Royce International Premier Fund Manager Commentary
article 02-15-2024

Royce International Premier Fund Manager Commentary

We are optimistic for 2024 and beyond and remain focused on consistently executing our process to identify superior long-term value compounding businesses for the portfolio.


Fund Performance

Royce International Premier Fund gained 7.6% in 2023, lagging its benchmark, the MSCI ACWI ex USA Small Cap Index, which was up 15.7% for the same period. The portfolio outperformed its benchmark for the 10-year, and since inception (12/31/10) periods ended 12/31/23.

What Worked… and What Didn’t

Six of the portfolio’s eight equity sectors made a positive impact on calendar year performance, led by Information Technology, Financials, and Materials. Communication Services and Real Estate detracted while Consumer Discretionary made the smallest contribution. At the country level, Japan, Switzerland, and Brazil contributed most in 2023, while Australia, South Korea, and Iceland were the largest detractors.

The portfolio’s top contributor at the position level was Maruwa, a Japanese company that manufactures niche ceramic packaging materials found inside various high-end electronics, including EVs, data center servers, and 5G base stations. These manufacturers rely on Maruwa’s high performance ceramics to transfer away the heat emitted from semiconductor chips as a byproduct of normal operation. Investors seemed to recognize Maruwa as a high-quality business exposed to multiple growth drivers, such as AI servers and EVs. Over the past 10 years to the fiscal year ended in March 2023, Maruwa’s return on net operating assets grew from 9% to 43%, driven by expanding earnings. The company’s balance sheet remains rock solid, with tangible equity accounting for 87% of its assets. Despite the combination of a quality franchise, high returns, attractive growth, and low debt, Maruwa receives little analyst coverage and at the end of 2023 was trading at what we believe was an attractive valuation. Odontoprev is the largest provider of corporate dental care plans in Brazil, partnering with a network of 30,000 dentists. We are attracted to Odontoprev’s high margin yet asset-light business model, which enables it to generate strong cash flows and returns on invested capital, as well as its structural growth prospects supported by Brazil’s expanding middle class. Its stock price growth was very impressive early in 2023, rallying more than 50% in U.S. dollar terms as of late February.

Germany’s New Work was the Fund’s biggest detractor for 2023. The company operates the largest career networking and recruiting platform in the DACH region of Germany, Austria, and Switzerland. It began as a Business-to-Consumer social networking website in 2003 but has since expanded into subscription-based Business-to-Business products. Its stock fell in May, when New Work reported positive first-quarter results albeit with slower revenue growth which, when coupled with management’s decision to still go ahead with planned investments, resulted in reduced profit guidance for the year. The difficult economic environment in Europe kept its shares in a slump through the rest of 2023 and led us to trim our position. Australia’s IPH is the leading intellectual property (“IP”) services group in Australia and Singapore. The company researches, files, enforces, and manages IP such as patents, designs, and trademarks. The disclosure of a cyber attack in March led its shares downward, even after it was revealed in April that only a small number of clients had their data downloaded, with limited personal data compromised, and that the financial impact was expected to be minimal. Meanwhile, IPH made significant strategic progress during 2023, most notably via the acquisitions of two leading Canadian IP services companies.

The portfolio’s disadvantage versus its benchmark in 2023 was attributable to stock selection—our sector allocation decisions were additive in the calendar-year period. Stock selection in Industrials hurt relative results the most by far, followed by stock selection in Communication Services and Health Care (where our higher weighting also detracted). Conversely, stock selection in Financials, a substantially lower weighting in Real Estate, and lack of exposure to the underperforming Consumer Staples sector contributed most to relative results in 2023.

Top Contributors to Performance 20231 (%)

Mortgage Advice Bureau Holdings0.91
Open Text0.83
OBIC Business Consultants0.81

1 Includes dividends

Top Detractors from Performance 20232 (%)

New Work-0.95
NICE Information Service-0.53

2 Net of dividends

Current Positioning and Outlook

As we begin 2024, we remain steadfast about providing our investors and clients a portfolio of companies with sustainably high returns on invested capital (ROIC), strong balance sheets, attractive long-term growth prospects, and valuations that in aggregate are equal to or better than that of the broader international small-cap market. We found the last months of 2023 particularly encouraging as we observed two consecutive quarters in which the gap between the three-year annualized price performance of high-ROIC stocks and the overall benchmark began to narrow, suggesting we may be in the early innings of a more sustained return to quality. Private and strategic investors took notice of the decoupling of company quality and share prices in the portfolio: three holdings received take-over bids in the fourth quarter, a level of activity never seen before in the Fund’s history. These actions underscore our optimism for 2024 and beyond, and we remain focused on consistently executing our process to identify superior long-term value compounding businesses for the portfolio.

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

International Premier 11.477.627.62-

Annual Operating Expenses: Gross 1.61 Net 1.44

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 2% 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 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 1.44% 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: Maruwa was 2.0%, Odontoprev was 2.0%, Mortgage Advice Bureau Holdings was 1.4%, Open Text was 0.3%, OBIC Business Consultants was 1.7%, New Work was 1.2%, IPH was 2.8%, Restore was 2.4%, NICE Information Service was 2.1%, Miura was 1.9%.

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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