Royce Small-Cap Total Return—1Q24 Update and Outlook—Royce
article 04-16-2024

Royce Small-Cap Total Return—1Q24 Update and Outlook

Portfolio Managers Miles Lewis, Chuck Royce, and Assistant Portfolio Manager Joe Hintz update investors on a strong quarter and their cautious and constructive outlook.


How did Royce Small-Cap Total Return Fund in 1Q24 and over longer-term periods?

Chuck Royce: The Fund, which is part of Royce’s Quality Value Strategy, Fund advanced 4.3% for the quarter, outperforming its benchmark, Russell 2000 Value Index, which was up 2.9% for the same period. The portfolio also outperformed its benchmark for the 1-, 3-, 5-, 10-, 15-, 20-, 25-, 30-year, and since inception (12/15/93) periods ended 3/31/24. I’m very pleased with the Fund’s results—in particular since Miles and, later, Joe joined us. They’ve helped to refine and evolve the approach over the last few years in what I think are highly effective ways.

How did performance shake out at the sector and industry level in 1Q24?

Miles Lewis: We were pleased that five of the portfolio’s eight sectors made a positive impact on quarterly performance. The sectors making the largest positive contributions were Industrials, Information Technology and Financials while the largest negative impacts came from Real Estate, Energy and Communication Services.

“Though the outcome is both distant and unknown, we’ve already begun to discuss potential election outcomes with management teams. With an ever-changing interest rate backdrop and the election, we think 2024 will likely provide interesting opportunities and, as always, we will be prepared to take advantage of any volatility.”
—Miles Lewis

What about for the Fund’s industry groups?

Joe Hintz: At the industry level, trading companies & distributors (Industrials), insurance (Financials), and electronic equipment, instruments & components (Information Technology) contributed most for the quarter, while banks (Financials), real estate management & development (Real Estate), and leisure products (Consumer Discretionary) were the largest detractors.

Which holding contributed and detracted most in 1Q24?

ML: The Fund’s top contributor in 1Q24 was Advance Auto Parts (“AAP”), an auto parts retailer with roughly 6,300 stores in the U.S. and Canada. We see it as a great fit for the Fund—it’s a fundamentally a good business, undergoing temporary and fixable issues that’s also on a trajectory of improvement. Its shares rose after the company issued guidance at the end of February that reflected optimism for both a modest recovery for fiscal 2024, and the new CEO’s strategic initiatives and organizational changes. In early March, AAP reached an agreement with activist investors to appoint three highly qualified directors to its board, which also seemed to drive its stock higher. AAP has been exploring a sale of its crown jewel “Worldpac” asset, and the stock appeared to also run up on rumors of strong interest from private equity buyers.

Which holding detracted most in the first quarter?

JH: The top detractor was Kennedy-Wilson Holdings, a real estate investment firm whose stock took a hit with fourth quarter earnings that were hurt by a decline in the fair value estimate for its co-investment portfolio—which is a non-cash charge that was required to estimate the fair value of certain of the company’s investments at a specific point in time. Management attributed the decline in the estimate to the higher cap rates associated with the rise in interest rates since 2022 while emphasizing three points: the underlying properties are generating growing cash flow, that many have cost bases well below their “fair value,” and that its partners in the investment vehicles in which the properties are held plan to hold the assets for the long term. Nevertheless, this second sequential decline in value unnerved investors, including ourselves, and we sold our position in the portfolio during March.

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

JH: The portfolio’s advantage over its benchmark was primarily attributable to stock selection in the quarter, with the Financials, Information Technology and Industrials sectors making the most significant positive impact versus the benchmark. Conversely, stock selection and a lower weighting in Energy, lack of exposure to Health Care, and stock selection in Consumer Discretionary detracted most from relative results in 1Q24.

What is your outlook for the Fund?

ML: Though the Fund outperformed in 1Q24, it was a challenging backdrop for our style of owning high-quality businesses at attractive valuations. Higher growth and speculative stocks did best within small-cap. While we acknowledged a few mistakes and moved on from some holdings, we also saw certain technology holdings benefit, in part from their role as “picks and shovels” providers in the rapidly growing AI space. After a solid, rather mundane reporting season for most community and regional banks, the issues that surfaced at New York Community Bank (one of the last banks to report earnings) caused a broader sell-off in the group. We used that weakness to bolster positions we thought were indiscriminately sold off. As was the case in 2023, insurance—our largest overweight in Financials by a considerable margin—offset the weakness in banks, even as fundamentals remained robust and valuations attractive. Strong stock selection in relatively more idiosyncratic opportunities, such as Advanced Auto Parts, Repay Holdings, and Air Lease also did well. We saw more opportunities to trim or exit rather than buy and build, as we sold seven names off while adding only two. Though the outcome is both distant and unknown, we’ve already begun to discuss potential election outcomes with management teams. With an ever-changing interest rate backdrop and the election, we think 2024 will likely provide interesting opportunities and, as always, we will be prepared to take advantage of any volatility.

Important Disclosure Information

Average Annual Total Returns as of 3/31/2024 (%)

NET               GROSS
Small-Cap Total Return 4.33 26.53 6.44 10.17 7.81 10.33 12/15/93  1.26  1.26
Russell 2000 Value
2.90 18.75 2.22 8.17 6.87 9.44 N/A  N/A  N/A
Russell 2000
5.18 19.71 -0.10 8.10 7.58 8.78 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 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 3/31/24 (%)

  Small-Cap Total Return

Advance Auto Parts


Kennedy-Wilson Holdings


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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