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Legg Mason IF Royce US Smaller Companies - we retain faith in the team

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Lauren Romeo has found many companies she believes are undervalued within the more economically-sensitive sectors
  • The fund performed well in 2016, but underperformed its benchmark last year
  • Our long-term analysis of the management team’s performance gives us confidence to retain this fund on our Wealth 150

Our View

Lauren Romeo, manager of the Legg Mason IF Royce US Smaller Companies Fund, benefits from the support of a well-resourced team, which has been investing in smaller companies for many years.

They seek smaller companies in good financial health and with a history of earning good returns on the capital invested in the business. They favour those that have been overlooked by other investors, but could see an improvement in their share price once they become more widely recognised. Please remember smaller companies are higher risk than their larger counterparts.

Performance has disappointed over the past few years, and we would have expected the fund to perform better given the manager’s bias towards higher-quality smaller companies. That said, we continue to believe the fund harnesses the skill of a talented team with a sensible approach, and their distinct investment style could bring valuable diversification to a portfolio. The fund therefore retains its place on the Wealth 150 list of our favourite funds in the major sectors. We will continue to monitor the fund closely and inform investors if our views change.

Performance review: 2016 v 2017

Lauren Romeo has found many companies she believes are undervalued in the more economically-sensitive sectors, such as industrials, technology, energy and basic materials. The fund is therefore biased towards these areas.

After being shunned by investors for a number of years, undervalued and economically-sensitive companies returned to favour in 2016 and the fund performed exceptionally well, boosted by the manager’s ability to select companies with the brightest prospects. It returned 48.7% and outperformed its benchmark by 4%, although please remember past performance is not a guide to future returns.

In 2017, this trend reversed and investors once again favoured companies with more stable and predictable growth prospects, and low sensitivity to the broader US economy. The fund has little exposure to these companies and this held back performance. Meanwhile, some of the fund’s more retail-focused investments suffered increasing competition from internet retail giant Amazon. This forced them to cut prices in order to compete, which reduced profits and caused a drag on their share prices. The manager has since sold three retailers from the portfolio.

Annual percentage growth
Dec 2012 -
Dec 2013
Dec 2013 -
Dec 2014
Dec 2014 -
Dec 2015
Dec 2015 -
Dec 2016
Dec 2016 -
Dec 2017
Legg Mason IF Royce US Smaller Companies 25.4% 5.8% -8.3% 48.7% 2.0%
Russell 2000 36.2% 11.4% 1.1% 44.7% 4.7%

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2017

Manager's outlook

Many of the companies within the fund remain out of favour with many investors, but Lauren Romeo remains focused on their longer-term prospects. In her view, the financial results from these companies are improving and this should be recognised by other investors sooner or later. At this point their share prices could be set to benefit. Please remember the value of investments can fall as well as rise, so investors could make a loss.

Interest rates are widely expected to rise further in the US over the coming years and the manager expects this to benefit the fund. Many of the companies the manager has avoided have taken advantage of low interest rates in recent years by borrowing money to grow their business. However, as interest rates rise these highly indebted companies could struggle to service their debts. This could encourage other investors to refocus on higher-quality businesses with sound finances, such as those held within the fund.

Find out more about this fund including how to invest

Please read the Key Features/ Key Investor Information Document in addition to the information above.

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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