Fund Performance

Royce Dividend Value Fund advanced 19.6% in 2024, beating the Russell 2500 Index, which was up 12.0% for the same period. The portfolio outperformed its the Russell 2500 for the 3-, and 5-year periods ended 12/31/24 while lagging the index for the 10-year period.

What Worked… and What Didn’t

Six of the portfolio’s eight equity sectors made a positive impact on calendar year period performance, led by Financials, Industrials, and Materials. The only negative impacts came from Consumer Discretionary and Energy, and Real Estate made the smallest contribution. At the industry level, capital markets (Financials), trading companies & distributors (Industrials), and construction & engineering (Industrials) contributed most in 2024, while machinery (Industrials), household durables (Consumer Discretionary), and chemicals (Materials) were the largest detractors.

The Fund’s top contributor at the position level in 2024 was FTAI Aviation, which provides maintenance, repair, and exchange of CFM56 and V2500 aircraft engines, the workhorses of the global aircraft fleet, to smaller airlines globally. FTAI also leases used aircraft and spare engines to airlines. Key aspects of FTAI’s business model have been its ability to deliver a better mousetrap (lease/sale/exchange; faster repairs; no negative surprises), have lower costs than its competitors, and operate in an asset-light manner through partnerships with Lockheed Martin, Chrome Alloy, AAR, Pratt & Whitney, et al. Contributing to its notable performance in 2024 were the market’s recognition of the tight supply of aircraft engines, FTAI’s growth runway as it closed deals with Latam Airlines and Pratt & Whitney, a burgeoning cost advantage after FTAI purchased its management fee agreement and a key maintenance facility in Montreal, and FAA approval for critical aftermarket engine parts.

We chose to sell our stake in investment banking company Evercore, which in the first half of the year reported strong net revenues and advised on five of the fifteen largest global transactions (such as acquisitions and spinoffs). Evercore also saw momentum in its underwriting business, which enjoyed its highest quarterly revenues since the fourth quarter of 2021 as the equity markets experienced more robust activity, particularly in IPOs, during the first half of 2024.

Comfort Systems USA provides heating, ventilation, and air conditioning system installation, maintenance, repair, and replacement services. Its services have been in demand thanks to increased activity in data centers, life science, food and other manufacturing centers. The company reported record earnings and cash flow for 3Q24, driven by growth in same-store revenue on a quarterly and year-to-date basis, compared to 2023. Believing that its valuation was getting rich, we exited our position in November.

HEICO Corporation is an aviation, aerospace, defense and electronics company that focuses on niche markets. In February, the company reported a hefty increase in net income, operating income, and net sales, thanks in large part to the strength of its commercial aerospace segment. This positive trend remained in place throughout 2024. In August, HEICO announced record highs in quarterly net sales, operating income, and net income that were driven by strength in its Flight Support Group, recent acquisitions, and increased demand across all of its product lines. New records were set again for its fiscal fourth quarter, as commercial aerospace sales growth led the company to its seventeenth consecutive quarter of sequential growth in net sales at the Flight Support Group. Pleased with the stock’s upward trajectory, we sold our position.

Shares of Applied Industrial Technologies, which manufactures and distributes industrial parts and products, rallied in 4Q24. The company reported somewhat mixed fiscal 4Q24 results in August that nonetheless featured an optimistic outlook that included two bolt-on acquisitions in its Service Center and Fluid Power Operations. While acknowledging that demand in its end markets remains uncertain, management said that there were potential catalysts for recovery, including a possible reacceleration in industrial production following 18 months of subdued activity, as well as the likelihood of a rebound across its technology vertical and Automation operations.

The top detractor at the position level was the U.K.’s Spirax Group, which provides thermal energy and fluid technology solutions. The company operates three related businesses: Steam Thermal Solutions, Electric Thermal Solutions, and Watson-Marlow Fluid Technology Solutions—which seeks to optimize the efficient use of resources and supports innovations in healthcare. Its business slowed in the first half as global industrial production slackened in key markets, including the U.S., Germany, and South America. Unsure about its ability to rebound, we significantly reduced our position in the second half of 2024.

Quaker Houghton produces, develops, and markets industrial chemical products, including heat treatment, metal forming, forging, and tin plating fluids, as well as cleaners, casting lubricants, greases, ground control agents, and metal rolling oils. We see Quaker as an attractive asset light business, with recurring revenues and strong customer loyalty. After a strong performance in 2023, its stock fell as the company faced more difficult sales growth comparisons as it lapped strategic price increases and volumes varied by geographic region, reflecting slower global industrial growth. Quaker recently promoted to CEO a respected, internal “rising star” who has overseen global growth initiatives and the merger integration of Houghton. We believe much of his focus is on reemphasizing the company’s “customer intimacy” sales process to accelerate new product growth and geographic expansion (e.g., to India), as well as more effectively capitalizing on cross-selling opportunities across its customers base.

We maintained a small position in Worthington Enterprises, which makes building products and offers heating and cooling solutions, specialized construction products, water systems, ceiling solutions, and versatile metal framing options. While its business remained solid, the company reported in December 2023 that its Consumer Products and Sustainable Energy Solutions segments had declined year-over-year. Then in March 2024, recoveries for these segments were offset by ongoing weakness in Europe and its Sustainable Energy Solutions business. In December, Worthington reported mixed results for its fiscal 2Q25, with declines in consolidated net sales year over year, but improved profitability as gross margins and adjusted EBITDA margins each increased.

B3-Brasil, Bolsa, Balcao operates regional stock exchanges in Brazil. Trading volumes have trended downward since late 2023. That, and the fact that many investors appear to have sold or ignored the stock in the current “higher for longer” interest rate environment in the first half of 2024, help explain the poor performance of its shares. Seeing what we thought were better opportunities elsewhere, we sold our position in October.

We also parted ways with employment services specialist ManpowerGroup in October on the heels of disappointing 3Q24 earnings that fell due to restructuring costs, stable but reduced demand, and the strength of the U.S. dollar, which hurt revenues in its non-U.S. business.

The portfolio’s advantage over the Russell 2500 in 2024 was mostly attributable to stock selection, though sector allocation decisions also helped. At the sector level, both stock selection and our much higher weighting in Financials did the most to boost relative performance, followed by a similar combination in Industrials and both stock selection and a lower exposure to Health Care. Conversely, stock selection in Consumer Discretionary, and a lack of exposure to Utilities and Consumer Staples detracted most from relative results.

Current Outlook and Positioning

Although we share to some degree the optimistic consensus view for 2025, we are equally conscious of the many risks that could arise next year or later. The yield curve has recently un-inverted, which on the surface would appear to be a positive signal. However, history suggests that recessions typically follow shortly thereafter. For now, the U.S. economy is strong, but recessions often result from unexpected events. We therefore think a measure of conservatism is warranted heading into the new year. Our investment approach remains unchanged: we will continue to build the portfolio from the bottom-up by investing in what we think are high-quality businesses experiencing some sort of transitory or cyclical issue, many of which have idiosyncratic drivers that create less dependence on the macro to produce positive results. We believe that our portfolio of high-quality businesses trading at undemanding valuations is capable of generating solid returns, regardless of the macroeconomic backdrop.

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

Annual Operating Expenses: Gross 1.56 Net 1.34

¹ Not annualized.

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