RYTRX—3Q21 Strategy Update and Outlook
article 10-12-2021

Royce Total Return—3Q21 Strategy Update and Outlook

Miles Lewis and Chuck Royce, who manage Royce Total Return Fund, update clients on the portfolio’s recent performance and their cautiously optimistic outlook. 


How did Royce Total Return Fund perform in 3Q21?  

Miles Lewis The Fund fell 1.8% in 3Q21 and outpaced its primary benchmark, the Russell 2000 Value Index, which lost 3.0%. For the year-to-date period ended 9/30/21, the Fund gained 17.7%, lagging the small-cap value index, which advanced 22.9%. So while the year-to-date results were disappointing on a relative basis, they were strong on an absolute scale—and we were pleased that the Fund held its value well during the third-quarter downturn.

How did the portfolio perform on a sector basis in 3Q21?

Chuck Royce Five of the 10 equity sectors where we held investments finished 3Q21 in the red. Industrials, our second-largest weighting, detracted most during the quarter while Materials and Consumer Discretionary also created a drag on performance. Financials, which is the portfolio’s largest weighting, made the most sizable positive contribution, followed by Consumer Stapes and Real Estate.

Which industries stood out as detractors and contributors?

CR Commercial services & supplies and machinery—both in Industrials—hampered performance most in 3Q21, followed by chemicals in the Materials sector. Conversely, each of the three top-contributing industries came from Financials: banks, diversified financial services, and capital markets.

Which portfolio holdings detracted most for 3Q21?

ML Insurance management and reinsurance consulting company Trean Insurance Group was the largest detractor for the quarter. Deluxe Corporation—which also hindered results—has a highly diverse business, producing everything from personal and business checks, logo design, website development, hosting, email marketing, social media management, search engine marketing, and fraud protection services. The Timken Company—the third largest detractor in 3Q21—is a global manufacturer of bearings and power transmission products. Confident in the long-term prospects for each company, we added to our respective stakes in all three stocks during the third quarter.

Can you briefly talk about the three top contributors for 3Q21?

ML The largest positive contribution came from Triumph Bancorp. Through much of 2021—it was also our top contributor for the first half of 2021—the market seemed to recognize the bank’s fintech expertise, which confirmed our original investment thesis. Triumph also boasts a strong market share in U.S. transportation (via Triumph Business Capital) and has successfully expanded that segment into payment processing for the trucking industry through its Triumph Pay (T-Pay) platform. Next came investment holding company Compass Diversified Holdings and home-essentials company Spectrum Brands.

What factors drove the Fund’s outperformance versus the Russell 2000 Value in 3Q21?

CR The Fund benefited from both sector allocation decisions and stock selection, with the former helping most. Financials drove outperformance on a sector basis due to our higher weighting. Both our lower exposure and stock picks were additive in Communication Services, as was our lower weighting in Health Care. On the other hand, Industrials—our second largest weighting—hampered performance because of ineffective stock selection while both our lower exposure and stock picking detracted in Energy—which did well within the benchmark. Our effective stock selection in Real Estate was not enough to overcome the negative effect of our lower portfolio weight.

What drove results for the Fund for the year-to-date period ended 9/30/21?

ML All of the Fund’s 11 equity sectors finished in the black. Financials led again—and by a wide margin—with Industrials and Information Technology following. Utilities, Energy, and Health Care made the smallest positive contributions to performance. Banks and capital markets, both in Financials, had the largest positive impact at the industry level. Semiconductors & semiconductor equipment in Information Technology rounded out the top three contributors for the year-to-date period. We had the biggest detractions from software, another group in Information Technology, equity real estate investment trusts—from Real Estate—and Energy’s oil, gas & consumable fuels group.

What drove underperformance versus the Russell 2000 Value for the year-to-date period ended 9/30/21?

CR Ineffective stock picks hampered the Fund’s performance—our sector allocation decisions were modestly positive and not enough to outweigh the negative effects of stock selection. In both Energy and Consumer Discretionary, we were hurt by the same combination of lower exposure and ineffective stock selection while our stock picking detracted in Materials. There were positives vis-à-vis the benchmark as well. Financials benefited from our savvy stock selection and, to a lesser degree, higher exposure to the sector, while Utilities was additive because of lower exposure. Finally, our lower weighting in Health Care was a positive relative to the small-cap value index for the year-to-date period.

“We’ve used headline induced macro weakness in individual stocks to add to core holdings that we believe have bright prospects over our three- to five-year investment horizon.” — Miles Lewis

Can you talk about current opportunities and your outlook for the Fund?

ML Supply chain issues, labor shortages, and inflation are dominating the headlines. These challenges are real, and we hear about them from most of the companies we speak with on a regular basis. However, these ominous headlines have also been creating opportunities for patient, long-term investors like ourselves. As a result, we’ve used headline induced macro weakness in individual stocks to add to core holdings that we believe have bright prospects over our three- to five-year investment horizon. In addition, we believe the chip shortage, while real, is a transitory phenomenon that simply moves growth from 2021 into 2022.  We also think the current focus on auto related issues looks past the robust fundamentals for the remainder of the semiconductor business. 

When the 10-year Treasury yield began to move higher in early August, and accelerated later in the quarter, the rotation into value and cyclical stocks began anew. The Fund was well positioned for this shift with our overweight in banks and Industrials, though our underweight in Energy, a space where dividends are somewhat scarce within small cap, served as a headwind. Interestingly, though, the other side of this rotation caught our attention most: the seemingly indiscriminate sell-off in many technology-related stocks. Our current research efforts are focusing on this area for overlooked, and/or over-penalized, attractively valued high quality dividend payers.




Important Disclosure Information

Average Annual Total Returns as of 9/30/21 (%) 

Total Return -1.75 47.42 8.50 10.44 11.73 7.89 9.60 10.59 12/15/93
Russell 2000 Value -2.98 63.92 8.58 11.03 13.22 7.50 9.79 10.13 N/A
Russell 2000 -4.36 47.68 10.54 13.45 14.63 9.16 10.29 9.61 N/A

Annual Operating Expenses: 1.25

1 Not annualized.

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

Mr. Lewis’s and Mr. Royce’s thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Percentage of Fund Holdings As of 9/30/2021 (%)

Return Fund

Trean Insurance Group


Deluxe Corporation


The Timken Company


Triumph Bancorp


Compass Diversified Holdings


Spectrum Brands


Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

Cyclical and Defensive are defined as follows: Cyclical: Communication Services, Consumer Discretionary, Energy, Financials, Industrials, Information Technology, and Materials. Defensive: Consumer Staples, Health Care, Real Estate, Utilities.

Sector weightings are determined using the Global Industry Classification Standard ("GICS"). GICS was developed by, and is the exclusive property of, Standard & Poor's Financial Services LLC ("S&P") and MSCI Inc. ("MSCI"). GICS is the trademark of S&P and MSCI. "Global Industry Classification Standard (GICS)" and "GICS Direct" are service marks of S&P and MSCI.

There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. All indexes referenced are unmanaged and capitalization weighted. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. The Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. The Fund may invest up to 25% of its net assets (measured at the time of investment) in securities of companies headquartered in foreign countries, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing Foreign Securities" in the prospectus.)



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