How did the Small-Cap Opportunistic Value Strategy perform in 1Q26 and since the market low on 4/8/25?

Jim Harvey: We were very pleased with how Royce Small-Cap Opportunity Fund, the portfolio we manage in the Strategy, performed in both periods. The Fund advanced 6.4% in the quarter, beating its primary small-cap benchmark, Russell 2000 Value Index, which was up 5.0%, and the small-cap Russell 2000 Index, which gained 0.9%, for the same period. The first-quarter performance was especially satisfying considering how volatile and challenging a period it was. Most large-cap stocks were down, for example, as were most small-cap growth stocks.

From 4/8/25 through the end of March 2026, the Fund rose 59.4%, way ahead of both the Russell 2000 Value, which was up 46.6%, and the Russell 2000, which gained 43.6%, for the same period.

How has the Fund done versus its benchmark over longer-term periods?

Brendan Hartman: I’d say we were equally pleased with results over longer-term periods. The Fund beat both small-cap indexes for the 1-, 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 3/31/26.

What were the Fund’s results on a sector basis in 1Q26?

Kavitha Venkatraman: Five of the portfolio’s nine equity sectors made a positive impact on quarterly performance. Information Technology made by far the biggest contribution, followed by Energy and Industrials. The largest negative impacts came from Health Care, Communication Services, and Consumer Discretionary.

What happened at the industry level during the quarter?

Jim Stoeffel: Our top three contributors each came from a different sector: semiconductors & semiconductor equipment (Information Technology), energy equipment & services (Energy), and aerospace & defense (Industrials). IT services (Information Technology), software (Information Technology), and health care equipment & supplies (Health Care) were the biggest detractors.

How did the Fund perform relative to the Russell 2000 Value on a sector basis in 1Q26?

BH: The portfolio’s advantage over the benchmark was attributable to our sector allocation decisions in the first quarter. At the sector level, stock selection and, to a lesser extent, our substantial overweight in Information Technology had the biggest positive effect on relative outperformance by a wide margin, primarily driven by companies in the semiconductors & semiconductor equipment industry. Our lower weighting in Financials and stock selection in Industrials also made meaningful positive impacts versus the benchmark. Conversely, stock selection in Energy, Health Care, and Communication Services detracted most from relative results in the first quarter.

What is your outlook for the Strategy?

JH: Even with the markets experiencing so much volatility lately, our long-term outlook is positive. And the volatility has been giving us chances to build existing positions in companies that have been hit hard but where our long-term prognosis is still positive, as well as uncovering new opportunities. As we look forward, the most compelling case for small-cap leadership—which is rooted in the relatively rare and promising combination of relatively low valuations for small-cap versus large-cap and the forecast for higher small-cap earnings—remains intact. Catalysts such as reshoring and ongoing infrastructure improvements should help keep small-caps in a sustained leadership role, as can the possibility of a healthy CapEx cycle and the benefits accruing to small-cap companies that are providing the AI infrastructure’s “picks & shovels.”

BH: Absolutely. In our view, one of the most compelling aspects of the AI revolution is how it is spreading from the cloud-based datacenters training LLMs (large language models) to the physical world requiring a significant infrastructure buildout, an effort that necessitates a physical upgrade comparable to the industrialization of electricity a century ago. The benefits were not felt until the electrification of homes and factories made way for machines and motors to ease or replace physical labor. We are seeing something similar happening now as AI is deployed across enterprises, devices, vehicles, etc., with large areas of the economy starting to make use of it to analyze real time data and perform physical tasks. Many of our portfolio holdings are involved in this buildout at the “edge,” which we believe will result in a broadening out of AI spending to areas such as healthcare and transportation, to name just two examples. It is important to point out that many of our industrial holdings already have the assets and technology in place to meet this growing demand without the large R&D investments required by the large hyper-scalers to create the “brains” of AI. This is an exciting and disruptive phenomenon. We are already seeing bottlenecks in certain supply chains, particularly power generation, but we believe our portfolio is well positioned to benefit from these areas of required investment.

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