RGT - RGT: One Fund For Global Value Stocks Not Best Strategy

Summary

• The Royce Global Value Trust offers wide exposure to both U.S. and non-U.S. small/mid-cap Value stocks; generally with market caps up to $10b.
• The article includes and compares data for RGT's targeted stocks against other possible equity choices. I find that Value is a plus; International a negative.
• My analysis says if you want Value stocks, use separate funds so you control the allocation. For International Value, Small-Cap does seem the place to invest. Use AVDV for that.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

Is it time for Value stocks, and in the case of the Royce Global Value Trust ( RGT ), with its mostly Small-Cap Value stock anywhere on earth focus? Since the COVID recovery started, US Small-Cap have been the best Value stocks as measured by CAGR and the Sortino ratio; almost by the Sharpe ratio too.

PortfolioVisualizer doesn't breakdown International Value by market-cap but overall, non-US Value was the poorest performing group. The above shows US Small-Caps were the place to be for Value stocks. The next data set compares those stocks against other equity investment choices.

Here we see that Small-Cap Value outperformed the total US market and total Small-Cap stocks. On the International side, Value was better than the overall International market but trailed US stocks by a wide margin.

Royce Global Value Trust review

Seeking Alpha describes this CEF as:

Royce Global Value Trust, Inc. was a closed ended equity mutual fund launched and managed by Royce & Associates, LLC. It invests in the public equity markets across the globe. The fund spreads its investments across diversified sectors. It invests in value oriented stocks of small-cap and micro-cap companies. At least 65% of its net assets in the equity securities of companies located in at least three countries outside of the United States, with long-term growth of capital as the main objective. RGT benchmarks against the MSCI ACWI SC Index. RGT started in 2013.

Source: seekingalpha.com RGT

RGT has $69m in assets and comes with a 174bps fee. Recent leverage was under 6%. Distributions occur at year-end only and vary based on capital gains available as investment income for payouts has never climbed above $.15. While RGT is actively managed, resulting in a 52% turnover rate in 2021, it has chosen to benchmark against the MSCI ACWI SC Index and not the MSCI ACWI SC Value Index . In reality, since 2000, the indices differ by 5bps in favor of the Value index. Since RGT doesn't actually invest based on the Index, I left out its analysis but here is a link for those interested.

Holdings review

This first chart, Morningstar's Style box, aligns RGT more as a Growth fund than Value fund. RGT holds about 120 stocks.

The Weight map confirms that finding and brings into question how well RGT stays within its mandate, both for market-Cap and Value stocks.

Royce provided some basic portfolio data points as of 6/30/22.

The country allocations from the same time are:

With 54% of the portfolio non-US, the initial charts showing the poor returns for international stocks is of some importance. Europe is the largest region outside of North America, with Africa/Middle East next. Only about 12% is spread across the Asia/Pacific region.

The sector data is more recent, from 7/31/22.

Sector diversification is limited with the Top 3 accounting for almost 75% of the allocation.

Top 20 holdings

To have more details, I used the 6/30/22 data, not the 7/31/22 data. The top holdings reflect the same stocks but different weights from the July data. As mentioned earlier, in 2021 RGT experienced a 52% turnover ratio, equivalent to owning every stock for only six months!

Distribution review

As mentioned above, distributions are each December.

RGT generates little income for distributions and was the sole source of its distributions most years. Both 2020 and 2021 had a capital gain payout and 2019 for ROC (very small). Not a CEF for income investors for sure! Unlike its sister CEFs, RGT does not have a Managed Distribution Policy.

Price, NAV and CAGR review

The first set of charts shows how investors did depending on what they did with the payouts.

Thanks to the recent price drop in RGT, investors who took all the payouts since inception had a CAGR of 5.62% compared to only 4.77% for those who reinvested the payouts. With 450 more shares held, re-investors will do better when RGT rallies.

The next chart shows the relationship between Price and NAV since inception.

The current discount is 11.3%. While deeper than recent levels, prior to 2020, that would have been seen as a small discount. The potential is there for investors to get a "bump up", but with RVT showing the same pattern, odds are not in the investors favor as I see it.

Portfolio strategy

So the dilemma seems to be yes to Value, no to International, which means a split decision on RGT. Here are some options for investors who want global exposure to Value stocks.

• Find a better Global SC Value fund

The Gabelli Global Small and Mid Cap Value Trust ( GGZ ) mirrors RGT, though with more Mid-Cap weight yet comes up with similar results in both returns and risk data. Other Global Value funds invested little in the Small-Cap space.

For the next two choices, I set the percent allocation between US/INTL stocks to match the 45/55% split currently held by RGT.

• Combine US-only and INTL-only SC Value funds

Some of the best I have reviewed is the Avantis International Small Cap Value ETF ( AVDV ) and the iShares S&P Small-Cap 600 Value ETF ( IJS ). Royce also has a US-only SCV CEF, the Royce Value Trust ( RVT ). Under this option, the investor can set the percentage split between US and INTL Value stocks. Two examples are provided along with 100% RGT allocation.

AVDV at under three years old is the oldest INTL SCV ETF I found. Like RGT, RVT and AVDV are actively-managed funds; IJS is not. Over this short history it doesn't appear combining AVDV with either US-only fund, regardless of the allocation between them, will necessarily improve the investor return by much; though it should generate a more steady, but low, income stream. With the long-term results between RVT and IJS being close, I would use IJS and save 45bps in fees.

• Combine US-only and INTL-only Value funds

This test uses the iShares MSCI Intl Value Factor ETF ( IVLU ) to see if LCV stocks should be used in place of SCV stocks. I kept the RVT/AVDV combination to help compare both sets of data.

Over this time frame, owning SCV INTL stocks provided better results than owning LCV INTL stocks. Removing AVDV provides data back to 2016 for RVT/IVLU combination and that shows RGT as superior to that combination.

Final thought

Even if an investor believes International stocks will outperform US stocks, Value or otherwise, controlling the allocations provides the opportunity for better results. Here I added the iShares MSCI EAFE ETF ( EFA ) for INTL results and the Vanguard Value ETF ( VTV ) for US LCV results.

This shows Value might not be the place to be internationally. Domestically, both LCV and SCV stocks tend to track closely and over the past decade or more, better than non-US stocks of any orientation.

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