Fund Performance

Royce Capital Fund-Micro-Cap Portfolio advanced 13.9% in 2025, trailing the 23.0% gain for its benchmark, the Russell Microcap Index, for the same period. Relative results were better over longer-term periods as the portfolio beat the benchmark for the 3-, 5-, 10-, and 25-year periods ended 12/31/25.

What Worked… and What Didn’t

Seven of the portfolio’s 10 equity sectors made a positive impact on calendar year performance, led by Industrials, Financials, and Information Technology. The largest negative impacts came from Consumer Discretionary, Real Estate, and Health Care. At the industry level, electronic equipment, instruments & components (Information Technology), banks (Financials), and aerospace & defense (Industrials) contributed most for the calendar year period, while professional services (Industrials), life sciences tools & services (Health Care), and software (Information Technology) were the largest detractors.

Our top contributor was nLIGHT, which designs, manufactures, and sells a range of high-power semiconductor and fiber lasers that are typically integrated into laser systems or tools built by its manufacturing customers. The company also provides components and integrated solutions to high-energy laser systems for directed energy and laser sensing systems used in a wide range of defense applications. nLIGHT differentiates its business by its vertical integration, domain knowledge, and manufacturing capabilities to combine dedicated resources and facilities with deep technical expertise to deliver cutting edge solutions, increasingly to government and defense organizations. Its shares have outperformed due to upward revisions to the outlook for its aerospace & defense customers. We remain constructive on the prospects for addressable market expanding product launches and a recovery in manufacturing-driven end-markets.

LightPath Technologies produces optical assemblies, modules, and integrated camera systems for the defense, public safety, and industrial end-markets. Its stock price rose as LightPath continued to deliver record backlog at record quarterly run-rate revenues amid a broad-based demand environment for components and systems, including those related to shipboard long-range surveillance, border security, and counter UAS (Unmanned Aircraft System). We remain constructive on LightPath’s evolution from an optical component manufacturer to vertically integrated provider of value-added infrared optics and camera systems, anchored by proprietary capabilities such as its germanium-free BlackDiamond infrared materials.

Astronics Corporation supplies flight critical electrical power, inflight entertainment and connectivity, lighting and safety, and test solutions to the aerospace, defense, and mass transit industries. The company holds a dominant market share in in-seat power systems for commercial aircraft. Accelerating activity levels related to improving aircraft production rates and ramping defense contracts drove its stock price performance in 2025. With more than two-thirds of revenue related to commercial aircraft, split close to equally between line fit and retrofits, Astronics will also benefit from airline fleet updates. We believe that sustained progress with process efficiencies and portfolio simplification will further benefit its through-cycle earnings power.

Sprott is a global alternative asset manager specializing in precious metals and real assets. The company operates a diversified platform of exchange-listed products, private equity funds, and lending strategies focused on gold, uranium, and energy transition metals. A combination of gold prices reaching record highs amid elevated geopolitical risk, central bank buying, and a weaker U.S. dollar drove the advance of its shares. Sprott’s suite of physical bullion trusts and energy transition ETFs saw substantial inflows, driving strong growth in assets under management and recurring fee revenue. The firm also benefited from robust performance in its private strategies, particularly in uranium and critical minerals lending. We remain constructive on continued operating leverage as the company’s global distribution scales, with new mandates secured across Europe and Asia. We also think that Sprott is well-positioned to compound earnings across commodity cycles.

CECO Environmental offers highly engineered systems and process solutions that safeguard people, the environment, and industrial equipment across niche applications, including the industrial air treatment and management, water treatment, and energy transition end-markets. The company has installed more than $10 billion of equipment across 4,200 customers. Its stock outperformed as CECO continued to deliver record backlog at record quarterly run-rate revenues amid tariff and government shutdown uncertainty, owing to continued momentum in the construction of power generation, water treatment, and semiconductor infrastructure. Electrification, reshoring, and the buildout of advanced manufacturing are sustaining a broad-based demand environment.

The Fund’s top-detracting position was outdoor products and accessories manufacturer American Outdoor Brands was negatively impacted by retail customer conservatism, as well as higher than expected tariff related costs. While management has been moving production out of China, many of its new manufacturing production partners, such as Vietnam, were also affected by the broad-based application of higher tariffs. Likewise, retailers in general continue to be cautious around inventory. That said, sell trough of the company’s products at retail remain robust, and we believe it positions the company for a more normalized retail/tariff environment over the more intermediate term.

Ichor Holdings is a key component supplier to the semiconductor industry. While from a revenue perspective the company has benefitted from a strong position with key customers, a nascent effort to drive margin improvements through a vertical integration strategy has struggled with poor execution, resulting in lower-than-expected margin and earnings performance, and a CEO transition. We still view the company as a key player in the industry and ultimately expect supply chain issues to be fixed and so added to our position on Ichor’s share price weakness.

PAR Technologies provides Point of Sale (POS) and other software products to the hospitality industry. The enterprise end-market among restaurant customers continues to move away from complex point solutions and/or costly internally developed technology, shifts that benefit PAR’s broad and integrated cloud platforms. The company remains in the midst of a multi-year transition toward a more focused, software-driven business model. And while PAR has successfully landed a number of large accounts such as Burger King, implementations, particularly in mid-sized clients, have been slower than anticipated as customers have paused investments due to concerns over economic growth and tariffs. We expect the slower pace of implementations to be short lived, however, and expect PAR to continue to win more than its fair share of new business.

Lakeland Industries manufactures industrial protective gear, with a focus mostly on the firefighting market. Management has been concentrating on consolidation opportunities with a focus on providing firefighting gear from “head to toe.” As sometimes happens with smaller cap consolidation investments, Lakeland has not executed as well as we would have anticipated on integrating some of its recent acquisitions. This has been compounded by tariff related headwinds, as well as the fact that tenders for firefighting gear tend to be lumpy. We see a large backlog of business that we expect to be let in 2026 and have maintained our position.

QuinStreet provides performance-based marketing activities across several verticals, including auto insurance and home Improvement. Auto insurance, the company’s largest vertical, has been a little weaker than anticipated as the insurers wait to see what inflationary impact tariffs may have on the cost of auto repairs. As the company uses its marketing expertise to build scale across a number of new verticals, we see a significant opportunity for operating leverage in the business model and thus have held our position.

It was a very strong year for the asset class, as the Russell Microcap outperformed each of the major domestic indexes. Micro-caps were particularly strong off the early April bottom, rising 63.5% from 4/8/25-12/31/25. Both sector allocation and stock selection hurt, with the former detracting most. At the sector level, both stock selection and a much lower exposure to Health Care hurt relative results most and by a wide margin. The bulk of our underperformance, both in the sector and for the Fund as a whole, was attributable to our underweight in biotechnology and pharmaceuticals, two industries that tend not to fit our investment philosophy and which had significant moves following the April bottom. While we are always thoughtful and deliberate about sector weightings, we believe that staying true to our investment philosophy is critical to long-term term success, even when it causes relative performance issues in the short-term. Also hampering relative results were our higher weighting and stock selection in Consumer Discretionary and a lower weighting and stock selection in Energy. Conversely, stock selection and, to a lesser extent, our lower weighting in Financials, stock selection in Communication Services, and stock selection along with a lower weighting in Consumer Staples were each additive versus the Russell Microcap in 2025.

Current Positioning and Outlook

We believe that many of the trends that drove micro-cap performance in 2025 remain in place as we heading into 2026. First and foremost, underlying economic growth remains solid, while inflation continues to moderate. These trends were in place even before significant stimulus spending had fully impacted the economy. Both the Biden administration’s Infrastructure Investment Act and the Trump administration’s Big Beautiful Bill remain in the early stages of their respective rollouts. When combined with a generally accommodative Federal Reserve, the pieces appear to be in place for ongoing growth, which should benefit micro-caps. We are also beginning to see the impacts of a lighter regulatory touch and the burgeoning productivity effect of the significant investments in AI. We continue to invest with an eye toward economic growth, and the long-term impact of shrinking supply chains and reshoring. We also continue to look for opportunities in the supply chain associated with the AI buildout, as well as seeking companies that can more fully harness the potential productivity gains associated with the technology. More than ever before, smaller teams can have an outsized impact on U.S. businesses.

Of course, we are also mindful of potential pitfalls, the most important being the legitimate concerns of a bubble in AI spending. While we do not believe that one has developed yet, history shows that technology spending can reach dangerous excesses. And while inflation has been coming down, the meaningful fiscal spending and full impact of tariffs could reverse that trend and impact the pace of Fed easing. Likewise, while we believe we are through the worst of the psychological impact of tariffs, the current administration has behaved capriciously at times. Lastly, as the events in Venezuela and the earlier bombing of Iran’s nuclear facilities have shown, the administration appears to a have a robust foreign policy position. As these are very complex issues, they increase the risk of an outlier event.

Average Annual Total Returns Through 12/31/25 (%)

Annual Operating Expenses: 1.18

¹ Not annualized.

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