Royce Pennsylvania Mutual Fund— Sailing on the Small-Cap Flagship —Royce
article 02-06-2024

Royce Pennsylvania Mutual Fund—Sailing on Our Small-Cap Flagship

Co-CIO Francis Gannon talks about the Fund’s impressive long-term record of more than 50 years and looks at what sets our small-cap flagship apart.


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We have always emphasized the virtues of long-term investing here at Royce. Of course, some terms last longer than others, and people are bound to have differing notions as to what exactly constitutes the long term. Yet, in a world often captivated by quarterly or other short-term performance periods, long term for many may be measured in months, not years, and certainly not 50 years and counting. And while other mutual funds have been in existence since late 1972—the year Chuck Royce assumed sole management of Royce Pennsylvania Mutual Fund (PENNX)—very few are helmed by the same manager or continue to employ the same investment tenets. For the past several years, Chuck has led a team that consists of Portfolio Managers Jay Kaplan, Lauren Romeo, Steven McBoyle, Miles Lewis, and Andrew Palen, with the assistance of Portfolio Manager Jim Stoeffel.

We take what we hope is an understandable pride in a portfolio with a long-term track record that few mutual funds can match, in terms of performance or longevity. This record includes an impressive showing in 2023, when Penn gained 26.7%, easily outperforming its small-cap benchmark, the Russell 2000 Index, which climbed 16.9% for the same period. Penn even narrowly beat the large-cap Russell 1000 Index, which was up 26.5% in 2023. The Fund 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%.

Royce Pennsylvania Mutual Fund Average Annual Total Returns (%)
As of 12/31/23

Subsequent Average Annualized Three-Year Return for the Russell 2000 Starting in Monthly Rolling VIX Return Ranges

Past performance is no guarantee of future results.

The importance of Penn’s long-term record, however, is about more than its performance history, impressive as it is. There is a story that lies behind the numbers. Penn’s long-term results reflect what we believe are two critical competitive advantages—our experience and our consistent multi-discipline investment approach. In most asset management organizations, small-cap investing occupies a small place on a much larger menu of offerings. However, at Royce small-cap investing is our primary business—and had been for more than 50 years. This focus has allowed us to build a formidable knowledge base about thousands of companies and study historical small-cap performance patterns through a variety of market and economic conditions. Small-cap companies can be quirky from a research and trading standpoint. To be sure, many receive little or no analyst coverage, so the fact that small companies are the center of our investment universe gives us an advantage. Our wealth of experience has seen us through almost every conceivable kind of market. These decades of experience have proven especially valuable in trying times.

There is another key distinction, one that we believe has contributed substantially to the long-term success of both the Fund and the firm. Small-caps have earned a reputation for higher volatility. So, while many small-cap portfolio managers focus on the return side of the equation, we devote equal attention to risk. Managing risk is crucial because failing to do so can erode, or even destroy, returns. Therefore, we think that doing better during downturns is of equal importance to success in upswings. And our approach focuses on risk at multiple levels—corporate, price, market, etc.— in an attempt to provide more consistent long-term results.

Another key element is our willingness to stick to our approaches, regardless of market movements and trends. Most asset management companies employ specific and consistent investment approaches. However, we are often surprised by those that do not and dismayed at those who adopt an approach, only to discard it for something else when the market goes against them. By contrast, we look for what we think are fundamentally strong companies trading at discounts to our estimate of their worth as a business.

These core principles have guided us through many markets, whether bearish or bullish. We believe that our more than five decades of fidelity to disciplined approaches have been among the most significant reasons that Penn boasts such attractive long-term results.

Today, Penn uses multiple investment disciplines in an effort to provide exposure to the approaches that have worked well in different market environments. Our disciplines include High Quality, where we look for companies with high returns on invested capital that we believe also possess significant competitive advantages; Emerging Quality, which are companies that are newer in their lifecycle that we think can make the jump to High Quality in the future; Traditional Value, wherein we look for companies trading at prices below our estimate of their current worth; and Quality Value, which seeks companies with attractive profit margins, strong free cash flows, and lower leverage that also trade at valuations we find attractive. Penn’s portfolio managers generally focus on one of these approaches, while Chuck collaborates with them across all segments.

The chart below shows the growth of $10,000 invested in Royce Pennsylvania Mutual Fund for the 50-year period ended 12/31/23. We believe that the Fund’s performance over this period is impressive mostly as a demonstration of the critical elements we describe above, that is, the dual importance of experience and process.

Royce Pennsylvania Mutual Fund Growth of $10,000
50 Years Through 12/31/23

Subsequent Average Annualized Three-Year Return for the Russell 2000 Starting in Monthly Rolling VIX Return Ranges

Past performance is no guarantee of future results.

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. Gannon’s thoughts and opinions concerning the stock market are solely his 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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