Royce Global Financial Services Fund Manager Commentary
article 12-31-2021

Royce Global Financial Services Fund Manager Commentary

The Fund not only beat its benchmark for the calendar year, but it also sustained its relative long-term advantages.


Fund Performance

Royce Global Financial Services Fund rose 20.3% in 2021, outperforming its benchmark, the MSCI ACWI Small Cap Index, which was up 16.1% for the same period. In addition to its calendar-year advantage, the Fund also outperformed its benchmark for the 3-, 5-, and 10-year periods ended 12/31/21.

What Worked… And What Didn’t

The Fund’s top contributor at the position level in 2021 was Sprott, a Canadian asset manager that focuses on precious metals. Its shares first rose during 1Q21, no doubt boosted by the announcement in February of an 88% increase in assets under management that helped earnings considerably. Strong third-quarter earnings then helped its shares recover from a brief mid-year slump. Popular, the portfolio’s second top contributor, is the largest bank by both assets and deposits in Puerto Rico and ranks as one of the top thrifts by total assets in the U.S. Its business benefited from the continued rebound in economic activity, the unprecedented level of federal stimulus, and the bank’s diversified sources of revenue. Adoption of the bank’s digital channels among its retail customers continues to grow, while its auto loan and lease originations, along with mortgage originations, remained solid. The next top contributor was KKR & Co., a leading alternative asset manager that offers investment strategies such as private equity, energy, credit, infrastructure, real estate, and hedge funds. The company enjoyed strong results throughout 2021, capped by third-quarter earnings in which the company reported fee-related earnings per share and after-tax distributable earnings that were as high as any KKR had ever reported, along with management fees that were up more than 50% since the third quarter of 2020. These improvements drove a 60% increase in fee-related earnings per share on a year-over-year basis.

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The biggest detractor at the position level was B3-Brasil, Bolsa, Balcao, a stock exchange located in So Paulo, Brazil. Its decline in 2021 may have been a case of investors expecting more. Brazil’s economy and equity markets have been recovering in 2021, and the company reported slightly better-than-expected profits and earnings in May. The company’s third quarter results showed lower revenues compared to 3Q20 and 2Q21 (though those two quarters were positively impacted by the reversal of non-recurring provisions). However, third-quarter recurring net income rose, even as investors continued to avoid the stock. The Fund’s second-biggest detractor at the position level was MarketAxess Holdings, which operates an electronic trading platform for corporate bonds and other fixed-income securities. Its shares typically do best during periods of high trading volume and volatility. For example, fixed income instruments saw higher-than-usual volatility and trading activity throughout 2020 and into early 2021, boosting the company’s revenues and earnings. However, its stock began to slip in 2Q21 as volatility fell in the fixed-income space, trading activity slowed, and analysts re-rated its shares. Credit-market trading continued to face headwinds in the second half due to a combination of historically low credit spreads and credit spread volatility. Through the first three quarters of fiscal 2021, commission revenue for MarketAxess was down about 1% versus the same point in 2020. We agree with management’s view, however, that credit conditions will mean revert, helping its shares to rebound. Headquartered in the U.K., Ashmore Group specializes in actively managed emerging markets strategies in equities, fixed income, and alternative investments. The company reported declines in adjusted net revenue and EBITDA (Earnings before Interest, Taxes, Depreciation, & Amortization) for the fiscal year ended 6/30/21 and then in October announced declines in assets under management and negative investment performance for the third quarter as market sentiment for certain of its key strategies deteriorated.

Top Contributors to Performance 20211 (%)

KKR & Co.1.75
First Citizens BancShares Cl. A1.57
Carlyle Group1.43

1 Includes dividends

Top Detractors from Performance 20212 (%)

B3-Brasil, Bolsa, Balcao-0.90
MarketAxess Holdings-0.63
Ashmore Group-0.58
Trean Insurance Group-0.46
Great Elm Group-0.29

2 Net of dividends

Current Positioning and Outlook

We were very pleased with both the Fund’s shorter- and longer-term performance and think that these results validate the Fund’s central investment thesis—that our distinctive approach to investing in companies in the broadly defined financial services ecosystem can produce attractive results compared with the global small-cap asset class. We continue to focus on what we view as the most attractive business models and investment opportunities, while also maintaining diversification across sub-industries and geographies. At year end, the Fund had 50 holdings, down from 61 a year ago, while still holding investments in businesses that can be expected to fare differently at different stages of the economic and market cycles. These investments include select traditional banks and insurance companies that we see as cyclically favored, alternative asset managers where we see continued strong growth prospects, stock exchanges in non-U.S. countries where there are often considerable barriers to competitive entry, and specialized technology platforms serving niches of the financial services ecosystem where we often see high quality attributes such as enduring competitive advantages and low capital requirements. Looking towards 2022, many of the Fund’s investments tend to do well when their respective countries’ economies are expanding, so as the global economy continues its uneven path of recovery, we look forward to another year of strong performance for the Fund.

Average Annual Total Returns Through 12/31/21 (%)

Global Financial Services 4.2320.2720.2719.8412.7913.297.559.10

Annual Operating Expenses: Gross 1.82 Net 1.53

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, 2022. 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, 2021, 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, 2021 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 12/31/21, the percentage of Fund assets was as follows: Sprott was 4.8%, Popular was 4.3%, KKR & Co. was 3.7%, First Citizens BancShares Cl. A was 4.0%, Carlyle Group was 3.2%, B3-Brasil, Bolsa, Balcao was 1.0%, MarketAxess Holdings was 1.7%, Ashmore Group was 0.0%, Trean Insurance Group was 0.0%, Great Elm Group 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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