Royce Dividend Value Fund Manager Commentary
article 12-31-2022

Royce Dividend Value Fund Manager Commentary

The Fund lost less than both its primary benchmark, the Russell 2500 Index, and its secondary benchmark, the Russell 2000 Index, in 2022.


Fund Performance

Royce Dividend Value Fund outperformed its primary benchmark, the Russell 2500 Index, in 2022 down -13.6% versus -18.4%, and also lost less than the Russell 2000 Index, its secondary benchmark, which fell -20.4% for the same period.

What Worked… And What Didn’t

Six of the portfolio’s eight equity sectors made a negative impact on calendar-year performance. The sectors making the largest detractions were Financials, Consumer Discretionary, and Health Care. The only positive impacts came from Energy and Real Estate, while Information Technology made the smallest detraction. At the industry level, capital markets (Financials), specialty retail (Consumer Discretionary), and banks (Financials) were the largest detractors while the biggest positive contributions came from trading companies & distributors (Industrials), electrical equipment (Industrials), and metals & mining (Materials).

The Fund’s top-detracting position in 2022 was Carlyle Group, a global investment firm that manages vehicles across four segments, including corporate private equity, real assets, global credit, and investment solutions. The company reported solid results in April that nonetheless fell below analysts’ estimates. In addition, as the Fed continued to tighten in the first half, financing conditions became stricter and borrowing costs rose, which particularly hurt companies involved in private equity. Rent-A-Center operates rent-to-own stores. Investors shied away from its stock after the company said that both the end of Covid relief funds and rising inflation would likely hurt its customers’ ability to buy and/or make payments. We also had concerns about the company’s 2021 acquisition of lease-to-own solutions provider Acima Holdings, which put leverage on Rent-A-Center’s balance sheet while also adding credit losses to its financial results. We sold the last of our shares in October. Listed in the U.K., Spirax-Sarco Engineering is a global leader in steam systems, electric thermal solutions, and specialty pumps that uses a recurring revenue model with its global customer base. Although demand remained strong and sales were robust, the company faced supply chain issues and crimped profit margins, both of which we see as temporary, fixable issues.

The top contributor was Applied Industrial Technologies, which both distributes and offers solutions for industrial motion, fluid power, flow control, and related maintenance tools. The company reported strong earnings in 2022, driven in large part by its higher-engineered solutions, service reliability, and an expanding automation platform as several customers made required investments and structural improvements to their operations. Reliance Steel & Aluminum offers metal processing services and distributes numerous metal products, including alloy, aluminum, brass, copper, carbon steel, titanium, and stainless steel, generally in small quantities on an as-needed basis. A long-time Royce holding, Reliance Steel & Aluminum benefited in 2022 from vibrant demand, especially in non-residential construction (including infrastructure), its largest end market, while demand for metals used in the semiconductor and aerospace industries recovered in the second half of the year. KBR delivers science, technology, and engineering solutions to governments and companies around the world. The company announced favorable third-quarter results and raised earnings guidance in October based on the success of projects such as developing NASA’s next generation of space suits and technological innovations designed to boost low-carbon clean ammonia capacity.

The portfolio’s advantage over the Russell 2500 in 2022 came primarily from sector allocation, though stock selection was also additive. Stock picks and—to a much lesser degree—our significantly higher weighting helped in Industrials. Our greater exposure and stock selection contributed in Materials, with a lesser contribution from the latter factor, while our much lower weighting in Information Technology also made a positive impact versus the benchmark. Conversely, stock selection hampered relative performance in Financials, as did our much lower weighting in Energy and lack of exposure to Utilities during 2022.

Top Contributors to Performance 20221 (%)

Applied Industrial Technologies1.34
Reliance Steel & Aluminum0.72
Hubbell Incorporated0.63
Lindsay Corporation0.61

1 Includes dividends

Top Detractors from Performance 20222 (%)

Carlyle Group-2.25
Spirax-Sarco Engineering-1.55
Triumph Financial-1.36

2 Net of dividends

Current Positioning and Outlook

We know better than to try predicting outcomes for the markets or the economy, but we routinely examine past performance patterns to help us make sense of the present as we prepare for the uncertain days ahead. The Russell 2500 fell -28.2% from 11/8/21 through the current bottom on 9/26/22, which places it around the average of Russell 2500 downturns of -15% or more since the index’s inception. Over that 44-year span, only three bear markets went markedly deeper than this one by falling at least another 10%. Each of these downturns was exacerbated by a monumental negative event: the Great Financial Crisis led to small- and mid-cap losses of -58.4% from 7/13/07-3/9/09; the bursting Internet Bubble saw the Russell 2000 down -37.7% from 3/9/00-10/9/02; and in the Covid pandemic the small-cap index declined -41.5% from 2/20/20-3/23/20. As difficult as these markets were, each presented investors with an important opportunity to build their small-cap allocation because in each case the subsequent recovery was robust—but it was much more rewarding for those who stayed invested. Regardless of what happens in the near term, then, we see the current period of uncertainty as a highly opportune time to actively invest in select small caps for the long run.

Average Annual Total Returns Through 12/31/22 (%)

Dividend Value 14.68-13.62-13.622.723.337.247.007.72

Annual Operating Expenses: Gross 1.62 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, 2023.

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, 2022, 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, 2022 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 12/31/22, the percentage of Fund assets was as follows: Applied Industrial Technologies was 6.3%, Reliance Steel & Aluminum was 3.5%, KBR was 5.5%, Hubbell Incorporated was 3.9%, Lindsay Corporation was 4.6%, Carlyle Group was 3.1%, Rent-A-Center was 0.0%, Spirax-Sarco Engineering was 2.9%, Triumph Financial was 0.0%, Sprott was 2.1%.

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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