Chuck pioneered small-cap investing . He basically created the asset class by recognizing small company stocks that used to be traded on the pink sheets . Some of them were penny stocks , but some of them were fantastic companies . And Chuck figured out through his incredible research and his common sense that they can be investment gems . They share common characteristics . They frequently move in concert , and they are under-researched and over-looked . They are a perfect area to mine for a value investor , which is what Chuck is .
Let me tell you about Pennsylvania Mutual Fund . It has delivered 13.2 % average annualized returns over the 50 years ended 12 / 31 / 23 . Eat your hearts out , active managers . And it has beaten its Russell 2000 benchmark in the last three- , five- , 10- , 15- , 20- , 25- , 30- , 35- and 40-year periods , but who ’ s counting ?
And , you know how everyone follows Warren Buffett ? What he ’ s buying , there ’ s an industry surrounding that . Well , it turns out that Warren Buffett has purchased 14 companies that have been in the Penn Mutual Fund over the years . And Chuck had to let them go . As he has described to me many times , it is a bittersweet moment when somebody comes and is willing to pay you much more than you paid for a company , when you really liked the company .
Here are some of the qualities that I think make a great investor . Chuck has an endless and insatiable curiosity . He loves stories . He wants to know the stories of companies and he wants to know the stories about individuals , and that extends to towns and buildings too . And , investing in small-caps he figured out that there are micro-cap stocks that act differently . And there are lots of value companies that he oversees as well , so they ’ re doing a lot of international investing early on in small-caps . He has been incredibly generous behind-the-scenes to individuals who need advice and help .
Chuck also has a dedication to improving communities He has revitalized several towns — literally taken over the main street and bought buildings and encouraged local people to open businesses . So , if you go to Watch Hill , Rhode Island ; if you go to Tannersville , New York ; if you go to downtown Stanford , Connecticut , you ’ re seeing bookstores , theaters , restaurants and just amazing revitalization of places that had fallen behind .
He has been active in the leadership of the Episcopal Church and he is spiritually curious and engaged . I ’ ve known Chuck for a long time , and it ’ s been an honor to know him . And everyone I ’ ve talked to , who have worked with Chuck or been the recipient of his generosity , and just his wonderful ear — his ability to listen to people and learn from them — has said he ’ s a prince of a man and he ’ s a brilliant investor . I can ’ t wait to hear what he has to say tonight .
CHARLES M . ROYCE
Founder , Chairman and Portfolio Manager , Royce Investment Partners
Consuelo is amazing . She has been a friend for maybe 30 years . It ’ s been my pleasure to get to know her . But , more importantly , this museum has really served so many purposes , and I ’ m proud to have been a minor part of that . I enjoyed terrifically thinking through this book on the history of our [ banking and financial ] system .
A very quick summary of some of the things I ’ ve experienced in the last 50 years . First , I started off with a left-foot start . I started in ’ 72 , and ’ 73 and ’ 74 were straight down — down 30 % each year . Inflation was high — 10 – 15 %. I think I lost for my shareholders about 75 % of the value . And I quickly learned the Buffett motto : “ Don ’ t lose the money .” And I learned the second rule : “ Follow the first rule .” So that took some time . The directors of my fund , by the end of ’ 74 , said , “ Chuck , that ’ s enough . We didn ’ t do so hot . It was an interesting experiment .” I sort of got on my metaphorical knees and begged to go another few months .
Then ’ 75 came , and the market went straight up . It was a strong year . We were up 100 % and we settled into a different mode of trying not to lose the money and let ’ s take a little more seriously the whole idea of how do you balance risk and reward . The market took off , and we began to get asset flows . In those days , we were a weirdo . We were a no-load fund in the system of load funds . There were a few no-load funds , and we got publicity and we had success without really having a business plan . This was this new world of no-load funds , which gradually got bigger over time , but we were early on
that idea . We weren ’ t part of the mainstream at all . We built a reputation and then approached registered investment advisors that were not part of the mainstream . These were smaller firms throughout the country , not New York City , and we showed up and marketed and told the story about how to invest .
Now , the no-load fund had to be modified , so we created something called a “ C share ,” which was a commission , but it was a level load . It was a new thing , and it helped us introduce ourselves to this new world of how do you sell a broker-dealer who wants a commission but wanted to have some flavor of a no-load fund . So that was a development in the early ’ 80s . Now , there was fortunately no index as to what the small-cap was . Out of the blue , Russell , I think towards ’ 86 / 7 / 8 , announced an index , but they did us the disservice ( or maybe a service ) of casting the index back to ’ 78 . So , all along we were playing against an index we didn ’ t even know existed .
Another big development for us was , all of a sudden , there was something called Schwab . And Schwab was a custody-type organization — and I ’ ve gotten to know them quite well . Chuck did the most interesting thing in that he extracted a fee from those people who wanted to sell through his firm . He did it very well . Fidelity and Schwab now dominate that market , and that was something we had to adapt to .
Then , Morningstar came along , and Morningstar sort of took over the analytical framework that Lipper had dominated for years . Morningstar came along and created this baseball-like diagram of nine boxes , and you were placed in a box so that you were compared with something similar . In the case of our fund , Pennsylvania Mutual Fund , it was the blend box . Now , 500 funds are in the blend box . So , it ’ s gone from a little thing to a really big thing , and Morningstar obviously dominates that conversation about who you are and how you should be compared . We didn ’ t love that either , but that ’ s what goes on , and that ’ s been important for us to have been successful within their definition of how to be successful .
Then ETFs came along and , wow , how they ’ ve changed the world completely . Now , as we all know , they are probably 50 % of the marketplace . In the trillions of dollars . And we have an active fund . We have not gone full-boat into ETFs , but they have certainly added flames to
www . MoAF . org | Spring 2024 | FINANCIAL HISTORY 13