How did Royce Micro-Cap Fund perform in 1Q26?

Andrew Palen: The Fund advanced 9.2% for the quarter, outperforming both its benchmark, the Russell Microcap Index, which rose 1.5%, and the small-cap Russell 2000 Index, which was up 0.9% for the same period.

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

Jim Stoeffel: We’re really pleased with the Fund’s long-term absolute and relative results as it beat the Russell Microcap for the 3-, 5-, 10-, 20-, and 25-year periods ended 3/31/26. The Fund also outperformed the Russell 2000 for the 1-, 3-, 5-, 10-, 25-, 30-year, and since inception (12/31/91) periods ended 3/31/26.

Which portfolio sectors made the biggest impact on 1Q26’s performance?

AP: Seven of the portfolio’s 10 equity sectors made a positive impact on quarterly performance, led by Information Technology, Industrials, and Financials, while the largest negative impacts came from Health Care (our top contributor in 4Q25), Communication Services, and Real Estate.

What happened at the industry level in 1Q26?

JS: The top contributors were semiconductors & semiconductor equipment (Information Technology), communications equipment (Information Technology), and diversified consumer services (Consumer Discretionary). The biggest detractors were software (Information Technology), health care equipment & supplies (Health Care), and specialty retail (Consumer Discretionary).

At the sector level, what factors made the biggest impact relative to the Russell Microcap in 1Q26?

AP: The Fund’s advantage over its benchmark was almost entirely attributable to stock selection in the quarter; our sector allocation decisions were positive, but just marginally. At the sector level, stock selection in Information Technology made the biggest positive impact by far, followed by stock selection in Financials and Materials. Conversely, stock selection in Health Care hurt most as the positive effect of our lower exposure in the sector, which finished 1Q26 in the red in the Russell Microcap, was not enough to overcome stock picks. Our lower exposure and, to a lesser extent, stock selection detracted in Real Estate, as did our lower exposure to Energy, which had the highest return of any sector in the Microcap index for 1Q26.

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

JS: First-quarter performance was buoyed by the Supreme Court’s landmark ruling in February striking down IEEPA tariffs—which structurally narrows executive tariff authority even as the administration pivoted to Section 122 replacement duties—continued fiscal stimulus rollout from the Infrastructure Investment and Jobs Act and “One Big, Beautiful Bill,” and an overdue rotation into small- and micro-caps trading at historically wide valuation discounts. Those gains were largely reversed after the U.S.-Israeli strikes on Iran in late February and the subsequent closure of the Strait of Hormuz, which pushed crude oil above $110 and shifted market expectations higher for inflation and tighter for Federal Reserve policy.

Despite these crosscurrents, we remain constructive on the micro-cap asset class. Our portfolio remains underpinned by durable thematic drivers, including reindustrialization, reshoring, and electrification. Our holdings in the supply chain supporting the buildout and densification of next-generation computing platforms and power generation assets are benefiting from multi-year project visibility. Further, we believe the vulnerabilities exposed by the current geopolitical landscape reinforce the burgeoning domestic capital investment cycle, which should continue to benefit our primarily domestic-oriented businesses. However, the principal near-term risk for our interest rate sensitive asset class remains simultaneous upward pressure on input costs and slower economic growth brought about by the prolonged disruption to the Strait of Hormuz.

Important Disclosure Information