Royce Small-Cap Total Return—1Q23 Update and Outlook—Royce
article 04-13-2023

Royce Small-Cap Total Return—1Q23 Update and Outlook

Portfolio Managers Miles Lewis, Chuck Royce, and Assistant Portfolio Manager Joe Hintz update investors on why their long-term outlook is constructive.


How did Royce Small-Cap Total Return Fund in 1Q23 and over longer-term periods?

Chuck Royce: The Fund, which is part of Royce’s Quality Value Strategy, advance 2.3% in 1Q23, beating its small-cap benchmark, the Russell 2000 Value Index, for the same period. The Fund also outperformed both the Russell 2000 Value and the Russell 2000 Index for the 1-, 5-, 10-, 15-, 25-year, and since inception periods ended 3/31/23.

How did performance shake out at the sector and industry level in 1Q23?

“Recent tumult throughout the market has given us opportunities to add to a variety of names across the portfolio at what we think are more attractive valuations.”
—Miles Lewis

Miles Lewis: It was another challenging quarter given that small-cap returns were positive into early February and then declined through most of February and March. However, we were pleased that six of the portfolio’s 10 equity sectors had a positive effect on quarterly performance, led by Information Technology, Industrials, and Consumer Discretionary. Financials made the biggest detraction by far, mostly due to our holdings in banks declining precipitously, while Energy and Health Care also hurt quarterly returns, though to a much lower degree.

What about for the Fund’s industry groups?

Joe Hintz: At the industry level, trading companies & distributors, which are in Industrials, made the biggest positive impact, followed by two industries in Information Technology: electronic equipment, instruments & components and software. Banks—which is part of the Financials sector—were the biggest detractor at the industry level, followed by capital markets, which are also in Financials, and energy equipment & services. After doing very well in 2022, Energy stocks fell hard in the first quarter.

Which holdings contributed and detracted most in 1Q23?

ML: FTAI Aviation was our top contributor. FTAI operates through two segments, Aviation Leasing and Aerospace Products. Aviation Leasing owns and manages aviation assets, including aircraft and aircraft engines, which it leases and sells to customers. Aerospace Products develops, manufactures, repairs, and sells aircraft engines and aftermarket components for aircraft engines. The top detractor was the Tel Aviv Stock Exchange, which operates a stock exchange in Israel. The company offers markets for the listing and trading of a range of securities and derivative instruments and engages in the clearing and settlement of securities. Each was one of our 20 largest holdings at the end of March.

At the sector level, how did the Fund perform versus its benchmark?

JH: The portfolio’s advantage versus its benchmark came primarily from stock selection in the quarter, although our sector allocation decisions were also additive. Our larger weighting in Information Technology, along with an assist from stock selection. Helped most. Both stock picking and our higher weight in Industrials also helped. With so much difficulty in the Financials sector, we were pleased that our stock selection was a relative strength in 1Q23. Conversely, a combination of stock selection and somewhat lower exposure to Consumer Discretionary detracted, as did stock selection in Energy. Our lack of exposure to Consumer Stapes also hurt, though it did so much less impactfully.

What is your outlook for the Fund?

ML: The quarter was made much wilder when the failures of Silicon Valley and Signature Banks catalyzed a sharp sell-off into a broader sell-off in regional and community bank stocks, which accounted for approximately 16% of the Russell 2000 Value. We entered 2023 slightly underweight, though we had been bullish on banks since the spring of 2020. This stance served us well. Recent drawdowns notwithstanding, banks have been among the Fund’s top contributing industries since May of 2020—and substantially outperformed on a relative basis. Recent events, however, have, appropriately in our view, led us to revise our longstanding positive bias. We still believe credit and capital are not the issues for the banks we hold. We also do not believe that the unique circumstances that took down Silicon Valley and Signature can be extrapolated to the industry at large, that is, we do not believe there is broader systemic risk. Nonetheless, we believe the perception of the group has taken a significant blow that likely limits the multiple re-rating opportunity we once viewed as our base case, which calls into question our bull thesis for the group, though we still believe opportunity is being created in specific banks. We are therefore actively looking to capitalize on what we see as dislocations in the industry, both in- and outside our portfolio. Beyond banks, we have high conviction in our portfolio of what we think are high quality, attractively valued businesses. Recent tumult throughout the market has given us opportunities to add to a variety of names across the portfolio at what we think are more attractive valuations while also surfacing new ideas that we expect to investigate using our rigorous investment process. As always, we welcome the opportunities created by market volatility, regardless of the root cause.

Important Disclosure Information

Average Annual Total Returns as of 3/31/2023 (%)

NET               GROSS
Small-Cap Total Return 2.30 -8.98 18.45 5.08 7.29 9.82 12/15/93  1.25  1.25
Russell 2000 Value
-0.66 -12.96 21.01 4.55 7.22 9.14 N/A  N/A  N/A
Russell 2000
2.74 -11.61 17.51 4.71 8.04 8.43 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. Lewis’s, Mr. Royce’s, and Mr. Hintz’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 3/31/23 (%)

  Small-Cap Total Return

FTAI Aviation


Tel Aviv Stock Exchange


Silicon Valley Bank


Signature Bank


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.

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 Russell 2000 Value index consists of the respective value 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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