Royce pays close attention to risk and maintains the same investment discipline regardless of market movements and trends. The firm's value approach leads it to invest in small- and micro-cap companies that are trading at significant discounts to its estimate of their value as businesses. The firm bases this assessment on either what it believes a knowledgeable buyer would pay to acquire the entire company (its 'enterprise value'), or on what it thinks the value of the company should be on the stock market. This assessment attempts to understand and value the company as an operating entity.
Royce employs a bottom-up, stock-picking approach to choosing portfolio holdings. Its goal is to identify promising companies that have strong balance sheets, high internal rates of return, and excess cash flow, in an attempt to understand the business and a company's ability to withstand economic adversity - factors that are significant measures of a company's financial health. Royce will generally sell a position when a company has reached its estimate of its value.
The firm likes its companies to demonstrate strong historical track records as businesses and to show potential for successful futures. Interviews with senior management help in making these assessments, as do interviews with customers, suppliers and competitors.