- Mark Rayner — portfolio manager and principal at Royce Investment Partners — put together the top-ranked global small- and mid-sized company fund of the last five years by focusing on market leaders.
- Some of his favorite stock picks are in industries most investors haven’t thought about.
- He told Business Insider what he’s added to his fund since the COVID-19 pandemic sent shockwaves through global markets, and revealed his three top picks for the next 10 years.
- Rayner’s emphasis on companies with the best returns on invested capital has contributed to steady growth, but also kept his portfolio safe during the recent downturn.
- Visit Business Insider’s homepage for more stories.
“We’re proudly boring in terms of what we do,” says Mark Rayner of Royce Funds. “We basically do one thing and we repeat it.”
The one thing he does is nail investments in obscure companies all around the world. Rayner’s Royce International Premier Fund is the best international small- and mid-sized company fund of the five years for the period ending March 31, according to Kiplinger. It returned 6.4% per year over that stretch.
If he’s able to do that, clients probably won’t complain about being bored — not that boring seems like such a bad thing these days. But when Rayner kids that his approach is boring, he means it’s systematic. He wants to find companies with “high and consistent returns on invested capital,” strong competitive positions, and great balance sheets.
That’s naturally steered Rayner away from many of the companies that have suffered the most damage in the coronavirus pandemic. He doesn’t buy banks or airlines and rarely adds retail, energy and natural resource companies, and favors tech, software, “asset-light” industrial companies, and healthcare equipment and service firms.
While Rayner stuck to his rigorous approach during the pandemic sell-off, he took advantage to invest in some companies he’d wanted to buy for years. In his exclusive interview, he told Business Insider about a few of them.
What he’s added
Nemetschek is a Germany company that makes software used in architecture and construction. Rayner was already a believer, having invested in the company a decade ago only to close his position in 2012.
Its price fell by 50% between mid-February and mid-March, and he says he was happy to have another chance to buy it.
“We sold Nemetschek in 2012 and we shouldn’t have,” he said. “We spent eight years watching it go up and it was painful to watch.”
Rayner prizes companies that are worldwide leaders in their industries, and he says Ossur, an Icelandic company that makes prosthetic limbs, fits that description. He’d had his eye on it for five years and made a move after its stock price dropped.
He describes Ossur as a smart way to get invested in the growing diabetes treatment industry, as that disease is responsible for most amputations. From Ossur’s point of view, that leads to a lot of recurring revenue.
“You have a customer for life because that limb is part of your body. So you get upgrades, you get recurring replacement parts and revenues, et cetera,” he said.
Another returnee to the fund is Aveva, a British company that makes 3-D design software that Rayner has bought and sold several times before. He says investors feared its business was going to be crushed because its oil and gas industry customers were losing revenue and closing rigs.
“We think the business is much, much more stable than that,” he said. “Lots of repeat revenues, subscription fees from that, from their software.”
Long-term winners
As a small-company investor, Rayner often looks at the leaders in markets that might sound obscure. The ideal, he says, is a company with a significant lead in its industry, but a relatively small market share — meaning it has a lot of room to build on its advantages.
One of those is Spirax-Sarco Engineering, which makes steam systems that are used in factories around the world.
“Steam is the best way at transferring energy around everything from hospitals to food and beverage plants to pharmaceutical plants,” he said. “It sounds like the most archaic thing, but it’s actually something which has an enduring need.”
That gives the company a huge customer base spread across lots of industries, which means it isn’t vulnerable to a downturn in one of them. The result is predictable demand growth and huge returns over time, including more than 50 years of annual dividend growth.
“I think it’s grown 5% to 6% per year for 52 years. That’s extraordinary,” he said. “I think that’s a great company. One of our favorite companies.”
Even more obscure to most is Karnov, a Swedish company that runs legal databases used by lawyers. Rayner says its data is must-have company like Bloomberg’s is for people in finance and investing, and demand for lawyers is constant.
“That’s a pretty a-cyclical business, and lawyers look backwards,” he said. “So if you have a database of case law, it improves with age, and they’ve been building this database since the 1920s.”
That means the company has extremely high subscription renewal rates, and the barriers to entry for possible competitor are huge. That’s a good sign as the company looks to consolidate the Scandinavian market.
“Not huge growth, but fantastic returns on invested capital, and that’s the thing you need to invest in,” he said.
Third on his list is the largest publicly traded company in Iceland, Marel, which makes software, equipment and systems used by companies that process all kinds of meat.
“They are the global number one in processing of animal protein,” he said. “They only have a 10% market share, much bigger than the number two. They spend much, much more on R&D, multiples higher than, the number two, so they can justifiably big claim … they have the best product.”
While investors grew extremely enthusiastic about Beyond Meat last year, he’s comfortable betting on them because history shows that as emerging countries grow wealthier, their meat consumption rises.
“You’ve got the structural growth, you’ve got the ability to consolidate the market and you’ve got that very nice customer retention because there’s lots of spare parts, there’s lots of software, there’s lots of recurring revenue,” he said.
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