Royce Dividend Value Fund Manager Commentary
article 12-31-2020

Royce Dividend Value Fund Manager Commentary

We believe dividend-paying small- and smid-cap stocks represent attractive relative value, and we remain optimistic about the prospects for small cap cyclicals.


Fund Performance

Royce Dividend Value Fund gained 4.5% for 2020, an underwhelming result that lagged each of its benchmarks as the Russell 2000 and Russell 2500 Indexes both advanced 20.0% for the calendar year. For context, we note that dividend payers as a group underperformed for the full year within each of these indexes. Nonetheless, we were disappointed by the Fund’s results for 2020.

What Worked… And What Didn’t

Four of the Fund’s 10 equity sectors finished 2020 in the black, with Materials and Industrials making the biggest positive impacts by a wide margin. Conversely, Energy and Consumer Discretionary detracted most. At the industry level, capital markets (Financials) and metals & mining (Materials) were the biggest contributors while energy equipment & services (Energy) and airlines (Industrials) were the biggest detractors.

The portfolio’s top contributor was KKR& Co., a leading alternative asset manager offering investment strategies such as private equity, energy, credit, infrastructure, real estate, and hedge funds. Its shares began to rebound in March before receiving a lift from the August announcement of strong earnings and increased fee-paying assets under management. Franco-Nevada is a Canada-based royalty company that focuses mainly on gold, as well as platinum, oil and gas, and other assets. As a gold streaming and royalty company, it does not mine or extract. Instead, Franco-Nevada funds mining companies upfront in exchange for buying gold and other precious metals from them at pre-set prices and percentages—usually at a much lower prices than the spot price. With ample reserves and rising commodity prices, the company is well positioned for a sustained rally in precious metals prices, a view buttressed by its strong second-quarter earnings and optimistic guidance from management for 2021. Quaker Chemical, a global leader in industrial process fluids, followed in third place. Its business benefited from the global industrial recovery toward the end of 2020, when all of its business segments returned to growth, driven primarily by the global rebound in automotive production.

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After positioning the portfolio for accelerating growth at the beginning of 2020, we had to quickly shift gears when the coronavirus outbreak and resulting lockdowns and other constraints plunged the U.S. and much of the globe rapidly into recession—and the equity markets into bear territory. Each of the Fund’s five top-detracting positions comes from an industry that sustained especially negative and prolonged impacts from the pandemic. Norway’s TGS-NOPEC Geophysical, which provides geophysical seismic data to oil exploration companies, was the largest detractor for 2020. We like its business model but also believe that structural changes in oil & gas exploration, as well as secular shifts toward cleaner energy, may ultimately crimp its long-term growth, so we reduced our stake in 2020. Our decision to exit oil and gas contract driller Helmerich & Payne was largely rooted in the company’s downbeat outlook for the energy industry and the likely negative effect the downturn would have on its business through the next several quarters. Plummeting sales led us to sell our positions in footwear manufacturer Caleres and women’s dress shoe retailer Designer Brands, as neither looked capable of a complete recovery to us given the challenges afflicting brick-and-mortar retailers. We also sold our position in low-cost carrier Allegiant Travel for similar reasons as few industries were harder hit than airlines in 2020—and a rebound could take a considerable amount of time.

Relative underperformance for 2020 was due to stock selection and sector allocation, with the former having a slightly larger impact. Because of our lower exposure and, to a lesser degree, stock selection, Health Care detracted most while our lower exposure and stock selection negatively impacted Information Technology. Dividend-payers are scarce in both sectors. Ineffective stock picks and lower exposure also hurt relative results in Consumer Discretionary. Conversely, our lower exposure to Real Estate helped versus the small-cap benchmark, as did our lower weighting and savvy stock selection in Utilities and our larger weighting in Materials.

Top Contributors to Performance 20201 (%)

KKR & Co.1.89
Quaker Chemical1.79
Evercore Cl. A1.68

1 Includes dividends

Top Detractors from Performance 20202 (%)

TGS-NOPEC Geophysical-1.50
Helmerich & Payne-1.19
Designer Brands Cl. A-1.07
Allegiant Travel-1.03

2 Net of dividends

Current Positioning and Outlook

Despite a strong run by small caps, we remain optimistic about the asset class and believe that dividend-paying small- and smid-cap stocks represent attractive relative value. Our optimism is also rooted in what we anticipate will be a stronger economic recovery than many think due to pent up services demand, limited excess capacity, a healthy U.S. consumer, and strong corporate balance sheets. Stronger-than-expected operating leverage should also aid this recovery as many companies have permanently reduced their cost structures. Our overall outlook for cyclicals is therefore bright. The vaccine roll-out should spur economic growth, though we suspect it will initially be unevenly distributed—and that is where we think active managers can offer an edge. The ability to recognize patterns, understand industry dynamics, and evaluate management teams should all prove crucial in such a climate. We continue to look for what we see as strong divided-paying businesses trading at attractive valuations due to what appear to be temporary issues.

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

Dividend Value 20.204.474.474.339.968.038.038.45 05/03/04

Annual Operating Expenses: Gross 1.60 Net 1.34

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. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service 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 Service 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 1.34% 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: KKR & Co. was 1.8%, Franco-Nevada was 3.1%, Quaker Chemical was 3.2%, Evercore Cl. A was 2.0%, Graco was 2.6%, TGS-NOPEC Geophysical was 0.7%, Caleres was 0.0%, Helmerich & Payne was 0.0%, Designer Brands Cl. A was 0.0%, Allegiant Travel was 0.0%

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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