How did Royce Small-Cap Special Equity Fund perform in 3Q25 and over longer-term periods?

Royce Small-Cap Special Equity Fund advanced 8.6% for the quarter, lagging its benchmark, Russell 2000 Value Index, which was up 12.6% for the same period. The Fund also trailed the Russell 2000 Value Index for the year-to-date period ended 9/30/25, up 2.0% versus 9.0%. The portfolio outperformed its benchmark for the 20-, 25-year, and since inception (5/1/98) periods ended 9/30/25 while lagging for the 1-, 5-, and 10-year periods.

We often remind investors during sharp upswings like the one that began on April 8th of this year that the Fund has historically done best over full market cycles, showing particular strength in down markets. In fact, the Fund beat the Russell 2000 Value during all seven downturns of 15% or more from the index’s prior historical high since its inception in May of 1998—and outpaced the small-cap value index in 12 out of 20 quarters over that same 27-year period.

How was performance at the sector level in 3Q25?

Seven of the portfolio’s 10 equity sectors made a positive impact on quarterly performance, led by Consumer Discretionary, Industrials, and Communication Services. Information Technology, Health Care, and Real Estate made the largest negative impacts.

How did the Fund perform at the industry level in the third quarter?

Automobile components (Consumer Discretionary), machinery (Industrials), and media (Communication Services) contributed most for 3Q25, while paper & forest products (Materials), semiconductors & semiconductor equipment (Information Technology), and electrical equipment (Industrials) were the largest detractors.

What were the portfolio’s top contributor and detractor at the position level for the quarter?

The portfolio’s top contributor at the position level for the quarter was Standard Motor Products, which manufactures and distributes premium replacement parts for the automotive aftermarket while also providing customizable solutions for vehicle control and thermal management categories in diverse end markets represented via its Engineered Solutions segment. Sylvamo Corporation, a low-cost producer of uncoated paper with a global reach, was the top detractor.

At the sector level, how did the Fund perform versus the Russell 2000 Value in 3Q25?

The portfolio’s disadvantage versus its benchmark was attributable to both sector allocation and stock selection in the quarter. At the sector level, stock selection in Information Technology and Materials, followed by the Fund’s substantially lower exposure to Health Care, made the most significant negative impact versus the benchmark. The Fund’s cash holdings also detracted from relative performance in 3Q25. Conversely, stock selection in Consumer Discretionary, our much lower weighting in Financials and a higher weighting in Communication Services helped relative results most.

We have found a few intriguing businesses to research, so that when the spread widens between a stock’s current price and our estimate of its worth as a business, we will purchase. This is crucial because we have always believed that the rate of return is a function of entry level. Put simply, price matters. Because we have seen just a few opportunities that meet our exacting criteria so far this year, the portfolio had a large cash position of 24.4% at 9/30/25.

Turning to the year-to-date period ended 9/30/25, how were results at the sector level?

Five of the portfolio’s 10 equity sectors made a positive impact on year-to-date performance, with Consumer Discretionary, Industrials, and Communication Services making the biggest contributions while the largest negative impacts came from Materials, Information Technology, and Real Estate.

What were the top contributing and detracting industries in the year-to-date period?

Automobile components (Consumer Discretionary), household products (Consumer Staples), and machinery (Industrials) contributed most for the year-to-date period, while paper & forest products (Materials), food products (Consumer Staples), and construction materials (Materials) were the biggest detractors.

What were the portfolio’s top contributor and detractor at the position level year-to-date through 9/30/25?

It doesn’t happen often, but both Standard Motor Products and Sylvamo Corporation were the top contributor and detractor, respectively, for the year-to-date period as well.

At the sector level, how did the Fund perform versus the Russell 2000 Value for the year-to-date period?

The portfolio’s disadvantage versus its benchmark was attributable to stock selection in the year-to-date period, as sector allocation decisions were slightly positive. At the sector level, stock selection in Materials, Information Technology, and Industrials hurt most versus the benchmark, though our cash holdings also detracted from relative results. Conversely, stock selection in Consumer Discretionary, as well as very little exposure to both Energy and Health Care, helped most vis-à-vis the Russell 2000 Value.

What is your outlook?

Market expectations regarding the Fed’s rate cuts remain well above the Fed’s 2% inflation objective. Such cuts, if they happen, could unleash more rapid inflationary pressures. Lower rates are welcomed by the administration for many reasons, but surely the lower interest cost on U.S. debt is a major one as it potentially reduces the deficit. Fed cuts in the face of above-target inflation could lead to additional fiscal concerns. Meanwhile, complacency reigns supreme in the equity markets. Is it based on the continuation of easy money/the Fed put? Hardly anyone is concerned about private credit, huge leveraged buyouts, stubborn inflation, tight bond spreads, subprime auto loan delinquencies, and historically high valuations.

It’s a Teflon market right now, a characterization that frightens me, as I have seen this play out many times over my 57 years on Wall Street—always with an ugly ending. When markets are priced to perfection, any deviation from perfection can cause the correction. In the meantime, we are happy to be holding a portfolio of small-cap companies with superior balance sheets, sustainable returns on invested capital, and strong levels of free cash flow from operations that we think can withstand a more volatile market in the days ahead.

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