Royce Celebrates 50 Years of Small-Cap Investing
article 11-08-2022

Royce Celebrates 50 Years of Small-Cap Investing

As we celebrate 50 years of small-cap investing, our founder Chuck Royce and CEO Chris Clark look back on the history of our firm and flagship portfolio, Royce Pennsylvania Mutual Fund.


What do you see as the most important changes in small-cap investing since you took the helm of what is now Royce Pennsylvania Mutual Fund (“Penn”) in November of 1972?

Chuck Royce: I’ve seen many, but I think the most significant has been how the asset class has evolved over the last five decades. Small-cap has gone from being obscure and misunderstood to an established and institutionally recognized asset class. When I began my career as an analyst, small-cap was not seen as an asset class of its own—that is, one that had its own distinctive investment attributes, performance patterns, etc. To the degree that it was recognized, investors saw it as the place you went to find one or maybe a few highly risky growth stocks. With Penn, I was trying to do something innovative that went against the current.

When you first began to manage Penn, were you using a risk-conscious approach?

CR: Not entirely, no. The collapse of the “Nifty Fifty” market in 1973-74 was what convinced me to be vigilant about risk and seek out companies with attractive valuations, strong fundamentals, and high company quality. It was in many ways similar to the current period. First, the “Nifty Fifty” was a group of large, mostly multinational firms that were thought to be both a sure and safe route to growth—similar to the “FAAMG” group (Facebook, Amazon, Apple, Microsoft, and Google) today. The country was also challenged by inflation, recession, and rising energy prices.

When I began my career as an analyst, small-cap was not seen as an asset class of its own—that is, one that had its own distinctive investment attributes, performance patterns, etc. To the degree that it was recognized, investors saw it as the place you went to find one or maybe a few highly risky growth stocks. With Penn, I was trying to do something innovative that went against the current.
—Chuck Royce

How Things Have Changed…

Price Changes

Source: USA Today,, and

How did this difficult period change your approach to investing?

CR: Few things will lead you to reevaluate your investment discipline more than deep losses. Penn’s dismal results in 1973-74, when it fell 48.5% and 46.0%, respectively, led me to evolve my approach. I became convinced at that time that successful long-term investing was as much a matter of preserving capital as growing it. A strategy that lost less during downturns and was at least competitive in more bullish periods could provide strong absolute returns while also being likely to beat its benchmark, in particular over full market cycle periods. The second lesson was that a risk-conscious approach could be very effective with small-cap stocks—possibly even more so than in the more established, larger asset classes because small-cap was so inefficient and garnered very little institutional attention. I believe these core tenets of our investment discipline remain as relevant today as they were then.

Was it surprising that more investors didn’t look to small-caps during these years?

Chris Clark: The perception that small-cap was a highly risky asset class was so strong that it’s not entirely surprising. Even on the heels of the success that pioneers like Chuck enjoyed, there were few competitors. There were only 13 open-end small-cap funds in 1972, 17 in 1982. The total began to climb in the ‘90s, with 121 funds at the end of 1992. The next 10 years saw the most explosive increase—there were 553 funds at the end of 2002, and only 556 at the end of 2012. That number had fallen to 501 as of the end of September 2022. Of course, ETFs devoted to small-cap investing have proliferated over the last 10 years, going from 44 in 2012 to 113 at the end of September. Even with this remarkable growth, the asset class remains the most inefficient, labor intensive, and exciting segment of the equity markets.

Growth in the Number of Open-End Small-Cap Funds
From 12/31/72 through 9/30/22

Open End Small Cap Fund

Source: Morningstar

What’s the most important lesson you’ve learned from 50 years of managing the Fund?

CR: There have been many, but if I had to mention one, it’s the importance of staying invested for the long run. So many market extremes are unimaginable—until they actually happen. Most, if not all, investors never see these kinds of seismic events on the horizon. Stagflation in the 1970s, the “Death of Equities” and Black Monday in the ‘80s, the currency crises of the ‘90s, the Internet Bubble in the Aughts, the Great Financial Crisis, and Covid were all shocks to varying degrees. They all frightened or discouraged investors, but markets ultimately recovered and prospered. They all created rewarding long-term investment opportunities for anyone who had the stomach—and patience—to stay invested. We see the current bearish environment the same way.

In what ways has Royce changed over the years?

CC: One of the two most important changes has been the gradual and purposeful transition from Chuck leading most of our strategies—which invested primarily in U.S. small-caps in mutual fund portfolios for U.S. investors—to employing multiple portfolio managers managing a range of small-cap portfolios, still mostly focused on U.S. small-caps, to where we are today, with multiple portfolio managers and analysts managing differentiated strategies that invest in U.S., international, and/or global small-caps in a variety of vehicles available to both U.S. and non-U.S. investors. These changes have better aligned us with the evolving needs of our clients while positioning our firm to navigate the ever-shifting landscape of the investment management industry.

What was the other notable change?

CR: I would say it is the purposeful growth in the number of our investment professionals, especially the way it’s evolved so substantially over the last two and a half years, that has been most significant. This growth demonstrates our commitment to a deep and multi-generational approach to our investment teams. Thirteen of our 30 current professionals have joined Royce since May of 2020—an increase of more than 40% in our research and portfolio management talent. This growth was highly intentional and was an effort that Chris and our Co-CIO Francis Gannon were instrumental in leading and implementing as we thought about the most effective ways to ensure another 50 years of success.

Two years into the transition, have you been happy with Franklin Templeton’s majority ownership of the firm?

CC: Absolutely. Just as we were very pleased with how Legg Mason supported us as an independent investment affiliate from 2001-2020, we couldn’t be happier with our relationship with Franklin. Our status as an autonomous Specialist Investment Manager (SIMs) within the Franklin Templeton family has been as positive as we could have hoped. They are both a key resource and supportive partner, and their global distribution team continues to provide increased reach for our products as clients across the globe look to, or consider, Royce to meet their small-cap allocation needs. In addition, we now sub-advise a range of portfolios for clients in the U.K., Europe, Japan, Australia, and Canada.

What do you think makes Royce unique?

CC: Over the last 50 years, we have developed unparalleled experience in small-cap investing that provides us with a deeper understanding of the nuances and lingering misperceptions about the asset class. This experience leads to critical investment insights that can benefit our clients. We continue to thoughtfully and intentionally evolve the firm with a long-term view and a resolute commitment to remaining a pre-eminent small cap specialist. Despite all of the firm’s accomplishments over five decades, we have never forgotten that our top priority is delivering strong long-term returns to our investors, which we have been doing: For the five years ended 9/30/22, eight of our 11 open-end funds beat their respective benchmarks—which represented 82% of our assets under management at the end of September.

Any final thoughts?

CC: Chuck is the last person who’d want to mention this, but I think it’s important to note just how impressive Penn’s record has been since he took over full investment responsibilities in 1972.

The Growth of $10,000 Invested in Royce Pennsylvania Mutual Fund
From 11/31/72 through 10/31/22

PMF IC Growth

Past performance is no guarantee of future results.

Important Disclosure Information

Average Annual Total Returns as of 9/30/22(%)

NET               GROSS
Pennsylvania Mutual -4.47 -24.77 -19.50 4.44 4.50 8.16 6.11 N/A N/A 0.92 0.92
Dividend Value -4.60 -24.68 -19.49 1.10 1.83 6.32 5.68 7.03 05/03/04  1.54  1.34
Global Financial Services -4.16 -25.46 -22.30 3.81 3.50 8.44 5.57 7.03 12/31/03  1.82  1.53
International Premier -11.95 -35.72 -36.66 -3.18 -0.45 5.51 N/A 4.37 12/31/10  1.54  1.44
Micro-Cap -3.73 -30.65 -25.65 8.44 4.26 4.79 3.88 9.87 12/31/91  1.20  1.20
Small-Cap Opportunity -5.28 -26.19 -21.95 10.33 5.35 9.99 7.21 11.23 11/19/96  1.21  1.21
Premier -4.87 -23.13 -16.29 2.67 4.95 8.16 6.90 10.65 12/31/91  1.17  1.17
Small-Cap Special Equity -3.61 -15.98 -8.83 5.97 3.26 6.57 6.55 8.06 05/01/98  1.20  1.20
Small-Cap Total Return -10.09 -22.35 -17.01 2.70 2.73 7.33 5.64 9.49 12/15/93  1.25  1.25
Smaller-Companies Growth 2.23 -34.79 -37.41 4.52 3.40 7.42 4.58 9.56 06/14/01  1.51  1.49
Small-Cap Value -1.19 -20.33 -13.80 0.65 1.85 4.53 3.78 7.61 06/14/01  1.55  1.49
Russell 2000
-2.19 -25.10 -23.50 4.29 3.55 8.55 6.40 N/A N/A  N/A  N/A
Russell 2500
-2.82 -24.01 -21.11 5.36 5.45 9.58 7.27 N/A N/A  N/A  N/A
-5.27 -26.36 -24.80 2.96 2.32 7.02 4.86 N/A N/A  N/A  N/A
-8.37 -29.37 -28.93 0.38 -0.56 4.44 2.18 N/A N/A  N/A  N/A
Russell Microcap
-0.48 -25.48 -27.46 6.86 3.11 8.37 5.46 N/A N/A  N/A  N/A
Russell 2000 Value
-4.61 -21.12 -17.69 4.72 2.87 7.94 5.70 N/A N/A  N/A  N/A
Russell 2000 Growth
0.24 -29.28 -29.27 2.94 3.60 8.81 6.82 N/A N/A  N/A  N/A
1 Not annualized.

Average Annual Total Returns as of 10/31/22(%)

  Oct1 YTD1 1YR 3YR 5YR 10YR 15YR 45YR DATE
Pennsylvania Mutual 9.37 -17.72 -15.71 6.74 5.96 9.18 6.58 12.44 N/A
Russell 2000
11.01 -16.86 -18.54 7.05 5.56 9.93 6.94 N/A N/A

Annual Operating Expenses: 0.92 (PENNX)

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 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. Investment and Service Class shares redeemed within 30 days of purchase may be subject to a 1% redemption fee payable to the Fund (2% for Royce International Premier Fund). Redemption fees are not reflected in the performance shown above; if they were, performance would be lower. Current performance may be higher or lower than performance quoted. Current month-end performance may be obtained at All performance and expense information reflects results of the Funds’ oldest share Class (Investment Class or Service Class, as the case may be). Price and total return information is based on net asset values calculated for shareholder transactions. Annual gross operating expenses reflect the Fund’s gross total annual operating expenses and include management fees, any 12b-1 distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Annual net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses, excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business, to the extent necessary to maintain net operating expenses at or below: 1.24% for Royce Micro-Cap Fund; 1.34% for Royce Dividend Value Fund; 1.44% for Royce International Premier Fund; 1.49% for Royce Global Financial Services, Small-Cap Value, and Smaller-Companies Growth Funds through April 30, 2022. 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. Service Class shares bear an annual distribution expense that is not borne by the Funds’ Investment Class. If such distribution expenses had been reflected for Funds showing Investment Class performance, returns would have been lower. Investments in securities of micro-cap, small-cap, and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Certain Funds invest a significant portion of their respective assets in foreign companies that may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see “Investing in Foreign Securities” in the prospectus.) Therefore, the prices of securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of securities of U.S. companies. (Please see “Primary Risk of Fund Investors” in the prospectus.) Certain Funds generally invest a significant portion of their assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause their overall value to decline to a greater degree. A broadly diversified portfolio, however, does not ensure a profit or guarantee against loss. tual funds, hedge funds, private equity funds, and other investment companies.

The thoughts and opinions of Mr. Royce and Mr. Clark 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.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 Index is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index along with the next smallest eligible securities as determined by Russell. The Russell 2000 Value Index consists of the respective value stocks within the Russell 2000 as determined by Russell Investments. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The MSCI ACWI ex USA Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. The MSCI ACWI Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. Index returns include net reinvested dividends and/or interest income. 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. 



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