Royce Pennsylvania Mutual Fund—2Q22 Update and Outlook—Royce
article 07-19-2022

Royce Pennsylvania Mutual Fund—2Q22 Update and Outlook

Lead Portfolio Manager Chuck Royce and Portfolio Managers Lauren Romeo, Jay Kaplan, Steven McBoyle, Andrew Palen, and Miles Lewis update investors on how our flagship portfolio, Royce Pennsylvania Mutual Fund, performed in 2Q22 and in the equally challenging first half of 2022 while offering their confident long-term outlook.


How did Royce Pennsylvania Mutual Fund perform in 2Q22?

Chuck Royce While a negative return is obviously never our goal, we consistently attempt to position the Fund to weather downturns better than its small-cap benchmark, the Russell 2000 Index. In that respect, the Fund performed as we would expect, down 13.3% for 2Q22 while the benchmark declined 17.2% for the same period.

How was performance for 2022’s first half and over longer-term periods?

Andrew Palen The Fund maintained its long-term advantages over the Russell 2000, outpacing it for the one-, three-, five-, 20, 25-, 30-, 35-, and 40-year periods ended 6/30/22. Consistent with Chuck’s observation, an important element in that long-running outperformance record is the Fund’s historical record of beating the index during down markets. So, while we weren’t happy about the portfolio’s negative return for the year-to-date period ended 6/30/22, we were pleased that Penn lost less than its benchmark, down 21.2% versus a decline of 23.4% for the Russell 2000 for the first half.

Which portfolio sectors made the biggest impact on 2Q22’s performance?

Jay Kaplan Each of the portfolio’s 10 sectors had a negative impact on quarterly performance, with the largest detractions coming from Industrials, Information Technology, and Financials. The least negative impacts came from Consumer Staples, Energy, and Real Estate.

What happened at the industry level in 2Q22?

Miles Lewis Two areas in Information Technology—semiconductors & semiconductor equipment and electronic equipment, instruments & components—detracted most, followed by capital markets in Financials. In the positive side, auto components and diversified consumer services, which are both in Consumer Discretionary, were the top contributors, with the Health Care sector’s pharmaceuticals group coming next.

At the sector level, what factors made the biggest impact relative to the benchmark in 2Q22?

Lauren Romeo Our advantage over the benchmark came solely from stock selection in the quarter, with the Consumer Discretionary, Industrials, and Information Technology sectors making the most significant positive impacts due to savvy stock picking. Eight out of the 11 sectors in the Russell 2000 had positive results versus the benchmark. Only Utilities—where we had no exposure—and our lower weightings in both Consumer Staples and Energy detracted from relative quarterly results.

Turning to the first half, how did the Fund perform in the first six months of 2022?

Steven McBoyle Nine of the 10 equity sectors in which the Fund held investments detracted from Penn’s first-half performance, with the biggest negative impacts coming from Industrials, Information Technology, and Financials. Energy made a small positive contribution while the smallest detractions came from Consumer Staples and Real Estate.

What about at the industry level?

AP The same two areas in Information Technology—semiconductors & semiconductor equipment and electronic equipment, instruments & components—detracted most, followed by banks from Financials. Each was among the Fund’s four largest industry weightings for the year-to-date period ended 6/30/22—and the two industries from tech were also significantly overweight versus the Russell 2000. These sizable exposures indicate our high long-term confidence in spite of recent stock price declines.

ML On the plus side, Penn’s top-contributing industries were energy equipment & services, in Energy; containers & packaging from Materials; and as was the case in 2Q22 pharmaceuticals.

How did the Fund’s results compare with those of the Russell 2000?

JK Our relative advantage came entirely from stock selection in 2022’s first half. In another similarity to 2Q22, eight equity sectors contributed to outperformance. At the sector level, stock picks and our lower exposure to Health Care both made positive impacts while stock selection drove the Fund’s relative advantage in Consumer Discretionary. The portfolio’s cash position also helped versus the benchmark. Conversely, the portfolio’s relative results were hurt by our lower exposure to Energy, lack of exposure to Utilities, and a combination of stock picks and our lower weighting in Consumer Staples.

What’s your long-term outlook for the Fund?

CR We are currently in what we would call a “sum of all fears” environment. War, inflation, slower growth, and rising rates are all understandably frightening investors. Both consumer and investor sentiment are near historic lows. Perhaps counterintuitively, then, we have found that the most opportune times to invest are when fear is high and trailing returns are low. The annualized three-year return for the Russell 2000 at the end of June was 4.2% compared to its three-year monthly rolling average since inception of 10.9%. Subsequent returns from these levels have been attractive. Coming off a record negative first half during what appears to be a late stage of the bear market, the current period looks like a solid entry point for long-term small-cap returns going forward.

Important Disclosure Information

Average Annual Total Returns as of 6/30/22 (%) 

  2Q221 1YR 3YR 5YR 10YR 15YR 20YR 30YR 45YR
Pennsylvania Mutual -13.34 -17.56 5.61 6.81 9.22 6.23 8.59 9.92 12.38
Russell 2000 -17.20 -25.50 4.21 5.17 9.35 6.33 8.17 9.09 N/A

Annual Operating Expenses: 0.92

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, 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. Royce’s, Ms. Romeo’s, Mr. Kaplan’s, Mr. McBoyle’s, Mr. Palen’s, and Mr. Lewis’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.

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.)



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