A recent article on Barron’s profiles Chuck Royce, the manager of the Royce Pennsylvania Mutual Fund for over 40 years. According to the article:

“The senior fund manager, 73 years old and regarded as a top small-cap investor, blames the Federal Reserve and its quantitative-easing program for distorting values in the stock market… For New York-based Royce, investing has always been about following a discipline. Those investors so eager to bolt for funds posting better returns should consider whether their new portfolio managers can match Royce’s 30-year record of 11.54% a year as of the end of the first quarter, versus 9.39% for the Russell 2000, or the 11.18% a year he’s managed over the past 10 years through May 8, better than 80% of all small-cap funds… In the short term, Royce hasn’t done as well. For the year through May 8, the fund’s 11.22% gain is worse than 81% of the small-cap funds tracked by Morningstar. Year over year, Royce posted a 19.75% rise, well behind the Russell 2000’s 24.17% gain.”

With that, how does the fund’s performance in the past eight years look from the Alpholio™’s perspective?

Cumulative RealAlpha™ for PENNX

The chart reveals two distinct phases in that period:

  • From early 2005 through late 2009, the fund largely did not generate any RealAlpha™
  • From 2010 onwards, the fund exhibited a negative trend in cumulative RealAlpha™.

In its analysis of the fund titled “Royce’s flagship fund is a contender,” which was published in November 2012, Morningstar states that:

“The past few years have been uninspiring, but Royce Pennsylvania Mutual still has what it takes to succeed in the long term.”

The questions are: How long will the fund take to recover? Will it ever outperform its reference exchange-traded product (ETP) portfolio? The above chart does not offer an encouraging answer to either question.


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