Royce Global Financial Services Fund Manager Commentary
article 12-31-2019

Royce Global Financial Services Fund Manager Commentary

The Fund generated a strong positive return despite financial stocks mostly lagging the overall market and international stocks generally falling behind those of the US.

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Fund Performance

Royce Global Financial Services Fund posted a strong absolute return in 2019, up 24.2% and bouncing back from 2018’s decline. This compares to an increase of 25.5% for the domestic small-cap Russell 2000 Index and an increase of 27.2% for the Financial Services stocks in the domestic smid-cap Russell 2500 Index in 2019. We think the Fund’s calendar-year result was more impressive when seen in the context of a year in which international stocks generally lagged those in the U.S., and financials mostly lagged the overall market. Although the Fund only modestly lagged the 2019 gain for the Russell 2000, an arguably more relevant comparison is that the portfolio bested the financial stocks within the MSCI ACWI Small Cap Index, a global small-cap index that advanced 20.3% in 2019.

What Worked… And What Didn’t

The Fund’s gains were notably broad based in 2019, as 77% of our holdings advanced. Moreover, stocks in 72%—that is, 13 out of 18—of the countries where the Fund had holdings rose. In contrast with the broad market’s experience, the Fund’s international holdings slightly outpaced its U.S. stocks. (Currency translations added a minor contribution in 2019 as well.) The countries that made the most significant contribution on a country basis were the U.S., Canada, and the United Kingdom, while holdings headquartered in India, France, and South Africa detracted most, albeit on a comparably more modest scale.

Ares Management was the top-contributing position in 2019. The firm is an asset manager that focuses on tradable credit, direct lending, private equity, and real estate. Ares’s stock more than doubled during the year as investors became more optimistic about the company’s ability to sustain mid-teens, high margin earnings growth for an extended period. The company also converted to C-corp. status, which broadened ownership, supporting an increase in its valuation. MarketAxess Holdings operates an electronic, multi-dealer trading platform for investment grade and high-yield corporate and emerging market bonds. The company seems very well positioned to benefit from the continued electronification of corporate bond trading. While we are optimistic about continued growth and potential margin expansion, we also found its stock’s valuation a bit high, which led us to trim our position in the second half.


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Virtu Financial detracted most at the position level. Virtu is a New York City based financial company that uses its technology to act as a market maker and liquidity provider to the global financial markets. Its business endured a slump through most of the year as the company typically does best in highly volatile markets—which were mostly absent in 2019—and/or when global trading volumes are heavy. Believing that higher volatility is more likely, we held our position. Benefitfocus is a cloud-based software provider of benefits solutions to employers and brokers. The company continued to disappoint investors with organic growth that fell below expectations. We retained our shares because the company provides the worthwhile value of helping its customers manage escalating benefits costs efficiently, and we are hopeful of seeing better execution in the coming year.


Top Contributors to Performance 20191 (%)

Ares Management Cl. A2.11
MarketAxess Holdings2.05
Carlyle Group1.54
Franco-Nevada1.53
Ashmore Group plc1.25

1 Includes dividends

Top Detractors from Performance 20192 (%)

Virtu Financial Cl. A-1.18
Benefitfocus-0.67
Edelweiss Financial Services Limited-0.49
Rothschild & Co. SCA-0.48
JSE Limited-0.32

2 Net of dividends

Current Positioning and Outlook

We significantly narrowed the Fund’s holdings in 2019, moving from 84 to 68 positions, as we focused more intensively on business models where we have the greatest conviction. This net reduction in holdings came despite adding six new positions that we have identified as attractive opportunities, including the recently publicly listed Tel Aviv Stock Exchange, which in our view has a well-protected franchise with solid growth prospects. The year-end portfolio reflected some additional repositioning. We reduced our weightings in more traditional financial industries such as insurance and banks while we increased our exposure to capital markets. Our perspective is that the combination of ongoing low interest rates and a flattish yield curve is a persistent headwind to the business models of many banks and insurance companies. In contrast, we are more optimistic about selected areas within capital markets, including traditional non-U.S. exchanges—we currently own nine—alternative transaction platforms, specialist traditional asset managers, and alternative asset managers.

While we are not in the business of making macroeconomic forecasts, we do believe that the odds favor a rebound in global growth from 2019’s more subdued levels. If that scenario develops, it is helpful to note that many of the Fund’s holdings, like many financial stocks, have a pro-cyclical bias in that their profits tend to grow faster when economies are rebounding. Beyond this potential cyclical boost, we believe that many of our holdings are equally well positioned to capitalize on more durable secular trends, including the persistent need of investors for attractive income and the opportunities to use technology in order to provide lower cost alternatives, to automate processes, and/or to deliver analytical insights.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR SINCE INCEPT. DATE
Global Financial Services 8.2824.1724.179.607.2210.207.628.07 12/31/03

Annual Operating Expenses: Gross 1.84 Net 1.52

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 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 & 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 1.49% through April 30, 2020. 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, 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: Ares Management Cl. A was 3.4%, MarketAxess Holdings was 3.4%, Carlyle Group was 1.9%, Franco-Nevada was 3.7%, Ashmore Group was 2.9%, Virtu Financial Cl. A was 2.1%, Benefitfocus was 0.6%, Edelweiss Financial Services was 0.6%, Rothschild & Co was 2.2%, JSE was 1.2%


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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