PENNX—4Q21 Strategy Update and Outlook—Royce
article 01-18-2022

Royce Pennsylvania Mutual Fund—4Q21 Update and Outlook

Lead Portfolio Manager Chuck Royce and Portfolio Managers Jay Kaplan and Andrew Palen update investors on how our flagship portfolio, Royce Pennsylvania Mutual Fund, performed in 4Q21 and 2021 as a whole while offering their confident outlook for 2022.


How did Royce Pennsylvania Mutual Fund perform in 4Q21?

Chuck Royce We were pleased that the Fund enjoyed a strong fourth quarter, advancing 7.0% and beating its benchmark, the Russell 2000 Index, which was up 2.1% for the same period.

Which portfolio sectors made the biggest positive impact on 4Q21’s performance?

Jay Kaplan Eight of the portfolio’s 10 equity sectors made a positive impact on quarterly performance, led by Industrials, Information Technology, and Financials. The only negative impacts came from Health Care and Communication Services while Energy made the smallest positive contribution.

What about at the industry level?

Andrew Palen We had the most success with semiconductors & semiconductor equipment in Information Technology, as well as two groups in Industrials—building products and machinery. We also saw the biggest detractions from IT services in Information Technology, health care equipment & supplies—Health Care more generally had a rough quarter—and software, which is also in Information Technology.

How did the Fund perform versus the Russell 2000 in the fourth quarter?

JK The Fund’s advantage over the benchmark came almost equally from stock selection and sector allocation decisions in the quarter. We had lower exposure to Health Care, which helped relative performance. We also received a smaller lift from our stock selection in that same sector in the quarter. Both our overweights and stock picking gave us advantages in Industrials and Information Technology, our two largest sector weightings.

CR On the other hand, both Real Estate and Utilities did well in the fourth quarter, so our underweight in the first sector and lack of exposure to the second hurt relative results—and our stock picking in Real Estate was a positive, though not enough to make up for our lower weighting. Something close to the opposite happened in Financials: Our higher weight helped versus the Russell 2000, but our stock picking gave us a modest net negative for the quarter.

Turning to the calendar year, how did the Fund perform in 2021?

AP The Fund advanced 22.0% in 2021 and outperformed the Russell 2000, which was up 14.8% for the same period. In addition to its calendar-year advantage, the Fund beat the benchmark for the 3-, 5-, 20-, 25-, 30-, 35-, 40-year periods ended 12/31/21, all under Chuck’s leadership. Penn’s 40-year average annual total return for the period ended 12/31/21 was 12.4%.

What happened at the sector level in 2021?

CR Nine of the portfolio’s 10 equity sectors made a positive impact on calendar-year performance. The sectors that made the largest positive contributions were Industrials, Information Technology, and Financials while the only negative impact came from Communication Services. Health Care and Energy made the smallest positive contributions to 2021’s performance.

Which industries did best and worst in 2021?

JK As in the fourth quarter, semiconductors & semiconductor equipment led, followed by banks, which are in Financials, and machinery from the Industrials sector contributed most in 2021. We were pleased to see strong results from this trio as they were our largest industry weightings during the year.

AP There were some disappointments, too, of course. Software in Information Technology, health care equipment & supplies in Health Care, and diversified telecommunication services from the Communication Services sector were the largest detractors for 2021.

What was the Fund’s top-contributing position in 2021?

JK It was Kulicke & Soffa Industries, which primarily supplies equipment for semiconductor wire bonding assembly and other capital equipment. The proliferation of demand for semiconductors is accelerating growth for Kulicke’s bonder equipment, in particular because 80% of the world’s semiconductor packages use wire bonding—while its new product innovations in advanced display and electronics has broadened its overall addressable market and improved its gross margin mix.

What as the Fund’s biggest detractor?

CR The largest detractor was Upland Software, which provides cloud-based enterprise work management software. Its shares fell on mixed revenue performance following outsized presidential election-related growth in 2020 and disappointing execution of the transition of its go-to-market strategy. Profit margins contracted as the company sustained elevated investments in advance of an improvement in revenue productivity. Although we still appreciate much about the strategic allocation of capital, these factors led us to substantially reduce our position during the fourth quarter.

What sectors helped or hurt the Fund versus the Russell 2000 in 2021?

AP The portfolio’s advantage came mostly from sector allocation decisions in 2021, with our significant underweight in Health Care helping most—it was the biggest detractor within the Russell 2000. We also benefited from both our higher exposure and savvy stock selection in Industrials, and primarily from the latter factor in Information Technology.

JK Conversely, our underweight in Energy, which was strong within the Russell 2000, hurt relative results, as did the Fund’s cash position. Our effective stock selection didn’t outweigh the negative impact of our overweight in Materials, which also detracted from relative results in 2021.

What’s your outlook for 2022?

CR Our outlook is very positive for small-cap value but it’s more nuanced for small-cap as a whole. The Russell 2000 enjoyed a third consecutive year of double-digit positive returns in 2021, which is rare for any equity index. It’s happened only twice before since the inception of the Russell 2000 in 1979: from 1991-1993 and 1995-1997. In each instance, a fourth year of double-digit positive performance failed to materialize. We always place a lot of weight on history, and this pattern, along with the likelihood of a less accommodative Fed, makes us think that performance for the Russell 2000 will be more muted in 2022. History also tells us, however, that small-cap value and cyclicals do well, particularly on a relative basis, during periods of improving economic growth. This is consistent with the encouraging signs we’ve been seeing on a company-by-company basis. We also are optimistic of the relative performance outlook for high-quality stocks— which we primarily define as companies with high returns on invested capital and stable returns on assets. We think the Fund’s combined focus on high-quality and value should be supportive for attractive returns, particularly relative to its benchmark.




Important Disclosure Information

Average Annual Total Returns as of 12/31/21 (%) 

  4Q211 1YR 3YR 5YR 10YR 15YR 20YR 30YR 45YR
Pennsylvania Mutual 7.00 22.05 20.78 13.10 12.30 8.62 10.09 10.97 13.18
Russell 2000 2.14 14.82 20.02 12.02 11.68 8.69 9.36 10.07 N/A

Annual Operating Expenses: 0.95

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 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 and other expenses.

Mr. Royce’s, Kaplan’s, and Palen’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 12/31/2021 (%)

Pennsylvania Mutual
Kulicke & Soffa Industries


Upland Software


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.

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 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 and micro-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 in foreign securities that may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)



Sign Up