How did Royce Small-Cap Fund perform in 4Q25?

Lauren Romeo: The Fund advanced 2.0% for the quarter, narrowly trailing its benchmark, the Russell 2000 Index, which was up 2.2% in 4Q25.

How was performance for 2025 as a whole?

Miles Lewis: The Fund lagged the Russell 2000 in 2025, up 9.0% versus a gain of 12.8%. The rally that began off the market low on 4/8/25 disproportionately favored lower quality, more speculative stocks—which is common in the early stages of a bullish period. However, as prior rallies matured, leadership has shifted to higher-quality companies, such as those with low debt balance sheets, healthy free cash flow generation, and high returns on invested capital. These are the kinds of attributes we focus on, and we feel confident that the Fund can fare better against its benchmark in 2026 if these qualities begin driving performance.

How did the Fund perform compared to the Russell 2000 over longer-term periods?

Jay Kaplan: We’re very pleased with our long-term absolute and relative results. The Fund held beat the Russell 2000 for the 3-, 5-, 10-, 20-, 25-, 30-, 35-, 40-year and 45-year periods ended 12/31/25.

Which portfolio sectors made the biggest impact on 4Q25’s performance?

Andrew Palen: Five of the portfolio’s 10 equity sectors made a positive impact on quarterly performance, led by Health Care, Information Technology, and Financials. The biggest negative impacts came from Consumer Discretionary, Consumer Staples, and Energy.

What happened at the industry level in 4Q25?

Steven McBoyle: Semiconductors & semiconductor equipment companies, which is in in Information Technology, was our top contributor, followed by two industries in Health Care, health care providers & services and health care equipment & supplies. The biggest detractors were specialty retail (from the Consumer Discretionary sector), professional services, and building products. The last two areas are in Industrials.

At the sector level, what factors made the biggest impact relative to the benchmark in 4Q25?

Miles Lewis: The portfolio’s narrow disadvantage versus its benchmark was attributable to sector allocation in the quarter. At the sector level, relative results were hurt the most by far by our much lower exposure to Health Care, most impactfully by our significant underweight in biotech, which was the top-contributing industry in the Russell 2000. Stock selection in Consumer Discretionary and Energy also detracted. Conversely, stock selection in Information Technology had an outsized positive impact on relative performance. Our lack of exposure to Utilities and both stock selection and our higher weight in Financials also contributed positively to relative results.

How did the Fund’s sectors perform for calendar 2025?

Steven McBoyle: Five of the portfolio’s 10 equity sectors made a positive impact on calendar year performance. The sectors making the largest positive contributions were Industrials, Financials, and Information Technology while the largest negative impacts came from Real Estate, Energy, and Consumer Staples.

What about at the industry level?

ML: Two industries from the Industrials sector—construction & engineering and machinery—were the first and third-best contributors while electronic equipment, instruments & components from Information Technology was second. The biggest detractors were software, which is in Information Technology, professional services from Industrials, and specialty retail in Consumer Discretionary.

How did the Fund’s results compare with those of the Russell 2000?

AP: The Fund’s underperformance versus the benchmark in 2025 came from stock selection; sector allocation decisions were positive. At the sector level, the combination of a much lower exposure to Health Care (most impactfully in the index’s top performing biotechnology industry) and stock selection in the sector detracted most, followed by stock selection in Industrials and Materials. Conversely, stock selection in Financials and Information Technology was additive versus the benchmark, as was our much lower weighting in Real Estate.

What’s your long-term outlook for the Fund?

Francis Gannon: We think the Fund has a compelling case for a better 2026 on both an absolute and relative basis. Our thinking is rooted in the somewhat rare and promising confluence of two important factors: Relatively low valuations for small-cap versus large-cap and the forecast for higher earnings for small-cap companies. We have always subscribed to the adage that psychology runs the market in the short run, but earnings run it in the long run. Earnings across asset classes were generally positive in 3Q25, with many companies handily beating estimates. Smaller companies generally fared better than their larger peers, however, in terms of earnings growth. Even more encouraging, the research we have seen forecasts accelerated earnings growth for small-cap stocks in 2026. The two Fed rate cuts provided a boost, and additional catalysts, including possible tariff relief, reshoring, and ongoing infrastructure improvements, should also help vault our risk-averse approaches into a sustained leadership role, as can the possibility of a healthy CapEx cycle and the benefits accruing to those small-cap companies that are providing AI’s ‘picks & shovels.’

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