When it comes to money, every now and then the U.S. government gets caught in the act of doing something terribly right. The creation of the Roth IRA in 1997 is a great example. 

As the Trump administration rolls out its tax plan, the proposed rollback of the corporate tax rate from 35% to 20%, a major component of the plan, might also enter the tax-reform hall of fame.

Sure, large multi-national companies  will benefit from the reduction, but these companies also have the luxury of tax benefits in many different countries. For example, in 2016 Microsoft (Nasdaq: MSFT) had a domestic loss of $300 million and foreign income of $20.1 billion. The company’s net tax liability was $3.3 billion, or an effective rate of around 16.5%.

Small- and micro-cap companies, on the other hand, do much of their business domestically. A 43% cut in the corporate tax rate would be a huge boon to these companies and their stocks alike. However, due to the sometimes esoteric nature of the space, one of the best ways to gain exposure is taking the fund route. 

#-ad_banner-#One of the most experienced small-cap funds out there is the Royce Value Trust (NYSE: RVT), a closed-end fund (CEF). Launched in 1986, the fund is still helmed by its original manager, small-cap investing legend Chuck Royce. Royce’s management style is classic value. In his own words, “We are looking for stocks trading at a discount to our estimate of their worth as businesses.” Translated: Buy low, sell high.

Royce identifies companies with a maximum of $3 billion in market capitalization, historically high returns on invested capital, and strong or improving fundamentals. The heaviest sector in the fund, with a hefty 31% weighting, is industrials. The other major sector allocations are rounded out with 18% to information technology, 15% to financials, and 11% to consumer discretionary. 

Royce has placed the fund ahead of the puck for sustained economic recovery in the United States as well as the corporate tax cut. It seems that his instinct has been dead on since the fund’s inception in 1986. Royce has turned in a steady average annual total return of 10.63%, beating the fund’s benchmark, the Russell 2000, by an impressive 112 basis points. Last year, RVT delivered a knockout 25.76%, but based on Royce’s tenure and consistency, investors aren’t chasing another hot dot.

Risks To Consider: Investors should remember that small-cap stocks are historically more volatile than large-caps. While this is always a concern, the RVT is classified as a value fund. Stocks with lower valuations are sometimes under-covered and/or under-owned by Wall Street. Flying below the radar can often translate into lower fluctuation compared to more widely held names. 

Also, the fund gives shareholders the option to receive their distribution in either cash or additional shares. Make sure you check the right box based on your preference.

Action To Take: As of this writing, RVT shares currently trade around $15.93, an attractive 9.5% discount to the fund’s net asset value (NAV). On the distribution side, the fund throws off a generous 6.8% yield. Long-term investors looking to position their portfolios to benefit from the proposed corporate tax cut would be well served by this choice. 

Small-caps are an organic component of disciplined asset allocation. RVT is an excellent addition to a portfolio’s small-cap sleeve.

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