Bill Hench of Legg Mason’s Royce Funds has spent his career at the sharp end of investing, where the risk and reward trade-off hits the top of the scale. Alongside colleague Buzz Zaino he manages the $1.47bn Royce Opportunity and $38m Micro-Cap Opportunity funds, which sit in what is arguably the toughest sector to beat the market – US equities.
Hench sums up the life of a US small cap investor in a sentence: “Each year you get some disasters, but you also buy some companies that the market falls in love with.”
With a good number of years under his belt, Hench has a wider frame of reference to draw on when forming this view than most. Also, as evidenced by his longevity in the business, he has picked more winners than duds.
“I have been with Royce for 14 years. Prior to that I was on the brokerage side and Royce was one of my clients. Royce ended up asking me to join, which I was pleased to do.
“I also have a background in accountancy that developed my interest in small companies. I dealt a lot with small healthcare and industrial companies, which made my move to Royce a wonderful fit,” he says.
“The Opportunity Fund is different to most funds of its type. It tends to be at the smaller end of smaller cap in terms of the stocks,” Hench says. “It is not the jumbo shrimps, it is the tiny stuff,” Hench says.
The sub-billion club
“At any given point our portfolio could be made of 40-60% of companies that are [valued at less than] $1bn. At the top end we go up to around $2.5bn. We tend to find the most opportunities and best value in that sub-billion range.”
Hench is careful to always keep in mind the essence of value investing.
“The most important thing is what you pay to get into your positions. Everything else is immaterial because if you pay the right price to start then sooner or later you are rewarded. Especially with the small and micro-cap markets, where you can get very big moves on the downside and on the upside and liquidity is often a concern.
He adds: “You can always be tempted, where you see something and want to buy it all. But what you learn is, with liquidity being what it is, there is no price that is too low.”
“We tend to hold stocks for many years. Typically, once we have bought a stock it takes 18 months or two years for it to become what we would call fairly valued but we usually hold it for at least three to five years, and sometimes longer.”
Hench enjoys his work, something which he says is greatly helped by operating in the small-cap universe.
“Small caps have always seemed more fun to me than larger companies. There is much more inefficiency. Also, the people you meet at the companies tend to have a tremendous effect on that company because in many cases the chief executive officer is the founder or related to the founding family.”
