Royce International Premier Fund Manager Commentary
article 12-31-2022

Royce International Premier Fund Manager Commentary

We were pleased that our cash generative, low debt companies with pricing power have coped operationally well with higher rates and other increased costs, even as investors were looking elsewhere in 2022.


Fund Performance

Royce International Premier Fund fell -27.2% in 2022, lagging its benchmark, the MSCI ACWI ex USA Small Cap Index, which declined -20.0%.

Longer-term results versus the benchmark were better, however, as the Fund outperformed its benchmark for the five-, 10-year, and since inception (12/31/10) periods ended 12/31/22.

What Worked… And What Didn’t

Seven of the portfolio’s eight equity sectors detracted from performance in 2022, with the largest negative effects coming from Industrials, Information Technology, and Materials. Consumer Discretionary made the only positive contribution while Real Estate and Communication Services detracted least. At the country level, the U.K., Japan, and Switzerland were the largest detractors in 2022 while Brazil, India, and France contributed most.

The portfolio’s top detractor was Australia’s Bravura Solutions, which provides software solutions for the wealth management and fund administration industries. Sonata, the company’s primary product, allows customers to develop and distribute new products, engage with their customers, and navigate the complex regulatory environment. Bravura’s business was hurt by pandemic-related project deferrals that persisted longer than expected, resulting in a number of revisions to financial guidance. Then, in early November, the company announced the need for additional investments that resulted in a significant downward revision to financial guidance and cash flow expectations, which in turn led to a 50%+ decline in its share price. The update was especially disappointing because a subsequent call with the new CEO pointed to inaccuracies in prior management’s communication, specifically around undisclosed and material customer losses. We promptly exited our position as a result. U.K.-based Marlowe provides a wide range of services and related software products such as testing and certification of fire safety systems, HR compliance and e-learning software, and audits to ensure compliance with environmental regulations. In November, Marlowe published first half results that showed revenue growth and margin improvement that nonetheless led to a sell-off, as the market found fault with Marlowe’s cash generation: The company booked working capital outflows, mostly caused by timing issues that will unwind in 2023, and higher one-off restructuring costs. We see these elevated costs as temporary and expect cash generation to normalize, particularly as management has suggested the pace of M&A may moderate moving forward in the uncertain macro environment. More important, we do not believe these issues impair Marlowe’s long-term value creation pathway.

The top contributor in 2022 was Canada’s LifeWorks, which provides employee well-being solutions through an integrated platform that includes confidential counselling, employee engagement tools, perks, and health programs. LifeWork’s services are proven to boost productivity and reduce absenteeism, producing a strong customer benefit. We also liked that, despite this strong customer benefit, its services cost just $2-4 per employee per month, resulting in a loyal customer base. In June 2022, LifeWorks received an acquisition offer from Telus, a large communication services company, at a significant premium. Boa Vista Servicos—the Equifax of Brazil—is one of the leading credit bureaus in the country. Its solutions are a relatively low-cost but important part of customers’ operations, and Boa Vista serves more than 130,000 customers with no single customer accounting for more than 10% of revenue. In December, Boa Vista received a take-out offer from Equifax representing an 89% premium to the last close. We saw the likelihood of a rival bid emerging as low and sold some of our position to take advantage of the price appreciation.

The portfolio’s disadvantage versus its benchmark came from both stock selection and sector allocation in 2022. Stock selection in Industrials, stock picks and a substantial underweight in Financials, and stock selection in Materials made the biggest negative impacts versus the benchmark. Conversely, our cash holdings, stock picks and a significantly lower weighting in Consumer Discretionary, and stock selection in Health Care all contributed most to relative results in 2022.

Top Contributors to Performance 20221 (%)

Boa Vista Servicos0.38
AIA Engineering0.26

1 Includes dividends

Top Detractors from Performance 20222 (%)

Bravura Solutions-1.72
XP Power-1.27

2 Net of dividends

Current Positioning and Outlook

We note that the aggregate key operating metrics of the Fund’s holdings—high returns on invested capital (ROIC), low debt, and strong trailing growth rates—remain both robust and remarkably similar to what they were at the onset of 2022, despite the year’s highly difficult economic and geopolitical backdrop. We believe our holdings continued to create substantial shareholder value. What has materially changed, though, is valuation. Over the course of the year, the multiple the market was willing to pay for the high-quality companies we hold fell by roughly 35%. Our disappointing absolute performance, then, was primarily driven by the rapid increase in interest rates around the world, which led to significant multiple contraction. The market also tended to favor shorter-term beneficiaries of higher rates and/or the inflation they were targeted to tame—such as banks, energy, and raw materials. So, while our cash generative, low debt companies with pricing power have coped operationally well with higher rates and other increased costs, the market looked elsewhere in 2022. As long-term investors, of course, we will stick to our knitting and have therefore been working to take advantage of long-run investment opportunities.

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

International Premier 13.25-27.21-27.21-3.770.866.185.36

Annual Operating Expenses: Gross 1.59 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, 2023.

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: LifeWorks was 0.0%, Boa Vista Servicos was 1.5%, TOTVS was 0.0%, Loomis was 2.1%, AIA Engineering was 0.0%, Bravura Solutions was 0.0%, Marlowe was 1.8%, GVS was 1.0%, XP Power was 1.8%, Restore was 2.6%.

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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