How did the Small-Cap Premier Quality Strategy perform in 4Q25 and over longer-term periods?

Steven Mcboyle: The mutual fund we manage in the Strategy, Royce Premier Fund, advanced 1.4% for the quarter, lagging its benchmark, Russell 2000 Index, which was up 2.2% for the same period. The Fund gained 5.6% in 2025 versus a 12.8% gain for the benchmark. Longer-term relative results were better. The Fund outperformed the Russell 2000 for the 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 12/31/25 and trailed for the 5-year period.

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

Lauren Romeo: 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 have seen a similar dynamic in play at times 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. January has so far been a very good month on both an absolute and relative basis, so we may just now be entering a dynamic period for quality small-caps.

How did Fund’s results break down on a sector basis in 4Q25?

Andrew Palen: Four of the portfolio’s eight equity sectors made a positive impact on performance, with Information Technology, Industrials, and Materials making the largest positive contributions while the largest negative impacts came from Real Estate, Financials, and Consumer Staples.

What happened at the industry level in 4Q25?

LR: Our top contributors were semiconductors & semiconductor equipment (Information Technology), construction & engineering (Industrials), and aerospace & defense (Industrials). Real estate management & development (Real Estate), electronic equipment, instruments & components (Information Technology), and specialty retail (Consumer Discretionary) were the largest detractors.

Which position contributed most in 4Q25?

SM: Our biggest contributor in the second quarter was MKS, which is a premier global provider of technology solutions that enable advanced manufacturing in the semiconductor, electronics, and specialty industrial markets. The company’s unique “wafer-to-board” strategy differentiates it from its competitors by integrating advanced vacuum, power, and photonics technologies with the specialty chemistry capabilities recently acquired through Atotech. We think this comprehensive portfolio makes MKS a premier business as it is an essential partner for the production of increasingly complex chips and high-density interconnects required for the AI era, which creates a high-barrier ecosystem with significant switching costs and deep technical moats. MKS combines high-value content on increasingly complex process steps (advanced logic/memory + advanced packaging) and deep engineering integration into customer processes, while offering a broad, cross-division toolkit rather than a single point solution that is reflected in dominant share positions.

MKS’s shares delivered exceptional performance in 2025, significantly outperforming the broader tech sector. The stock’s momentum was primarily driven by the cyclical upswing in the semiconductor capital equipment market, particularly within the AI and advanced packaging segments where MKS has a dominant footprint. Throughout the year, the company consistently delivered earnings beats. Investors rewarded the management team for the successful integration of Atotech, which realized significant cost synergies and enhanced the company’s recurring revenue profile through materials and services. Despite localized headwinds in MKS’s specialty industrial segment and high interest expenses from its debt load, the stock’s valuation was bolstered by strong free cash flow, as well as benefiting from visible balance-sheet progress via strong free cash flows and voluntary debt prepayments. Late in the year, reports that MKS was exploring a specialty-chemicals divestiture to sharpen focus on semiconductors also supported the company’s “focus + deleveraging” narrative.

Which position detracted most in the quarter?

LR: That would be FirstService Corporation, which is headquartered in Toronto and is a leading residential and non-residential property manager and property service provider throughout North America. Early in June, FirstService announced the acquisition of two companies, Crowther Roofing and Hamilton Roofing, that combined will provide FirstService with a new and significant presence in Florida for commercial roofing services and was well received by the marketplace. These acquisitions followed FirstService’s initial entry into the repair and replacement roofing market in the U.S. after having acquired Roofing Corporation of America in 2023. The commercial repair and replacement driven roofing market is large and fragmented, represents an “essential” property service, is recurring in nature, and serves similar customer constituencies (that is, property managers) via a national branch network—all attributes that are consistent with FirstService’s essential property services national branch network and long history of capital allocation bringing national scaled benefits to local branch density.

The stock fell in 4Q25 due to a disappointing shortfall in the roofing business that was driven by transitory customer deferrals of large commercial projects and management’s acknowledgement that its roofing backlog was not converted as anticipated. That said, the remaining parts of the business reported strong results. In particular, the Residential segment exhibited organic growth of 5%, with solid contract wins and margins expanding year over year.

How did the Fund perform compared to the Russell 2000 on a sector basis in 4Q25?

AP: The Fund’s disadvantage was attributable to sector allocation in the quarter; overall stock selection was additive. At the sector level, our substantially lower exposure to Health Care hurt most, followed by stock selection in Real Estate and Financials. Conversely, stock selection in Information Technology gave the Fund a sizable relative advantage, along with smaller but still meaningful contributions from stock selection in Industrials and Consumer Discretionary.

How did the Fund perform at the sector level for the calendar year?

LR: Five of the Fund’s eight equity sectors made a positive impact on performance in 2025, with the biggest contributions coming from Industrials, Information Technology, and Consumer Discretionary while Health Care, Real Estate, and Consumer Staples had the largest negative effect.

What were the biggest industry contributors and detractors in 2025?

SM: Semiconductors & semiconductor equipment (Information Technology), machinery (Industrials), and construction & engineering (Industrials) contributed most for the calendar year period, and health care equipment & supplies (Health Care), real estate management & development (Real Estate), and chemicals (Materials) detracted the most.

Which holding contributed most from performance in the calendar year?

AP: Our top contributor at the position level in 2025 was MKS, which we discussed above.

Which holding detracted most in 2025?

LR: Our top detractor was medical technology company, Enovis Corporation, a premier company focused on reconstructive surgery and rehabilitation, distinguished by its transformation from its industrial roots to a “MedTech” business. Its unique value proposition lies in its focus on high-growth orthopedic categories, particularly its market-leading positions in “Extremities” (shoulder and foot/ankle) and its proprietary augmented reverse glenoid system (ARG). Enovis has relentlessly focused on innovation while executing its strategic expansion into the European market through the acquisition of LimaCorporate, which solidified its position as a global leader in complex reconstructive solutions while creating a high-barrier ecosystem of specialized surgical tools and implants. Its business model is driven by clinically differentiated products that sit directly in surgeon and clinician’s workflows, supported by a continuous-improvement operating culture and a steady cadence of new product introductions. Its shares faced significant pressure in 2025. Enovis delivered decent organic growth and exceeded earnings expectations in the third quarter, but the stock was weighed down by a material, non-cash goodwill impairment charge. Investor sentiment was further dampened by the company’s high debt leverage and elevated interest expenses, which overshadowed double-digit growth in the shoulder segment. Despite management’s efforts to divest lower-margin businesses like Diabetic Footwear to focus on core Reconstructive growth, the market remained cautious, prioritizing balance sheet de-leveraging over the company’s fundamental operational improvements. Both management and operating results reinforced the fact that 2025 was a “transition/optimization” year rather than the clean, linear compounding story that many investors had come to expect.

What were the sources of the Fund’s relative disadvantage versus the Russell 2000 in 2025?

AP: Our relative underperformance in 2025 was attributable to stock selection; our sector allocation decisions were positive. At the sector level, both stock selection and a substantially lower exposure to Health Care detracted most versus the Russell 2000, where the sector’s biopharma complex dominated in 2025. Next came stock selection in Materials and Real Estate. Conversely, stock selection was additive in Information Technology and Consumer Discretionary, as was the Fund’s lack of exposure to Energy, which was a laggard in the Russell 2000.

What is your outlook?

LR: Given 2025’s sharp multiple expansion among lower quality small-cap companies, such as those with low returns on invested capital, no profits, and/or more speculative profiles, it would not be surprising to see small-cap leadership again follow its historical pattern and transition to higher quality companies in 2026. We believe many of our portfolio companies created measurable economic value in 2025 that was not fully reflected in their stock prices. This valuation disconnect, along with accelerating growth, underpinned by durable business models with identifiable, high return reinvestment opportunities, should drive further compounding of value, creating an attractive setup for quality small-caps in 2026. In addition, absolute valuations for many small-caps remain reasonable, and we find the case for their reversion to the mean of relative valuation versus large-caps highly compelling. Small-caps also only recently emerged from an earnings recession that lasted more than two years. The return to small-cap earnings growth, and, importantly, at a projected pace that is much faster than that of large-caps, could prove to be the key catalyst for sustained outperformance for quality small-caps in 2026.

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