Fund Performance

Royce Capital Fund–Small-Cap Portfolio gained 3.4% in 2024, trailing the Russell 2000 Value Index, which was up 8.1%, and the Russell 2000 Index, which increased 11.5%, for the same period. The portfolio outperformed the Russell 2000 Value for the 3-, 25-year, and since inception (12/27/96) periods ended 12/31/24 while lagging for the 5- and 10-year periods.

What Worked… and What Didn’t

Six of the portfolio’s 10 equity sectors made a positive impact on calendar year performance, led by Financials, Information Technology, and Industrials while Consumer Discretionary, Communication Services, and Materials had the largest negative effects. At the industry level, banks (Financials), electronic equipment, instruments & components (Information Technology), and professional services (Industrials) contributed most in 2024, while hotels, restaurants & leisure (Consumer Discretionary), communications equipment (Information Technology), and marine transportation (Industrials) were the biggest detractors.

The Fund’s top contributor at the position level was Flex, an electronics manufacturing services company that designs and develops original design manufacturing (ODM) products for several industries, including aerospace & defense, cloud, digital health, lighting, housing, energy, industrial, and communications. Flex’s stock moved higher thanks to strong earnings and revenues in 2024. In May, and then again in January 2025, the company raised revenue and earnings per share guidance, thanks in large part to focusing on its higher-margin business mix.

Investment bank Evercore offers advisory services on mergers, acquisitions, divestiture, restructuring, and other corporate transactions while also providing investment management services. The market has been excited—arguably over-excited—about expectations for a revived M&A landscape under the second Trump Administration, which helped Evercore’s shares to climb even higher through the year’s last two months We have been trimming our stake as its stock price rose.

Allison Transmission Holdings manufactures fully-automatic transmissions for medium and heavy-duty commercial vehicles, medium and heavy-tactical U.S. military vehicles, and hybrid-propulsion systems for transit buses. Its shares had mostly been sluggish prior to 2024, as the market appeared to be expecting a significant cyclical downturn that never materialized. Rising off what we thought was a very cheap valuation, the market then seemed to recognize that Allison was paying down debt and executing effectively against the backdrop of a robust U.S. trucking industry.

Sanmina Corporation provides electronics contract manufacturing services—aka “EMS”—to a global customer base. Inventories for a lot of networking and communications gear had been full but began thinning out in 4Q24. As this inventory overhang abated, its shares began to rise.

Unity Bancorp is a full service commercial bank operating in New Jersey. In October, Unity announced the highest quarterly earnings results in its history, driven by increased commercial loan volumes and deposit growth.

The top detractor in 2024 was Bloomin’ Brands, a consortium of casual dining restaurants that includes Outback Steakhouse and Carrabba’s Italian Grill. Spending by middle- and lower-income consumers continues to be slow, resulting in declining restaurant traffic. Along with the retirement of the company’s CEO in May, this dynamic has put pressure on its shares. We trimmed our stake in the first half of 2024 but began buying again when the stock looked attractively cheap to us in the second half of the year.

Aviat Networks provides IP solutions to wireless public and private telecommunication operators. Aviat completed its acquisition of the Wireless Transport Business of a Japanese company in November of 2023. Early optimism that the move would enrich and diversify Aviat’s business wilted in the face of disappointing earnings. We sold the last of our shares in November.

We also lost confidence in the long-term prospects for Cross Country Healthcare, which provides healthcare staffing services such as travel and per diem nurses and clinical research trials staffing. The company over-earned during the pandemic and the wait for its business to normalize proved much longer than we initially anticipated, so we chose to exit our position, selling the last of our shares in July.

Electronics contract manufacturing services business Kimball Electronics offers engineering, manufacturing and supply chain services to the automotive, medical, industrial, and public safety industries. Much of the EMS industry has faced headwinds, Kimball included. A slowdown in the manufacture of automotive components used for power steering and regenerative braking was especially rough, prompting us to exit the stock.

We also exited our position in Ryerson Holding, which purchases, processes, and distributes various forms of stainless steel, aluminum, carbon, alloy steel, nickel, and red metals, as weakness in many of its end markets continued to pressure margins.

The portfolio’s disadvantage versus the Russell 2000 Value came from both stock selection and sector allocation in 2024, with the former having the biggest impact. At the sector level, stock selection and our much larger weighting in Consumer Discretionary, stock selection in Industrials, and stock selection and a lower weighting in Communication Services hurt relative performance the most. Conversely, stock selection in Financials, stock selection and lower exposure in Health Care, and our lack of exposure to Utilities all helped versus the Russell 2000 Value in 2024.

Current Outlook and Positioning

There is a tremendous amount of uncertainty as we enter 2025. We can begin with the incoming administration and the possibility of widespread tariffs. Inflation remains sticky and stubborn, and adding significant tariffs into the economic mix would potentially worsen an already challenging problem. Considering the razor-thin majority in the House, the size and scope of tax cuts is also hard to see with any clarity. Potential battles over the debt ceiling and budget deficit are also looming in the months ahead. Moving beyond the U.S., there are geopolitical conflicts and largescale displeasure with government in Germany, France, and Canada while China’s economy remains mostly in neutral. A robust market that seems to be overlooking these challenges is, needless to say, worrisome. Federal Reserve Board of Governors member Lisa Cook recently described several capital markets, including equities, as priced to perfection and therefore susceptible to significant declines, a sentiment with which we largely agree. We see the market as long overdue for a correction. Most small-cap names look inexpensive for good reasons while others have reached lofty levels that in our view would discourage a risk-conscious buyer. That said, we still like pockets of the market, such as homebuilders, where long-term prospects look positive. We made no significant changes to positioning as we look forward to an environment with a larger number of fundamentally sound, attractive purchase candidates.

Average Annual Total Returns Through 12/31/24 (%)

Annual Operating Expenses: 1.15

¹ Not annualized.

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