Royce International Premier Fund Manager Commentary
article 12-31-2019

Royce International Premier Fund Manager Commentary

Our international small-cap quality strategy significantly outperformed its benchmark in 2019 and maintained its advantage for the three-, five-year, and since inception (12/31/10) periods ended 12/31/19.


Fund Performance

The Fund gained an impressive 34.2% in 2019, once again outpacing the MSCI ACWI ex USA Small Cap Index, which was up 22.4% for the same period. This strong calendar-year result helped the portfolio to solidify its long-term relative edge as the Fund beat its benchmark for the three-, five-year, and since inception (12/31/10) periods ended 12/31/19.

What Worked… And What Didn’t

All nine of the equity sectors in which the portfolio had investments in 2019 made a positive contribution to performance. Industrials—the Fund’s largest sector weighting—made by far the biggest positive contribution, followed by a strong showing for Information Technology. The smallest contributions came from Communication Services, Consumer Discretionary, and Energy—three sectors to which the Fund had little exposure in 2019. The top-contributing industries in 2019 were professional services (Industrials) and software (Information Technology), followed by health care equipment & supplies (Health Care). Construction & engineering (Industrials) was the only industry that detracted—and it did so modestly—while the smallest contributions came from interactive media & services (Communication Services) and containers & packaging (Materials).

The Fund’s top contributor at the position level was Brazil’s TOTVS, which provides enterprise resource planning and supply chain management software solutions. TOTVS capped a strong 2019 with robust revenue growth, effective cost management that created greater operational efficiency, and adjusted EBITDA margin expansion, driven by its core software business. The cost of its new initiatives also did not significantly impact the firm’s profits. Finally, TOTVS acquired SUPPLIER, a credit card company with a virtual private label B2B solution.

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Amadeus Fire, which focuses on finance professionals in Germany, was the next biggest contributor. We initially purchased it as a replacement for another company with a similar ‘employee leasing’ model that we like. These models work especially well in countries with strict labor laws and tight labor markets. The client receives increased workforce flexibility and access to skilled personnel for which it is willing to pay a premium. Amadeus bears the employment risk, which it can dissipate through economies of scale. Earnings grew and its margins expanded through most of 2019. In addition, Amadeus announced the takeover of Comcave in late December. This is a 25% EBITDA margin business that retrains white-collar professionals who are leaving their existing employment or are in-between jobs. Within Amadeus, it will also act as a funnel for recruitment into Amadeus’s core employee leasing business. The market aggressively re-rated Amadeus’s stock following the acquisition.

We sold our stake in each of the Fund’s two biggest detractors for 2019. Consort Medical is a U.K.-based Contract Development & Manufacturing Organization that makes high-volume, disposable drug delivery devices primarily for respiratory treatments. Full-year results announced in June showed revenues and operating profits both down, but in line with the reduced expectations. The company also reported mixed news on the development of a relatively narrow, though expanding, portfolio of commercialized and in-development projects. Adding to its challenges was an explosion in its Northumberland facility in July, though we began to reduce our position in June. SH Kelkar & Company is a family-run fragrance producer based in India whose ongoing declines in earnings and revenues led us to sell the last of our shares in April.

Relative outperformance for the calendar year was due primarily to stock selection, though sector allocation was also positive versus the benchmark. The strongest sector by far on a relative basis was Industrials, driven overwhelmingly by superior stock picking. The portfolio also benefited from its significantly larger weighting in Information Technology. Conversely, our lack of exposure to Utilities was a modest disadvantage while the portfolio’s cash holdings created an additional drag on relative performance.

Top Contributors to Performance 20191 (%)

TOTVS S.A.2.09
Amadeus FiRe AG1.29
Altus Group Limited1.28
Restore plc1.24
XP Power Ltd.1.21

1 Includes dividends

Top Detractors from Performance 20192 (%)

Consort Medical Plc-0.34
S.H. Kelkar & Co Ltd.-0.17
AIA Engineering Limited-0.11
Burkhalter Holding AG-0.04
Cyient Limited-0.03

2 Net of dividends

Current Positioning and Outlook

Over the last few years, we’ve been cautious and somewhat underweight when contrasted with the potential to invest in U.K. companies based on the strong fundamental opportunity set. As the political risks have diminished in the aftermath of the elections, however, we’ve been reevaluating the opportunities for many U.K. companies both in and out of our database of high-quality international small-caps. The portfolio’s exposure to the U.K. increased in 2019—it finished the year as our second-largest country weighting. Our strategy typically places a materially lower emphasis on short- to medium-term macroeconomic news or forecasts and rarely if ever positions itself to take account of such data. During 2019, we made our investment decisions based on this core philosophy and remain constructive with regard to the long-term opportunities for high-quality international small-caps. We are encouraged by incremental but solid improvements in the global economy, which should help to diffuse recession risk. Moreover, central banks throughout the developed world remain accommodative, keeping rates low and/or providing ample liquidity. Each of these developments should remain supportive for equities in 2020.

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

International Premier 15.3334.2234.2217.8613.498.59 12/31/10

Annual Operating Expenses: Gross 1.58 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 & 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 1.44% through April 30, 2020.

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: TOTVS was 1.3%, Amadeus Fire was 2.2%, Altus Group was 1.5%, Restore was 2.1%, XP Power was 2.2%, Consort Medical was 0.0%, SH Kelkar & Company was 0.0%, AIA Engineering was 1.4%, Burkhalter Holding was 0.0%, Cyient 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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