How did Royce Small-Cap Total Return Fund in 2Q25 and over longer-term periods?

Miles Lewis: The Fund, which is part of Royce’s Quality Value Strategy, advanced 2.7% for the quarter, lagging its benchmark, Russell 2000 Value Index, which was up 5.0% for the same period. The portfolio also trailed the Russell 2000 Value Index slightly for the year-to-date period ended 6/30/25, down -3.4% versus -3.2%. However, the Fund outperformed its benchmark for the 3-, 5-, 10-, 15-, 20-, 25-, 30-year, and since inception (12/15/93) periods ended 6/30/25.

How did performance shake out at the sector and industry level in 2Q25?

Joe Hintz: Seven of the portfolio’s 10 equity sectors made a positive impact on quarterly performance, led by Information Technology, Industrials, and Financials while the largest negative impacts came from Energy, Real Estate, and Consumer Staples.

What about for the Fund’s industry groups?

Jag Sriram: Banks (Financials), trading companies & distributors (Industrials), and capital markets (Financials) contributed most in the second quarter, while financial services (Financials), professional services (Industrials), and energy equipment & services (Energy) were the largest detractors.

Which holding contributed most in 2Q25?

ML: The Fund’s top contributor was Healthcare Services Group, which provides management, administrative, and operating services to the housekeeping, laundry, linen, facility maintenance, and dietary service departments of nursing homes, retirement communities, rehabilitation centers, and hospitals in the U.S. In April, management reported the company’s best quarterly revenue and cash flow performance in five years, driven in part by the post-covid recovery in the nursing home industry, strong retention rates, new customer acquisitions, and opportunities for cross-selling.

Which holding detracted most in the second quarter?

JH: Our top detractor was Vestis Corporation, which provides uniform rentals and workplace supplies in the U.S. and Canada. Its shares fell sharply in May when the company reported poor results for its fiscal second quarter, which included a cessation of its dividend and a down shift to negative earnings per share and led us to exit the position.

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

JS: Our disadvantage versus the Russell 2000 Value came from stock selection. At the sector level, stock selection detracted the most in Financials, Industrials, and Information Technology. Conversely, our substantially lower exposure to Real Estate, a lower exposure and stock selection in Health Care, and lack of exposure to Utilities were all additive vis-à-vis the benchmark.

How did the Fund perform at the sector level for the year-to-date period ended 6/30/25?

ML: Seven of the Fund’s 10 equity sectors made a negative impact on year-to-date period performance, with Consumer Discretionary, Energy, and Industrials detracting most while the largest positive impacts came from Financials, Information Technology, and Health Care.

What were the biggest industry contributors and detractors in the year-to-date period?

JH: Professional services (Industrials), financial services (Financials), and energy equipment & services (Energy) detracted most for the year-to-date period, while capital markets (Financials), trading companies & distributors (Industrials), and banks (Financials) were the largest contributors.

Which holding detracted and contributed most from performance in the year-to-date period?

JS: There was a rare instance of the same two holdings being the top detractor and contributor: Vestis Corporation was the top detractor, and Healthcare Services Group was the top contributor.

What were the sources of the Fund’s slight disadvantage versus the Russell 2000 Value in the year-to-date period ended 6/30/25?

JH: The disadvantage was attributable to stock selection. At the sector level, stock selection in Consumer Discretionary, a lack of exposure to Utilities, and stock selection in Industrials hurt relative results most while lower exposure (with an assist from stock selection) to Health Care, an underweight in Energy, and higher exposure to Financials were additive versus the Russell 2000 Value.

What is the outlook for the Fund?

JH: The second quarter regained much of the lost ground from the first quarter, as investors seemed to gain comfort despite continued U.S. policy and tariff uncertainty. However, underneath the surface there was a significant dispersion of returns across the market, with low-quality and high-beta driving much of the returns in the small-cap universe. Within the Russell 2000 Value, Information Technology led by a wide margin, with Materials following in a distant second place in the quarter. While the Fund has an overweight position within the IT sector, the strength of the sector within the small-cap value index came mostly from massive share price swings in more speculative growth-type companies with negative earnings. Given our focus on high-quality companies with strong financial characteristics, we would not expect to outperform in such a big risk-on market. (For reference, the Russell 2000 Value rallied 20.2% from the 4/8/25 bottom through the end of June.) We continue to hold a somewhat cautious view entering the third quarter.

ML: As we have previously discussed, the un-inverting of the yield curve near the end of last year may not have been a positive development. Not only has it historically signaled the presence or imminent arrival of recessions going back to 1980, but it is also another data point in a current environment that has a plethora of mixed signals, making the subsequent direction of the economy and capital markets even tougher to gauge than usual. Furthermore, while 1Q25 earnings were not nearly as bad as many had feared following the tariff announcements on 4/2/25 and the concurrent market swoon, we think that risks remain elevated from U.S. trade policy and overall geopolitical tensions. We continue to build the portfolio using our robust and repeatable research process and feel that our bottom-up focus on constructing the portfolio with high-quality companies that trade at undemanding valuations can drive solid returns regardless of the macro environment. We think that our overweight within insurance offers a perfect example of this view, particularly within the lens of second quarter performance. The overweight was a detractor in the quarter, predominantly because the industry’s defensive characteristics worked against it in a low-quality rally. That being said, we don’t own this group of companies predominantly for their defensive characteristics, but rather because each holding company operates within a unique niche and has a strong management team, which we think will lead to idiosyncratic opportunities in the long run.

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