Royce Dividend Value Fund Manager Commentary
article 12-31-2021

Royce Dividend Value Fund Manager Commentary

We are pleased the Fund outperformed both the Russell 2500 and Russell 2000 Indexes in 2021.


Fund Performance

Royce Dividend Value Fund advanced 20.1% in 2021, outperforming both its benchmark, the Russell 2500 Index, which rose 18.2%, and the Russell 2000 Index, which gained 14.8%, for the same period.

What Worked… And What Didn’t

Seven of the portfolio’s nine equity sectors made a positive impact on calendar-year performance. The sectors making the largest positive contributions were Industrials, Financials, and Consumer Discretionary while the only negative impacts came from Energy and Real Estate. Consumer Staples made the smallest positive impact. At the industry level, capital markets (Financials), professional services (Industrials), and banks (Financials) contributed most in 2021 period while containers & packaging (Materials), chemicals (Materials), and software (Information Technology) were the largest detractors.

The Fund’s top contributor at the position level was Carlyle Group, which manages investment vehicles across four segments: corporate private equity, real assets, global credit, and investment solutions. The firm reported record levels of fee-related earnings with strong margins and a confident outlook in February, which was followed by healthy fee-based and other earnings announced in April. The firm then reported third-quarter results in October, highlighting additional progress in fee-related earnings, record highs in quarterly distributable earnings, and strong fund-raising momentum. KBR, the portfolio’s next-best contributor, is a global engineering & construction company. The company made an acquisition in 2020 in order to move further into the aerospace & defense markets and in January 2021 signed an agreement with Mura Technology to offer an advanced plastics recycling process. In October, KBR reported robust earnings and revenue growth while raising fiscal 2021 revenue and earnings guidance. Its success was driven mostly by government contracts and wins for its sustainable technology solutions. Carlyle and KBR were the Fund’s two biggest holdings at year-end.

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The biggest detractor at the position level was B3-Brasil, Bolsa, Balcao, a stock exchange located in So Paulo, Brazil. Its decline in 2021 may have been a case of investors expecting more. Brazil’s economy and equity markets have been recovering in 2021, and the company reported slightly better-than-expected profits and earnings in May. The company’s third quarter results showed lower revenues compared to 3Q20 and 2Q21 (though those two quarters were positively impacted by the reversal of non-recurring provisions). However, third-quarter recurring net income rose, even as investors continued to avoid the stock. Headquartered in the U.K., Ashmore Group specializes in actively managed emerging markets strategies in equities, fixed income, and alternative investments. The company reported declines in adjusted net revenue and EBITDA (Earnings before Interest, Taxes, Depreciation, & Amortization) for the fiscal year ended 6/30/21 and then in October announced declines in assets under management and negative investment performance for the third quarter as market sentiment for certain of its key strategies deteriorated.

The portfolio’s advantage over the Russell 2500 resulted from sector allocation decisions in 2021—stock selection was a negative factor versus the benchmark. The Fund’s substantially lower exposure to Health Care—which was the only sector in the Russell 2500 to finish the year in the red—helped most. Our stock selection was also positive in the sector. Both our significantly greater exposure and savvy stock picking provided a relative edge in Industrials, while our overweight in Financials also made a notable positive impact. Conversely, stock picking hampered relative results in Materials, overcoming the positive effect of our large sector overweight. Our stock selection and lower exposure hurt in Energy—which had the highest return of any sector in the Russell 2500. The same combination also led Real Estate to detract from relative performance in 2021

Top Contributors to Performance 20211 (%)

Carlyle Group2.55
Triumph Bancorp1.52
Applied Industrial Technologies1.18

1 Includes dividends

Top Detractors from Performance 20212 (%)

B3-Brasil, Bolsa, Balcao-0.84
Ashmore Group-0.57
Quaker Chemical-0.26

2 Net of dividends

Current Positioning and Outlook

We reduced the number of positions in the Fund in 2021, finishing the year with 49 holdings versus 67 at the end of 2020, while increasing our exposure to U.S. stocks. Our outlook is very positive for small-cap value, though it’s more nuanced for small-cap as a whole. The Russell 2500 enjoyed a third consecutive year of double-digit positive returns in 2021, which is rare for any equity index. It’s happened only twice before since the inception of the Russell 2500 in 1979: from 1991-1993 and 1995-1997. In each instance, a fourth year of double-digit positive performance failed to materialize. We always place a lot of weight on history, and this pattern, along with a less accommodative Fed, makes us think that performance for both the Russell 2500 and Russell 2000 will be more muted in 2022. History also tells us, however, that small-cap value and cyclicals do well, particularly on a relative basis, during periods of improving economic growth. This is consistent with the encouraging signs we’ve been seeing on a company-by-company basis. We also are optimistic of the relative performance outlook for high quality stocks— which we primarily define as companies with high returns on invested capital and stable returns on assets. We think the Fund’s combined focus on dividend payers, high-quality, and value should be supportive for attractive returns, particularly relative to its benchmark.

Average Annual Total Returns Through 12/31/21 (%)

Dividend Value 6.8920.1120.1117.6510.6610.548.059.08

Annual Operating Expenses: Gross 1.54 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, 2022.

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, 2021, 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, 2021 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 12/31/21, the percentage of Fund assets was as follows: Carlyle Group was 5.1%, KBR was 5.0%, Triumph Bancorp was 2.3%, Sprott was 3.5%, Applied Industrial Technologies was 4.2%, B3-Brasil, Bolsa, Balcao was 0.9%, Ashmore Group was 1.3%, AptarGroup was 3.3%, USS was 1.1%, Quaker Chemical was 2.8%, Mura Technology 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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