Royce Value Trust (RVT) is a closed-end fund (CEF) born in 1986; this is an excellent pick that income investors should grab with both hands, asserts Rida Morwa, editor of High Dividend Opportunities.
Whatever most investors are worried about — stagflation, high inflation, recessions, terror attacks, financial system failures, pandemics – RVT is one of the few funds that has “seen it all.” The CEF has rewarded shareholders handsomely through the years, averaging around 10% in annual returns since its inception.
The relative valuations for small-caps versus large-caps are at their lowest in 20 years, and market experts predict a reversal in the near term. In April, manager Chuck Royce said, "We think small cap is ready to roll and expect the next three to five years to be strong on both an absolute and relative basis."
RVT provides the best possible income-focused exposure to small caps and trades at an attractive 13% discount to NAV. Small-cap firms carry risks, but the CEF effectively mitigates this through adequate diversification across 479 entities. RVT does not rely much on leverage, and its current portfolio composition only carries a 2.1% leverage.
We note that RVT pays variable distributions at the annual rate of 7% of the rolling average of the prior four calendar quarter-end Net Asset Values. We expect the CEF to declare $0.25/share in June. With that and the past three distributions, RVT’s TTM yield calculates to 8.4%.
Looking at RVT’s distribution composition since 2015, we have generally seen a large portion come from long-term gains. However, recent quarters show a rising Return of Capital component. As we have discussed several times, ROC isn't automatically a negative factor as long as we have a well-managed fund.
Despite nerve-racking drawdowns during uncertain market conditions, RVT has demonstrated NAV preservation and growth over the years due to its active management. Remember, the portfolio management team's bonuses are determined by the CEF's outperformance vs. its benchmark index, the Russell 2000.
Since the end of WWII, most down years for small caps have been followed by positive performance. Moreover, data since the late 1980s show that small caps generated significantly better returns than large caps during recessions. RVT presents among the best income-oriented small-cap investments and is available at a steep discount as this recession fear strikes the market.