How Do We Select Micro-Cap Stocks? —Royce
article 05-26-2026

Investment Focus

How Do We Select Micro-Cap Stocks?

Portfolio Manager Jim Stoeffel and Assistant Portfolio Manager Andrew Palen discuss the security selection criteria they use in Royce Micro-Cap Fund.

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We often refer to small-caps as the “forgotten asset class.” Even with small-cap’s widespread institutional acceptance, many small-cap stocks continue to receive little analyst coverage, just as many investors are unaware of the asset class’s robust long-term performance record—and that record’s often significant divergence from large-cap performance. Based on these observations, micro-caps would qualify as the “even more forgotten asset class.”

To illustrate the point, we suspect that many investors are not aware that micro-caps have been leading the U.S. equity markets for more than a year now. We also think that many investors may have only a vague idea of the asset class’s existence.

We, on the other hand, have been investing in micro-cap stocks for almost 40 years. Royce Micro-Cap Fund is one of the oldest, and one of the only, open-end funds dedicated to investing in micro-cap stocks (which Royce defines as companies with market caps no higher than that of the largest company in the Russell Microcap® Index). The number of actively managed funds and ETFs that invest solely or primarily in micro-cap stocks remains low—and totals less than 20 as of this writing.

"We are particularly pleased with the recent results for both the asset class (as measured by the Russell Microcap Index) and the Fund, which have been outstanding from the market low last April: from 4/8/25-5/22/26, the Fund gained 93.5%, and the Russell Microcap rose 88.8% compared to 62.3% for the small-cap Russell 2000 Index, 50.4% for the large-cap Russell 1000 Index, and 54.6% for the mega-cap Russell Top 50 Index."
—Jim Stoeffel

Like its bigger small-cap sibling, the micro-cap universe is broad and diverse, offering plenty of opportunities to find companies that are lightly researched (or not researched at all) or appear mispriced based on the strength of their financial and operational fundamentals.

Of course, investing in this area of the market also involves considerable risks. Micro-cap companies are followed by few, if any, analysts, and there tends to be less publicly available information about them than about larger small-cap companies. Many micro-cap stocks are thinly traded and can be subject to even more abrupt or erratic market price movements than larger small-, mid-, or large-cap stocks. Some micro-cap companies have limited markets, financial resources and/or product lines, may lack management depth, and can be even more vulnerable to adverse business or market developments.

So, while these conditions create increased risk, they also create great opportunities for us to find stocks trading below our estimate of their current worth as a business.

Our decades of experience have taught us that a core approach works best to help us identify opportunities in this exciting area of the market while also managing risk. Which is why we use multiple approaches in Royce Micro-Cap Fund. These methods give us exposure to the entire asset class while our discipline and long-term investment horizon keep us focused on the fundamental business strengths that we think can create strong long-term performance. We source many of the Fund’s purchase candidates from 4 categories:

Companies with Depressed Earnings

  • Current earnings below normalized level
  • Very low valuation on Price/Book and/or Price/Sales basis
  • Specific catalysts for change

Out-of-Favor Value Companies

  • Above average profitability
  • Lower than average leverage
  • Low valuation and expectations

Premier Companies

  • Discernible competitive advantages
  • High returns on capital
  • Sustainable “moat-like” franchises

Growth at a Reasonable Price Companies

  • Superior projected growth
  • Support from secular themes
  • Modest valuations

We are particularly pleased with the recent results for both the asset class (as measured by the Russell Microcap Index) and the Fund, which have been outstanding from the market low last April: from 4/8/25-5/22/26, the Fund gained 93.5%, and the Russell Microcap rose 88.8% compared to 62.3% for the small-cap Russell 2000 Index, 50.4% for the large-cap Russell 1000 Index, and 54.6% for the mega-cap Russell Top 50 Index.

Yet even in light of this recent market leadership, we are still finding attractive buying opportunities in several different areas. In fact, based on our preferred index valuation metric, enterprise value over earnings before interest & taxes or EV/EBIT, micro-caps as a group remain close to a 25-year low versus large-cap stocks. From our vantage point, the leadership cycle remains in its early stages.

Important Disclosure Information

Average Annual Total Returns as of 3/31/2026 (%)

  QTD1 1YR 3YR 5YR 10YR SINCE
INCEPT.		 DATE ANNUAL
OPERATING EXPENSES
NET               GROSS
Micro-Cap 9.23 45.42 17.76 7.62 11.53 10.83 12/31/91  1.24  1.26
Russell Microcap
 1.49 45.78 16.88 3.13 10.36 N/A N/A  N/A  N/A
Russell 2000
 0.89 25.72 13.05 3.77 9.88 9.30 N/A  N/A  N/A
1 Not annualized.

Average Annual Total Returns as of 4/30/2026 (%)

  QTD1 1YR 3YR 5YR 10YR SINCE
INCEPT.		 DATE ANNUAL
OPERATING EXPENSES
NET               GROSS
Micro-Cap 15.58 71.87 25.68 10.09 12.94 11.27 12/31/91  1.24  1.26
Russell Microcap
 12.39 64.61 22.59 5.51 11.30 N/A N/A  N/A  N/A
Russell 2000
 12.21 44.41 18.19 5.75 10.98 9.64 N/A  N/A  N/A
1 Not annualized.

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Operating expenses for Royce Micro-Cap Fund reflect the Fund’s total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees and other expenses.

Mr. Stoeffel’s and Mr. Palen’s thoughts and opinions about the stock market are solely their own, and there can be no assurance about future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future. The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Sector weightings are determined using the Global Industry Classification Standard ("GICS"). GICS was developed by, and is the exclusive property of, Standard & Poor's Financial Services LLC ("S&P") and MSCI Inc. ("MSCI"). GICS is the trademark of S&P and MSCI. "Global Industry Classification Standard (GICS)" and "GICS Direct" are service marks of S&P and MSCI.

Return on Invested Capital is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock).

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication. All indexes referenced are unmanaged, and capitalization weighted. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 1000 Index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 Index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell Top 50 Index measures the performance of the largest companies in the Russell 3000 Index. It includes approximately 50 of the largest securities based on a combination of their market cap and current index membership and represents approximately 40% of the total market capitalization of the Russell 3000 Index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. The performance data and trends outlined in this article are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements. Investments in securities of micro-cap, small-cap, and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) Investments in foreign companies may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see "Investing in International Securities" in the prospectus.)

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