Royce Capital Fund-Micro-Cap Portfolio Manager Commentary
article 12-31-2020

Royce Capital Fund–Micro-Cap Portfolio Manager Commentary

We are pleased the Fund outpaced both of its benchmarks, the Russell Microcap (+21.0%) and Russell 2000 (+20.0%) Indexes, in 2020.

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Fund Performance

Royce Capital Fund–Micro-Cap Portfolio advanced 23.8% in 2020, outpacing both of its benchmarks, the Russell Microcap (+21.0%) and Russell 2000 (+20.0%) Indexes, for the calendar year. This year’s strong performance also allowed the Fund to beat both of its benchmarks for the three-year period ended 12/31/20.

What Worked… And What Didn’t

Six of the Fund’s 10 equity sectors made positive contributions to performance in 2020. Information Technology made by far the largest impact, followed by Health Care and Consumer Discretionary while Energy, Financials, and Consumer Staples detracted most. At the industry level, the top two contributors for 2020 were in Information Technology—semiconductors & semiconductor equipment and electronic equipment, instruments & components—while construction & engineering (Industrials) was third. Conversely, banks and thrifts & mortgage finance, each in Financials, negatively impacted performance, with energy equipment & services (Energy) sandwiched in between.

The top contributing security in 2020 was diagnostic blood testing company Chembio Diagnostics. The company’s performance was driven by its receipt of FDA Emergency Use Authorization for its rapid COVID-19 antibody finger prick blood test. However, we reduced our position meaningfully after its shares appreciated sharply over uncertainty regarding the effectiveness and accuracy of COVID-19 tests. Ameresco, which provides services in energy efficiency, asset sustainability, infrastructure upgrades, and renewable energy, also contributed to results during the calendar year. The company’s strong performance was driven by the maturation of a number of early-stage projects, the addition of a new CFO, and exceeding earnings expectations. Rounding out the top three securities for the year was American Superconductor, which is an energy technologies company specializing in the design and manufacture of power systems and superconducting wire. The company benefited from diversifying its product portfolio, recent strong sales, and a shift towards favoring renewable energy generation, urbanization, and grid resilience.


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Newpark Resources, which provides drilling fluid systems and composite matting systems used in oilfield and other commercial markets, detracted most for the year. The company was negatively impacted by collapsing oil prices as travel-related economic activity declined due to the coronavirus. We exited the position earlier this year as the company had financial leverage at the top end of our comfort level. Astronics Corporation also detracted from performance during 2020. The company is a New-York based aerospace electronics corporation known for its lighting and electronics integrations on military, commercial, and business aircraft and semiconductor test systems. Astronics’s shares underperformed in 2020 due to aerospace suppliers being severely impacted by both the COVID-19 travel shutdown and the grounding of the Boeing 737 MAX airplane. In addition, Investar Holding hindered performance. The company, which provides commercial banking products to individuals and small- to medium-sized south Louisiana businesses, was hurt in 2020 by a combination of the public health crisis and by its exposure to the energy industry, which suffered through most of 2020.

Relative to the micro-cap benchmark for 2020, sector allocation drove outperformance—stock selection detracted, albeit mildly. The largest source of relative outperformance was Financials due to our lower exposure and savvy stock selection. Our higher exposure to Information Technology made the sector additive to relative results, while Real Estate followed due to both stock selection and our lower weighting. On the detraction side, our lower exposure to Health Care and, to a lesser degree, ineffective stock selection made it the largest source of relative underperformance for the calendar year. Stock selection in Industrials also hampered results, as did our lower exposure to Consumer Discretionary.


Top Contributors to Performance 20201 (%)

Chembio Diagnostics1.89
Ameresco Cl. A1.87
American Superconductor1.76
AXT1.63
PAR Technology1.60

1 Includes dividends

Top Detractors from Performance 20202 (%)

Newpark Resources-1.09
Astronics Corporation-0.89
Investar Holding-0.79
BayCom Corporation-0.75
TriState Capital Holdings-0.74

2 Net of dividends

Current Positioning And Outlook

The country has made its way through a contentious election with what might best be described as a “Blue Ripple”—a clear victory for the Democratic Party, but one that awards them the narrowest majority since the Wilson administration. Although the transition was chaotic, we expect policy priorities to rapidly become clear and remain hopeful that the most arduous tax proposals on profits and capital will be difficult to implement. We do expect regulatory burdens and spending to increase, though, with priorities shifting to infrastructure with an emphasis on environmental concerns. Although our investment decisions remain company specific, we will continue to factor in the rapidly changing political environment as an important investment consideration. We are pleased that the news on effective treatments for COVID-19 remains increasingly positive as numerous vaccines have been approved. Even with the fits and starts in distribution, we believe the effect will be highly positive. Despite all this, we believe the combination of the gradual reopening of the world’s economies and a step up in fiscal stimulus will provide a cyclical tailwind to the positive attributes in our portfolio investments as our value orientation tends to make our portfolio pro cyclical.

Average Annual Total Returns Through 12/31/20 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Capital Micro-Cap 35.6223.7923.7910.4111.135.056.018.5310.01 12/27/96
Russell Microcap 31.3920.9620.968.7811.8910.557.348.95N/A N/A

Annual Operating Expenses: Gross 1.47 Net 1.33

1 Not annualized.

Important Performance and Disclosure Information

Important Performance and Expense Information

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. The Fund's total returns do not reflect any deduction for charges or expenses of the variable contracts investing in the Fund. Gross operating expenses reflect the Fund's total gross operating expenses for the Investment Class and include include management fees and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Investment Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.33% through April 30, 2021.

Current month-end performance may be obtained at our Prices and Performance page.

Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2020, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Royce’s investment intentions with respect to those securities reflect Royce’s opinions as of December 31, 2020 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.


As of 12/31/20, the percentage of Fund assets was as follows: Chembio Diagnostics was 0.3%, Ameresco Cl. A was 1.4%, American Superconductor was 1.6%, AXT was 1.3%, PAR Technology was 1.4%, Newpark Resources was 0.0%, Astronics Corporation was 0.0%, Investar Holding was 0.6%, BayCom Corporation was 0.5%, TriState Capital Holdings was 0.9%


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.

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. 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. The Russell 2000 Index is an index of domestic small-cap stocks. It measures the performance of the 2,000 smallest 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 Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The returns for the Russell 2500-Financial Sector represent those of the financial services companies within the Russell 2500 index. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI ACWI Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks.The MSCI ACWI ex USA Small Cap Index is an index of global small-cap stocks, excluding the United States.The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information.

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to:

-the Funds’ future operating results,

-the prospects of the Funds’ portfolio companies,

-the impact of investments that the Funds have made or may make, the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

-the ability of the Funds’ portfolio companies to achieve their objectives.

This discussion uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Royce Funds have based the forward-looking statements included in this commentary on information available to us on the date of the commentary, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

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. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see ""Primary Risks for Fund Investors"" in the prospectus.)

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