Royce Pennsylvania Mutual Fund—4Q22 Update and Outlook—Royce
article 01-10-2023

Royce Pennsylvania Mutual Fund—4Q22 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 4Q22 and in the highly challenging year of 2022 while offering their confident long-term outlook.


How did Royce Pennsylvania Mutual Fund perform in 4Q22?

Chuck Royce: We were pleased that the Fund significantly outpaced its small-cap benchmark, the Russell 2000 Index, in the only positive quarter in 2022. Penn advanced 10.2% for the quarter versus 6.2% for the Russell 2000.

How was performance for 2022 and over longer-term periods?

Jay Kaplan: The Fund maintained its long-term advantages over the Russell 2000. It beat the benchmark by losing less in 2022, -17.1% versus -20.4% while also outperforming for the three-, five-, 20-, 25-, 30-, 35-, and 40-year periods ended 12/31/22. An important element in the Fund’s long-running outperformance is its historical record of beating the index during down markets. So, while a negative return year is never what we want, we were pleased that Penn lost less than its benchmark in 2022.

Which portfolio sectors made the biggest impact on 4Q22’s performance?

Andrew Palen: All 10 of Penn’s equity sectors had a positive impact on quarterly performance, with the biggest contributions coming from Industrials, Information Technology, and Materials. The smallest contributions came from Real Estate, Communication Services, and Consumer Staples.

What happened at the industry level in 4Q22?

Lauren Romeo: The electronic equipment, instruments & components group, which is part of Information Technology, contributed most, followed by machinery in Industrials and chemicals, which is in Materials, while the biggest detractors in 4Q22 were our holdings in media from the Communication Services sector and two groups in Health Care: health care technology and health care providers & services.

At the sector level, what factors made the biggest impact relative to the benchmark in 4Q22?

Miles Lewis: Our advantage over the benchmark came mostly from stock selection in the quarter, although sector allocation decisions were also additive. Altogether, seven of 11 sectors had better relative performance in 4Q22. Our much lower exposure to Health Care did most to boost relative performance, followed by effective stock picks in Information Technology and a combination of our much higher weighting and savvy stock selection in Industrials. Conversely, we were hurt by our lower weighting in Energy and stock selection in Real Estate. Penn’s cash position also had a negative effect on relative results in 4Q22.

Turning to the calendar year, how did the Fund perform in 2022?

Steven McBoyle: Nine of the 10 equity sectors in which the Fund held investments finished 2022 in the red, with the largest detractions coming from Information Technology, Consumer Discretionary, and Financials. Energy made a small positive contribution while the smallest detractions came from Consumer Staples and Materials.

What about at the industry level?

ML: 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 five largest industry weightings at the end of 2022—and the two industries from tech were also significantly overweight versus the Russell 2000. All three exposures indicate our long-term confidence in spite of their stock price declines in a bearish 2022.

LR: On the plus side, Penn’s top-contributing industries were the metals & mining group in Materials, communications equipment in Information Technology, and energy equipment & services in Energy.

AP: Our relative advantage came entirely from stock selection in 2022 as sector allocation was slightly negative. Eight equity sectors contributed to outperformance. At the sector level, both our lower exposure and stock picks helped in Health Care while in Industrials stock selection and our higher weighting keyed outperformance, as did stock picking in Information Technology. Conversely, the portfolio’s relative results were most hurt by our lower exposure to Energy, along with our 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 know better than to try predicting outcomes for the markets or the economy, but we routinely examine past performance patterns to help us make sense of the present as we prepare for the uncertain days ahead. The Russell 2000 fell 31.9% from 11/8/21 through the current bottom on 6/16/22, which places it precisely at the average of Russell 2000 downturns of 15% or more since the index’s inception. Over that 44-year span, only three bear markets went markedly deeper than this one by falling at least another 10%. Each of these downturns was exacerbated by a monumental negative event: the Great Financial Crisis led to small-cap losses of 58.9% from 7/13/07-3/9/09; the bursting Internet Bubble saw the Russell 2000 down 44.1% from 3/9/00-10/9/02; and in the Covid pandemic the small-cap index declined 41.8% from 8/31/18-3/18/20. As difficult as these markets were, each presented investors with an important opportunity to build their small-cap allocation because in each case the subsequent recovery was robust—but it was much more rewarding for those who stayed invested. Regardless of what happens in the near term, then, we see the current period of uncertainty as a highly opportune time to actively invest in select small caps for the long run.

Important Disclosure Information

Average Annual Total Returns as of 12/31/2022 (%)

NET               GROSS
Pennsylvania Mutual 10.24 -17.06 4.91 5.71 8.73 12.18 N/A  0.92  0.92
Russell 2000
6.23 -20.44 3.10 4.13 9.01 N/A N/A  N/A  N/A
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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