How did the Small-Cap Premier Quality Strategy perform in 2Q25 and over longer-term periods?

Steven McBoyle: The mutual fund we manage in the Strategy, Royce Premier Fund, advanced 6.7% for the quarter, lagging its small-cap benchmark, Russell 2000 Index, which was up 8.5% for the same period. However, the portfolio was ahead of the Russell 2000 for the year-to-date period ended 6/30/25, down -0.6% versus -1.8%. The Fund also outperformed its benchmark for the 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/25, while lagging for the 1-, 3-, and 5-year periods.

What factors do you think led to the Fund’s recent underperformance versus the Russell 2000?

Andrew Palen: As was typical during past small-cap recoveries, the initial rebound in the Russell 2000 from its trough on 4/8/25 was led by low quality factors such as low or no returns on invested capital, or ROIC, and higher debt levels. We've seen similar dynamics periodically over the last few years. However, if past is prologue, we believe that higher quality factors such as high ROIC—returns on invested capital—should reassert leadership.

How did Fund’s results break down on a sector basis in 2Q25?

Lauren Romeo: Six of the portfolio’s eight equity sectors made a positive impact on quarterly performance, led by Industrials, Information Technology, and Financials. The only negative impacts came from Health Care and Real Estate while Consumer Staples made the smallest contribution.

What happened at the industry level in 2Q25?

LR: Capital markets (Financials), semiconductors & semiconductor equipment (Information Technology), and machinery (Industrials) contributed most for the quarter, while chemicals (Materials), life sciences tools & services (Health Care), and real estate management & development (Real Estate) were the largest detractors.

Which position contributed most in 2Q25?

LR: Our biggest contributor in the second quarter was MKS (formerly MKS Instruments), which provides critical components and subsystems that go into semiconductor capital equipment, as well as optical solutions, plating chemicals, and equipment that play a vital role in advanced semiconductor device packaging. The bellwether Philadelphia Stock Exchange Semiconductor Index (SOX) rose almost 17% in June—while MKS’s stock rose around 20%, benefiting from improved sentiment related to apparent progress on trade deals with key U.S. partners, including China. Incrementally positive demand commentary from MKS’s management, as well as its two largest customers, at various conferences held in June raised hopes that a long-awaited upturn in the NAND memory market to which MKS is more leveraged, is beginning to gain traction. (NAND stands for “Not And.” A two-input NAND gate is a digital combination logic circuit that performs the logical inverse of an AND gate.) After several years of flat sales, a return to more normal growth would drive significant earnings growth from operating leverage and MKS’s continued focus on debt reduction.

Which position detracted most in the quarter?

LR: That would be Enovis Corporation, which is a medical technology company that derives 50% of its sales from orthopedic and support products, with the remaining 50% coming from its faster growing orthopedics surgical implant segment, which has solid market positions in knee, shoulder, hip, foot, and ankle products. Enovis reported solid 1Q25 results, including low double-digit organic growth in its Reconstruction segment. However, while management reiterated 6.0-6.5% total company organic growth guidance for the year, it reduced EBIT guidance by about 5% for the year due to tariff impacts (mainly in its Prevention & Rehab business). The company has a strong slate of new product introductions that will debut as the year progresses, but investors continue to take a wait-and-see approach.

How did the Fund perform compared to the Russell 2000 on a sector basis in 2Q25?

SM: Premier’s disadvantage versus the benchmark was attributable to stock selection in the quarter; our sector allocation decisions were additive. At the sector level, stock selection hurt in Industrials, Materials, and Information Technology (where our underweight also detracted). Conversely, stock selection and, to a lesser extent, our lower weighting in Financials boosted relative results, as did the Fund’s lack of exposure to Energy, as well as stock selection and lower exposure to Consumer Staples.

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

AP: Five of the portfolio’s eight equity sectors made a negative impact on year-to-date period performance, with the largest detractions coming from Health Care, Real Estate, and Information Technology while the largest positive impacts came from Industrials, Financials, and Consumer Staples.

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

AP: Chemicals (Materials), real estate management & development (Real Estate), and health care equipment & supplies (Health Care) detracted most for the year-to-date period, while machinery (Industrials), capital markets (Financials), and paper & forest products (Materials) were the largest contributors. while the top contributor was ESCO Technologies.

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

SM: The portfolio’s top detractor at the position level for the year-to-date period was Enovis Corporation, which we discussed above.

Which holding contributed most for the year-to-date period ended 6/30/25

SM: Our top contributor at the position level in the year-to-date period was ESCO Technologies, which provides engineered products and solutions, including special purpose communications systems for electric, gas, and water utilities. ESCO also offers software to support advanced metering applications and provides engineered filtration products to the aviation, space, and process markets from around the world. Its shares rose mostly on the company’s improved sales and earnings, with a record backlog, especially in its Aerospace & Defense segment.

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

LR: The portfolio’s advantage over its benchmark was attributable to sector allocation decisions in the year-to-date period. At the sector level, both stock selection and our larger weighting in Industrials, stock selection in Financials, and a lack of exposure to underperforming Energy stocks made the most significant positive impact versus the benchmark. Conversely, stock selection in Health Care, Real Estate, and Information Technology detracted most from relative year-to-date period results.

What is your outlook?

SM: The Fund’s biggest sector weights at the end of June were Industrials, Information Technology, Financials, and Consumer Discretionary, with the first and fourth overweight compared to the Russell 2000. We remain confident in the Small-Cap Premier Quality Strategy’s time-tested focus on owning quality companies with high ROIC, cash generative business models, and low financial leverage. Portfolio companies are not immune to macroeconomic changes, of course, but the strength and sustainability of their underlying competitive advantages ultimately determine their ability to grow shareholder value at attractive rates over the long run. While geopolitical and policy uncertainties persist, the combination of historically low relative valuations, early-cycle earnings acceleration, and probable policy tailwinds in the form of lower rates and potential tax break underpins our conviction that the Fund offers an attractive asymmetry: limited downside due to balance-sheet strength and significant upside if the anticipated small-cap catch-up unfolds. We believe patient ownership of durable franchises remains the best path to compounding shareholder value over the coming cycle.

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