Royce Dividend Value Fund Manager Commentary
article 02-15-2024

Royce Dividend Value Fund Manager Commentary

The Fund advanced 22.9% in 2023, outperforming its benchmark, the Russell 2500 Index, which was up 17.4% for the same period.

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Fund Performance

Royce Dividend Value Fund advanced 22.9% in 2023, outperforming its benchmark, the Russell 2500 Index, which was up 17.4% for the same period.

What Worked… and What Didn’t

Seven of the Fund’s eight equity sectors made positive contributions to 2023’s performance, with the biggest impacts coming from Financials, Industrials, and Consumer Discretionary. Real Estate was the lone detractor while the smallest contributions came from Information Technology and Energy. At the industry level, capital markets (Financials), household durables (Consumer Discretionary), and banks (Financials) contributed most for the calendar year period, while real estate management & development (Real Estate), financial services (Financials), and specialized REITs (Real Estate) were the largest detractors.

The portfolio’s top contributor at the position level for the calendar year was First Citizens BancShares. Although a relative newcomer to the portfolio, it’s a company we have owned in other Royce-managed portfolios for several years. In March of 2023, First Citizens made its FDIC-assisted acquisition of Silicon Valley Bank. The market eventually re-rated its shares, first as it became clear that the acquisition was accretive and again when no systemic banking crisis materialized. Worthington Enterprises makes metal products and operates four segments: Steel Processing, Consumer Products, Building Products, and Sustainable Energy Solutions. In early December, the company separated out its steel processing business, Worthington Steel, into a standalone, publicly traded company. Later that month, Worthington reported solid results for the second quarter of fiscal 2024. The Carlyle Group is a multinational private equity, alternative asset management, and financial services corporation whose shares rose the most in the last two months of 2023, when the company reported lower-than-expected declines in revenues and fee-related earnings, leading investors to its stock.

The top detractor was Lindsay Corporation, which provides center pivot irrigation systems for commercial agriculture. Investors fled the stock in June when Lindsay reported disappointing fiscal third quarter results, which included a double-digit revenue decline from 2022’s third quarter and substantially lower earnings per share than had been expected. We are cautiously optimistic about Lindsay’s long-term prospects, including the potentially positive effect of increased infrastructure spending in 2024. Franco-Nevada is a Toronto-based gold-focused royalty and streaming company with a diversified natural resources portfolio. The company provides cash upfront to miners for building mines or expanding existing assets. In exchange for putting up cash, Franco-Nevada receives the right to buy precious metals at lower rates in the future. Slumping gold prices and a large mine investment that was dormant both hurt its stock price in 2023. BOK Financial is a bank that operates in attractive geographies across the Midwest and Southwest U.S. Despite what we saw as a strong deposit franchise, demand deposits/total deposits declined in 2023, and deposit beta—which measures deposit-rate sensitivity to Fed fund rate changes—was higher than anticipated, pressuring net interest margins. Fears of a commercial real estate (“CRE”) recession also likely kept the stock under pressure, even as CRE comprised only 21.4% of total loans as of 2Q23, with offices only representing 4.3%.

The Fund’s advantage over the Russell 2500 in 2023 came overwhelmingly from stock selection, though sector allocation also contributed. Stock selection was strongest in the Financials and Consumer Discretionary sectors, while our significantly lower exposure to Health Care also contributed meaningfully. Conversely, our much lower weighting in Information Technology, stock selection and a much higher weighting in Materials, and stock selection in Industrials detracted most from relative performance.


Top Contributors to Performance 20231 (%)

First Citizens BancShares Cl. A2.37
Worthington Enterprises2.04
Carlyle Group1.62
Comfort Systems USA1.58
Evercore Cl. A1.56

1 Includes dividends

Top Detractors from Performance 20232 (%)

Lindsay Corporation-0.99
Franco-Nevada-0.66
BOK Financial-0.58
Kennedy-Wilson Holdings-0.10
NewtekOne-0.06

2 Net of dividends

Current Positioning and Outlook

Our outlook is constructive. First, we suspect that returns are likely to be spread more widely over the next few years and that the reign of the Magnificent 7—the mega-cap cohort of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—may be coming to an end, especially if 2023’s fourth quarter and early January 2024 are any indication. The backdrop of moderating inflation, normalized interest rates, and a still growing U.S. economy also bolsters our belief that small-cap’s lengthy stretch in the relative performance wilderness has run its course. We believe moderate economic growth and the more normalized rate environment should support a broadening of equity market returns where dividend paying small- and mid-caps could be clear beneficiaries, especially those businesses that have largely sat out the mega-cap performance regime. Even more important is what we’ve been hearing from management teams—most of whom remain cautiously optimistic about 2024. We see an increasing likelihood, for example, that the U.S. economy will achieve the much-desired soft landing—which is encouraging for many reasons. The next few years will see even more tangible benefits of reshoring, the CHIPS Act, and numerous infrastructure projects, and many of our holdings are poised to benefit from these developments. We’re looking forward to what we think should be a favorable cycle for small- and mid-cap stocks.

Average Annual Total Returns Through 12/31/23 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR SINCE INCEPT.
(05/03/04)
Dividend Value 13.6722.9222.928.4411.576.5811.258.45
Russell 2500 13.3517.4217.424.2411.678.3612.669.15
Russell 2000 14.0316.9316.932.229.977.1611.308.15

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 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 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, 2024.

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, 2023, 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, 2023 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 12/31/23, the percentage of Fund assets was as follows: First Citizens BancShares Cl. A was 3.0%, Worthington Enterprises was 2.7%, Carlyle Group was 4.9%, Comfort Systems USA was 2.9%, Evercore Cl. A was 3.7%, Lindsay Corporation was 0.8%, Franco-Nevada was 2.9%, BOK Financial was 2.1%, Kennedy-Wilson Holdings was 0.0%, NewtekOne 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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