s worth sharing!


iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


 
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