FTGF Royce US Small Cap Opportunity
Why is this fund on our radar?
FTGF Royce US Small Cap Opportunity Fund is a value specialist, that is to say the managers seek to invest in companies that are, in their view, undervalued by the stock market. The fund is focused on the small- and micro-cap space in the US. and benchmarked against the Russell 2000 Value index, which is a broad measure of how these ‘value’ investments perform. The sub-$2.5bn companies the fund generally owns are in an under-researched area of the market where an active manager can exploit inefficiencies by doing their own research. The fund’s strong performance over the short- and long-term comes from a broadly diversified portfolio of 220-250 stocks, and scores highly in risk-adjusted terms, notable in an area of the market where volatility can be higher.
The management team invests in businesses trading at low valuations, and looks for catalysts such as management changes or product innovation. A value-based strategy such as this is inherently contrarian compared to funds that are focused more on identifying fast growing companies, and can therefore act as a complement to a more growth-orientated fund.
Skip to Our VerdictPerformance
The traditional expectation for a value-based strategy is that it will lag markets during phases where growth dominates, but do better in periods of economic recovery, for example when rates fall and inflation abates. As well as reducing single stock risk, FTGF Royce US Small Cap Opportunities strategy of owning a very diverse 220-250 stock portfolio can help to alleviate some of the extreme performance divergence one might expect with a value strategy. The chart below shows discrete annual performance from 2020 to 2025 year to date (11/11/2025) and shows that this does appear to be the case, with the fund performing well in phases where ‘value’ as an overall style has not done so well, for example in 2020 where the chart shows the fund generating a >20% return and keeping pace with the IA North American Smaller Companies peer group even while the value index was more or less flat.
That said, it is reasonable for investors to expect that the fund will from time to time diverge from the peer group, which contains a greater number of growth-orientated strategies. At time of writing, while many ‘scene setting’ factors are in place for value investors, such as falling rates and low valuations, the US small cap market has seen a similar pattern to that of the large cap space, with a concentrated group of more speculative growth names performing very well against a backdrop of slightly negative performance for the fund and its peer group. None of these growth stocks appear in the fund’s value benchmark, so this is really a problem for others in the peer group with a growth benchmark, but it highlights that there can be times when the fund may miss out on performance from small caps as an asset class.
Discrete annual performance
Past performance is not a reliable indicator of future results
Overall, the fund has delivered outperformance of the peer group and index over three, five, and ten years. Over ten years, the annualised return is 10.9% compared to the benchmark, 9.0% and peer group, 9.7%. Over five years, the same figures are 13.9% compared to 12.2% and 7.7%. Thus, the fund can deliver outperformance in phases such as the last five years when value has been a strong theme, but also deliver compound returns over longer periods when value as a style may not always be in favour.
Broader context is provided by the following chart, which shows the fund, and its peer group, against an ETF tracking the S&P500, which is the US’s main market index of larger, and so-called ‘mega-cap’ companies, many of which are household names. As the chart shows, overall, the main market has performed very strongly over the last five years, driven by the dominance of some very large technology companies. This helps highlight that one of the risks of investing in smaller companies is that they can go through periods where they perform less well. That said, smaller companies over the very long-term have shown that they can produce better returns than the broader market.
Performance against the broader market
Past performance is not a reliable indicator of future results
Portfolio
The fund’s philosophy is rooted in identifying undervalued businesses with clear catalysts for improvement. The management team use four broad categories to describe the portfolio: unrecognised asset values, turnarounds, undervalued growth, and interrupted earnings, each representing different recovery or growth dynamics. The chart below illustrates the split between these categories, although in reality it’s likely that some holdings could be placed in more than one category. The four categories can be summarised thus:
Unrecognised asset values (15-25%): Market value is less than the probable sum of parts liquidation value of the assets including tangibles such as real estate or equipment or intangibles such as high brand value. Put more simply, one could say this is the ‘break up’ value of the company if it simply ceased trading and sold whatever assets it owns. Corporate action may be the catalyst to release value.
Turnarounds (20-35%): Where profits are recovering from a depressed level due to company or industry specific factors. The team believes that management is critical – monitor changes and track talented executives in the small- and micro-cap space
Undervalued growth (35-45%): Potential to grow at more than 12% is not recognised by investors, perhaps due to operating in a difficult sector, or due to previous company-specific disappointments.
Interrupted earnings (10-20%): Past strong growth temporarily interrupted by e.g. a product or service transition, causing historically strong revenue growth to decelerate. The team seeks to identify situations where revenue can re-accelerate once a transition has been completed.
Asset allocation
The portfolio typically holds 220–250 stocks, which is relatively high for an actively managed fund. While the largest category, undervalued growth, may be about identifying companies, it’s easy to see how investments in turnarounds, underappreciated asset value or interrupted earnings, might be more event-driven, i.e. it may be that a specific event such as a change in management or a corporate restructuring is the catalyst for improved performance. Therefore holding a larger portfolio will help reduce the specific reliance on a few key events to release value, which can be a performance characteristic of some deep value funds which focus on a few corporate situations. As we see in the performance section, this broader approach has led to relatively consistent performance that while somewhat reliant on value being in favour, is not wholly dependent upon it.
Our Verdict
The US remains the pre-eminent stock market in the world and for good reason as it is not only home to the high-profile mega caps that have become household names but to a large array of businesses operating in different niches. Value investing is a particular style of investing that can require patience and sometimes finds itself at odds with the stock market when investors are very focused on growth. But that patience can be rewarded with strong long-term performance that comes from a very different set of companies that an index fund can provide. As implied by the descriptions of the four categories that the team uses to define investments, a high degree of active management can make all the difference, as value and the catalysts to release it may require careful in-house research, particularly in an area of the market that Wall Street can often ignore. The team have put together a very impressive long-term track record in the space and the fund would be an ideal companion to a more growth orientated fund in a portfolio.
Key Risks
- Smaller companies are harder to buy and sell quickly and their share prices may be more volatile than large companies.
- Value bias may underperform during prolonged growth-driven markets.
- Although the fund is broadly diversified at a stock level, it is often tilted to sectors such as industrials which can be more cyclical, that is they are exposed to the ebb and flow of the global and local economy more than other sectors.
