Co-CIO Francis Gannon details what Royce has been hearing in our conversations with the CEOs of small-cap companies.
Q3 2019 hedge fund letters, conferences and more
What have you been hearing in your conversations with CEOs?
I think one of the unique things about working at Royce is that we work in an ongoing small-cap investor conference with hundreds of CEOs and CFOs coming through our office on an annual basis. And I think one of the most important things in our conversations with those CEOs and CFOs today is actually what we’re not hearing. And we’re not hearing that there is an imminent recession. And most of our companies are actually very cautiously optimistic about their outlook. But we’re not hearing the potential of a recession on the horizon.
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How are CEOs dealing with tariffs?
I think it varies by industry. Supply chains are changing, without question we’re hearing that from multiple companies not just within our space but even if you go up the market cap spectrum.
I think what we’re hearing more and more of is tariffs are part of the environment. It’s part of the business environment. And while they seem to be ratcheting up on a daily basis or ratcheting down on a daily basis depending upon the day, the CEOs have to think longer-term. What’s best for their business over the next three to five years? Is it continuing to operate in China? Is it moving your business to Vietnam? So they have to figure out what is a level playing field and operate in that environment.
How are CEOs managing the tight labor market?
Many companies are actually looking towards technology to help them, and in this environment of very tight labor or skilled labor, we’ve actually been able to take advantage of it from an investment standpoint. So when you hear CEOs talk about their inability to actually find people to work in their business, they talk about technology and what are the technologies that are benefiting them. We hear that and look for those companies that actually help companies, through automation or whatever it might be in a small-cap world that we can actually benefit from and our shareholders can benefit from.
What would an average investor be surprised to hear in these CEO conversations?
I think the average investor if they sat in in one of our meetings would be surprised at how long-term oriented we are. We’re not looking at short-term aspects of a company in terms of how they might be doing in this particular quarter.
We want to understand how that business is going to grow over the next three to five years. How are they thinking about growing their business? What returns are they getting on their investments? How are they thinking about leveraging their balance sheet if they have to leverage their balance sheet to make an acquisition to grow their business? So it’s very long-term oriented and it reflects really how we think about owning these businesses.
Article by The Royce Funds
