Royce Global Financial Services Fund Manager Commentary
article 12-31-2022

Royce Global Financial Services Fund Manager Commentary

In a challenging 2022, the Fund held long-term relative advantages, beating its benchmark for the three-, five-, 10-, and 15-year periods ended 12/31/22.


Fund Performance

Royce Global Financial Services Fund was down -20.3% in 2022, lagging its benchmark, MSCI ACWI Small Cap Index, which fell -18.7% for the same period.

Longer-term relative results were better as the portfolio outperformed its benchmark for the three-, five-, 10-, and 15-year periods ended 12/31/22.

What Worked… And What Didn’t

The Fund had investments in five sectors during 2022, all of which detracted from performance. Financials detracted the most, followed by Real Estate and Information Technology. All of the portfolio’s industry groups also detracted from performance. Capital markets (Financials), real estate management & development (Real Estate), and banks (Financials) had the biggest negative effect while the smallest came from metals & mining (Materials), professional services (Industrials), and electronic equipment, instruments & components (Information Technology). At the country level, Canada, the U.S., and the United Kingdom were the largest detractors in 2022 while Israel, Brazil, and Panama made positive contributions.

The Fund’s top detractor was Canaccord Genuity Group. Canada’s largest independent investment dealer, Canaccord specializes in wealth management and brokerage in capital markets—with a particular focus on growth companies and initial public offerings (“IPOs”). With both of these markets hard hit in 2022, the company’s revenue and earnings fell precipitously. We maintained our position at the end of 2022. (In early January, certain members of the c-suite announced a bid to take the company private at a 30% premium to its close on 1/8/23.) Intermediate Capital Group is a London-based private equity business that invests in private debt, credit and equity, and bridge financing, among other financial instruments. After a profitable 2021, the firm’s earnings declined sharply in 2022 against a challenging and uncertain macroeconomic environment. Taking a long-term view, we held our shares. Sprott is another Canadian business, which provides portfolio management and broker-dealer services, primarily in the precious metals area. Sprott’s shares began to fall sharply in March as precious metals prices corrected, falling through most of 2022. Having confidence in its ability to rebound, we held our shares at the end of December.

The portfolio’s top contributor for 2022 was New York City-based financial services firm StoneX Group, which benefited from the robust operating environment in its global payments business and strong margin growth rooted in the effective management of its cost structure. The company also reported strong trading volumes, growth in client funds, and strong revenue growth across all of its products and client segments for fiscal 2022 and has made progress in delivering a number of digital solutions and platforms in 2023. In addition, rising interest rates have been a boon to the company’s asset sensitivity. Tel Aviv Stock Exchange, which offers trading services for stocks, convertible securities, corporate and government bonds, short-term certificates, and index and currency options in Israel, saw steady growth in revenue and earnings in 2022 thanks in large part to increased trading and clearing commissions, listing fees and levies, and clearinghouse services. Shares of Florida-based Capital City Bank Group rose after the company announced solid second-quarter results driven by strong loan growth, credit quality, rising rates, and lower expenses. The bank’s third-quarter results were similarly sunny, with margin expansion, steady loan growth, and relative strength in its residential mortgage business (despite higher borrowing rates and a slowdown in secondary market loan sales) all driving earnings.

The portfolio’s relative performance will generally hinge not just on the performance of financial stocks—which were underwater in both the Fund and the MSCI ACWI Small Cap in 2022—but also on those sectors where we have little or no exposure vis-?-vis our broad-based global benchmark. Hurting relative results most at the sector level were our lack of exposure to Energy, scant exposure and stock selection in Industrials, and stock picks in Real Estate. Conversely, lack of exposure to Health Care and Consumer Discretionary were relative strengths in 2022, as was stock selection in Information Technology.

Top Contributors to Performance 20221 (%)

StoneX Group1.08
Tel Aviv Stock Exchange0.66
Capital City Bank Group0.45
BOK Financial0.28
Charles Schwab0.24

1 Includes dividends

Top Detractors from Performance 20222 (%)

Canaccord Genuity Group-1.80
Intermediate Capital Group-1.56
MarketWise Cl. A-1.44
Carlyle Group-1.42

2 Net of dividends

Current Positioning and Outlook

While the near-term forecast for equities is as unclear as any we can recall, we also see better weather over the long-term horizon for smaller global financial stocks. Indeed, throughout 2022 we have often been struck by the contrast between the more confident—albeit cautious—outlooks from the many management teams we’ve met with and the fatalistic headlines we see almost every day. In our view, our companies boast generally strong long-term growth prospects and/or proven management expertise. We think that they appear well positioned as a whole for a market that is more focused on fundamentals and/or from a reaccelerating global economy. And while recession remains a reality or possibility (depending on geography), none of us knows how long it will last or how deep it will go. History shows us that any recession—like any bear market—is ultimately finite and that a recession will be followed by a recovery. For this and other reasons, we would welcome any degree of increased scrutiny of company fundamentals.

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

Global Financial Services 6.89-20.32-20.323.373.508.686.277.31

Annual Operating Expenses: Gross 1.98 Net 1.57

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 gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and 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 1.49% through April 30, 2023. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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: StoneX Group was 3.5%, Tel Aviv Stock Exchange was 6.1%, Capital City Bank Group was 2.0%, BOK Financial was 4.0%, Charles Schwab was 4.5%, Canaccord Genuity Group was 2.6%, Intermediate Capital Group was 2.0%, Sprott was 5.0%, MarketWise Cl. A was 0.6%, Carlyle Group was 2.3%.

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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