Royce Dividend Value Fund Manager Commentary
article 12-31-2019

Royce Dividend Value Fund Manager Commentary

The Fund boasted a strong performance and outpaced the Russell 2000 and Russell 2500 Indexes for the year.

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Fund Performance

Royce Dividend Value Fund came back strong in 2019, advancing 29.8% and outpacing its small- and smid-cap benchmarks, the Russell 2000 and Russell 2500 Indexes, which rose 25.5% and 27.8%, respectively, for the same period. The Fund also beat the Russell 2000 for the three-, 15-year, and since inception (5/3/04) periods ended 12/31/19. The portfolio’s performance was notable in that small-cap dividend payers lagged their non-dividend-paying peers in 2019.

What Worked… And What Didn’t

Nine of the 10 equity sectors in which the Fund held investments had a positive impact on 2019’s performance. Two areas dominated, as Financials and Industrials—the portfolio’s two largest sectors—made respective contributions that more than doubled the positive impact of Information Technology, the third-largest contributor. Consumer Staples detracted very modestly while the smallest contributions came from Real Estate and Consumer Discretionary. At the industry level, capital markets (Financials) made by far the biggest positive impact, followed by notable contributions from metals & mining (Materials) and machinery (Industrials). Detractors at this level had a far more modest effect and were led by food & staples retailing (Consumer Staples), chemicals (Materials), and textiles, apparel & luxury goods (Consumer Discretionary).

The Fund’s top contributing position was global investment firm Carlyle Group, whose shares reaped the rewards of sustained earnings growth. This was the result of successful deals—both acquisitions and sales—as well as more than doubling its fee-related earnings from the prior-year period in the second quarter and boosting its total assets under management to a record-high $223 billion in July 2019. The firm also pays a steady dividend. KBR, another consistent dividend payer, offers differentiated engineering and related services and technologies. The company operates in three synergistic segments: Government Solutions, Technology Solutions, and Energy Solutions. Its shares benefited from KBR exceeding earnings estimates for four consecutive quarters as of October 2019. This growth was driven by robust book-to-bill rates and notable strength in its Energy Solutions division. Each company was a top-10 holding at year-end.


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The top detractor at the position level was Value Partners Group, an asset management business that focuses mainly on investors in China and other parts of the Asia-Pacific region. We were initially drawn to its success managing assets with a risk-conscious, value orientation and dominant position in a fast-growing region. We chose to sell our stake in Dividend Value’s portfolio in August, however, after the company reported double-digit second-quarter declines in its revenues and operating income from the previous year. We maintained our position in the Fund’s next largest detractor, American Eagle Outfitters, which designs, markets, and sells its own brand of casual clothing, targeting younger consumers with affordable, high-quality merchandise. Few areas have been hit harder by the expansion of e-commerce than brick-and-mortar clothing retailers. While this has created challenges for American Eagle’s business, we think its stock’s decline was more attributable to the misguided perception that retail is dying—as opposed to changing. We therefore placed greater weight on the company’s efforts to navigate the seismic shifts faced by its industry. Additionally, a new denim cycle began in 2019 and the firm’s subbrand, Aerie, is growing rapidly.

Outperformance relative to the Russell 2000 was driven entirely by stock selection—sector allocation was negative in the calendar year. The biggest advantages on a sector level came from stock selection in Financials (where our larger exposure detracted slightly) and Industrials, where our overweight also proved additive. Savvy stock picks also gave us an advantage in Energy that more than compensated for the negative effect of our sector overweight. Among the Fund’s industries, the aforementioned capital markets group was especially strong on a relative basis. Conversely, stock selection detracted from relative performance in Consumer Discretionary, as did our lower exposure to Health Care, particularly in biotechnology, where conservatively capitalized dividend payers are thin on the ground. The portfolio’s cash position also detracted from results versus the small-cap index.


Top Contributors to Performance 20191 (%)

Carlyle Group1.81
KBR1.79
KKR & Co. Cl. A1.48
HEICO Corporation Cl. A1.46
Reliance Steel & Aluminum1.44

1 Includes dividends

Top Detractors from Performance 20192 (%)

Value Partners Group Limited-0.30
American Eagle Outfitters-0.21
Designer Brands Cl. A-0.21
Alliance Resource Partners L.P.-0.18
FamilyMart Co., Ltd.-0.15

2 Net of dividends

Current Positioning and Outlook

The backdrop looks quite favorable to us for solid to strong small-cap performance overall. We have previously cited four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and ample access to capital, which all remain in force and which suggest that small-cap returns can go higher. We see a global economy that’s showing signs of renewed life (the coronavirus outbreak not withstanding), an ISM Manufacturing Index that’s been incrementally rising (despite December’s setback), and, most important, valuations that range from reasonable to attractive among the many small-cap cyclical areas that we typically like best. During the second half of 2019, we increased investments in professional services firms that appear well positioned to benefit from a growing economy and added a turnaround investment in a consumer rental business that’s been benefiting from cost containment, increased traffic trends, and improved cash flows while reducing its debt load.

Average Annual Total Returns Through 12/31/19 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR SINCE INCEPT. DATE
Dividend Value 9.3429.7829.789.767.7310.438.228.71 05/03/04
Russell 2000 9.9425.5225.528.598.2311.837.928.61 N/A
Russell 2500 8.5427.7727.7710.338.9312.588.799.45 N/A

Annual Operating Expenses: Gross 1.43 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 www.royceinvest.com. 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 & Associates 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, 2020.

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, 2019, 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, 2019 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 12/31/19, the percentage of Fund assets was as follows: Carlyle Group was 3.7%, KBR was 3.1%, KKR & Co. Cl. A was 3.3%, HEICO Corporation was 0.0%, Reliance Steel & Aluminum was 2.6%, Value Partners Group was 0.0%, American Eagle Outfitters was 0.9%, Designer Brands Cl. A was 1.0%, Alliance Resource Partners L.P. was 0.0%, FamilyMart was 0.4%


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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