Royce Pennsylvania Mutual Fund—4Q23 Update and Outlook—Royce
article 01-09-2024

Royce Pennsylvania Mutual Fund—4Q23 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 4Q23 and in 2023 while offering their confident long-term outlook.


How did Royce Pennsylvania Mutual Fund perform in 4Q23?

Chuck Royce: The Fund had a very strong fourth quarter, though it lagged its small-cap benchmark, the Russell 2000 Index. Penn advanced 12.9% in 4Q23 while the Russell 2000 was up 14.0%.

How was performance for 2023 and over longer-term periods?

Jay Kaplan: The Fund’s long-term results were excellent. Penn beat the Russell 2000 soundly in 2023, up 26.7% versus 16.9% (and the Fund also narrowly outpaced the large-cap Russell 1000 Index, which was up 26.5% in 2023). Penn also beat the Russell 2000 for the 3-, 5-, 10- 15-, 20-, 25-, 30, 35-, and 40-year periods ended 12/31/23. In addition, the Fund’s average annualized total return for the 50-year period ended 12/31/23 was 13.2%.

Which portfolio sectors made the biggest impact on 4Q23’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, Financials, and Information Technology, while the smallest contributions came from Energy, Consumer Staples, and Real Estate.

What happened at the industry level in 4Q23?

Lauren Romeo: The machinery group, which is part of Industrials, contributed most, followed by semiconductors & semiconductor equipment in Information Technology, and resurgent banks from Financials. The three industries that detracted most in 4Q23 were oil, gas & consumable fuels from the Energy sector, electrical equipment in Industrials, and entertainment in Communication Services.

At the sector level, what factors made the biggest impact relative to the benchmark in 4Q23?

Miles Lewis: Our somewhat narrow disadvantage over the Russell 2000 came solely from stock selection in the quarter—our sector allocation decisions were additive. Altogether, eight of 11 sectors underperformed the benchmark in 4Q23. Stock selection hurt most in Financials, Health Care (where our lower weighting also detracted), and Industrials. Conversely, our lower weighting in Energy was additive, as were stock selection in Materials and lack of exposure to Utilities. (Energy was down within the Russell 2000 while Utilities had the lowest positive return in 4Q23.)

Turning to the calendar year, how did the Fund perform in 2023?

Steven McBoyle: All 10 equity sectors in which the Fund held investments finished 2023 in the black, with the largest contributions coming from Industrials, Information Technology, and Financials. Communication Services, Energy, and Health Care made the smallest positive contributions.

What about at the industry level?

ML: Two of Penn’s largest industry weights—semiconductors & semiconductor equipment in Information Technology and machinery in Industrials—were the top contributors, followed by another good-sized weighting—building products in Industrials. The top detractors were communications equipment from Information Technology, air freight & logistics in Industrials, and interactive media & services in Communication Services.

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

LR: Our relative advantage came mostly from stock selection in 2023, though sector allocation was highly additive. Altogether, 10 of 11 equity sectors contributed to the Fund’s outperformance. Both stock selection and our higher weighting helped in Industrials, stock selection in Financials, and stock selection and a higher weighting in Information Technology, drove relative outperformance most. Conversely, stock selection detracted in Communication Services while the smallest contributions to outperformance came from our lower weightings in Consumer Staples and Energy.

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

CR: Our outlook is constructive. First, we suspect that returns are likely to skew more widely over the next few years and that the reign of the Magnificent 7—the mega-cap cohort of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—may be coming to an end, especially if 2023’s fourth quarter and early January 2024 are any indication. The backdrop of moderating inflation, normalized interest rates, and a still growing U.S. economy, also bolsters our belief that small-cap’s lengthy stretch in the relative performance wilderness has run its course. Moderate economic growth and the more normalized rate environment should support a broadening of equity market returns where small-caps could be clear beneficiaries, especially those businesses that have largely sat out the mega-cap performance regime. Even more important is what we’ve been hearing from management teams—most of whom remain cautiously optimistic about 2024. It appears increasingly likely, for example, that the U.S. economy will achieve the much-desired soft landing—which is encouraging for many reasons. The next few years will see even more tangible benefits of reshoring, the CHIPS Act, and numerous infrastructure projects, and many of our holdings are poised to benefit from these developments. So, we’re looking forward to what we think should be a favorable cycle for small-cap stocks.

Important Disclosure Information

Average Annual Total Returns as of 12/31/2023 (%)

NET               GROSS
Pennsylvania Mutual 12.86 26.66 8.64 13.11 8.02 12.39 N/A  0.96  0.96
Russell 2000
14.03 16.93 2.22 9.97 7.16 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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