Q. I’m considering purchasing shares of Royce Value Fund. What is your opinion?
–K.T., via the Internet
A. It has a clear strategy that has paid off handsomely for investors since the fund’s inception in 2001. This savvy fund specializing in small-cap stocks owns about 60 stock names, unlike some rivals that have 200 or more. By avoiding the smallest micro-cap stocks and sticking with more established names in the $500 million to $5 billion market-cap range, it is less volatile than most of its peers.
The $76 million Royce Value Fund (RYVFX) has posted a total return of 24 percent over the past 12 months to rank in the top 15 percent of small growth and value funds. Its three-year annualized return of 37 percent puts it in the top 2 percent of its peers.
“We think of Royce managers as some of the best in the small-cap business, and since the end of 2003 this fund has been in a sweet spot,” observed Todd Trubey, analyst with Morningstar Inc. in Chicago. “While it could be a small-cap anchor for an individual’s portfolio, because of market cycles it is unlikely to remain as red-hot as it has been.”
Co-managers are Whitney George, a successful manager at other Royce funds, and Jay Kaplan, previously a fund manager at Prudential. With no sector considered off-limits, they’ve been bullish on energy this year. But, since various Royce funds tend to own some of the same stocks, be sure to compare this fund to any other Royce holdings you may have to avoid overlap.
More than 20 percent of Royce Value’s portfolio is in industrial materials, with financial services and consumer goods other significant concentrations. Top holdings are Aspen Insurance Holdings, Nu Skin Enterprises, Trican Well Service, eFunds, Ensign Resource Service Group, St. Mary Land & Exploration, Endurance Specialty Holdings, Polo Ralph Lauren, AmerUs Group and Tektronix.
This “no-load” (no sales charge) fund requires a $2,000 minimum initial investment and has a not-so-cheap annual expense ratio of 1.49 percent.
Q. I own shares of Dell Inc. and have been disappointed with them this year. What is their problem?
–D.L., via the Internet
A. Price wars are taking their toll on this company that’s famous for marketing computer products directly to individuals, companies, government and schools.
Sales in Europe and Asia are vibrant, but U.S. consumers and the federal government have reduced their spending on new computers. The company cut its projections for the current quarter, which ends this month.
Discounts on laptops and other personal computers kept the world’s largest PC-maker from meeting analyst sales expectations in its most recent quarter, though net income did rise 28 percent on a tax adjustment.
Another problem: Dell’s customer satisfaction rating has declined to 74 percent from last year’s 79 percent, according to a quarterly survey by the University of Michigan. That was the biggest drop among computer-makers and Dell’s lowest rating since 1998.
An additional negative is that Dell’s chief information technology officer, Randy Mott, left to join Hewlett-Packard Co.’s executive council.
Shares of Dell (DELL) are down 19 percent this year, following gains of 24 percent last year and 27 percent in 2003. Rising component costs, the mature desktop-computer market and a stock-option program that consumes cash are further concerns.
On the positive side, however, Dell still has a time-tested, cost-conscious strategy for selling computers and is expanding globally with new products. Chief Executive Kevin Rollins predicts that, with 55 percent of Dell’s growth coming internationally, its sales will reach $80 billion in 2009.
The firm has moved aggressively into computer services, signing a $50 million, four-year contract to provide services for UBS AG, the global Swiss financial-services firm. In addition, Dell’s data storage system sales grew 27 percent in its most recent quarter to move ahead of Hitachi into fourth place in that lucrative category.
Taking into account their reduced price and overall prospects, Dell shares currently receive a consensus “buy” rating from analysts, according to Thomson Financial. That consists of nine “strong buys,” 13 “buys” and nine “holds.”
Earnings are expected to increase 23 percent in its fiscal year ending in January, versus 20 percent for the personal computer industry, according to Thomson. Next year’s estimated 18 percent increase compares with 23 percent projected industrywide. The expected five-year annualized growth rate of 20 percent beats the 15 percent forecast for its peers.
Napster and Dell have joined forces to offer legal music downloads to students, with the University of Washington being the first location. This combines Napster’s music service with Dell’s servers.
Q. Can I gift appreciated stock to my wife and children in order to reduce some of the capital gains tax?
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–N.P., via the Internet
A. It’s more likely to be advantageous with your children.
If you give stock to your wife and you file jointly, it makes no difference in terms of taxes. In addition, tax rates tend to be higher for married couples filing separately, so it’s unlikely she’ll have a lower tax rate there, either.
In regard to your children, the maximum rate on long-term capital gains is 15 percent. For those in the 10 percent to 15 percent individual tax bracket–which your children might be–the rate will be just 5 percent. But keep the “kiddie tax” in mind.
If the child is under age 14 and recognizes a gain on the sale, much of it could be taxed at the parent’s rate, explained Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. “The first $800 is tax-free and the next $800 taxed at the child’s rate, with anything in excess of the $1,600 taxed at the parent’s rate,” he said.
You could gift the appreciated stock to your child, wait until the child turns 14 and then sell it, Nissenbaum concluded. The child’s tax basis (original cost) will be the same as yours, but the tax rate is likely to be lower.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].