Royce International Premier Fund Manager Commentary
article 12-31-2021

Royce International Premier Fund Manager Commentary

We believe that our portfolio holdings will continue to create additional shareholder value with correlated price appreciation in the long run.


Fund Performance

2021 saw Royce International Premier Fund underperform its benchmark after four consecutive years of outperformance. The Fund advanced 5.8% in 2021, trailing its benchmark, the MSCI ACWI ex-USA Small Cap Index, which was up 12.9% for the same period. The Fund beat the benchmark for the 3-, 5-, 10-year, and since inception (12/31/10) periods ended 12/31/21.

What Worked… And What Didn’t

Four of the portfolio’s nine equity sectors made a positive impact on 2021’s performance, led by Industrials, Materials, and Real Estate, while Health Care, Information Technology, and Consumer Discretionary made the largest detractions. The Fund’s top-contributing position in 2021 was IMCD—a leading distributor of specialty chemicals. Based in the Netherlands, IMCD offers more than 40,000 products to a diverse range of industrial and life sciences customers in areas that range from personal care to food and pharmaceuticals. Its shares rose steadily in 2021 and gained nearly 75% for the year. Results for the first nine months of 2021, announced in November, saw strong organic growth stemming from the company’s pricing power (a key attribute in inflationary periods) and ability to gain market share. IMCD also announced 10 acquisitions in 2021, consistent with its proven ability to acquire businesses at attractive prices.

Next came Australia’s Hansen Technologies, which provides billing software and customer care technologies for utilities and the telecom industry. Its shares gained sharply in March on the announcement that it had executed a Master Agreement with Telefonica’s Germany operations before rallying again in June after the company announced it had received an unsolicited proposal to be acquired by private equity firm BGH. The stock then gave back much of those gains when BGH unexpectedly withdrew its proposal in September. As investors then re-focused on the company’s fundamentals, the stock was mostly flat through the rest of the year as sentiment fluctuated between optimism around long-term performance and concerns about cost inflation and the achievement of the company’s short-term organic growth targets.

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The top detracting position was Australia’s Bravura Solutions, which offers software solutions for the wealth management and fund administration industries. Its stock fell by almost 40% from mid-August through the end of the year, triggered by the release of full fiscal year 2021 results that, while in line with management’s guidance, reflected weaker results of “just” mid-teens growth. The company also announced the unexpected retirement of a popular long-time CEO, who was succeeded by the company’s COO. The market’s adverse reaction to his departure was exacerbated by the company’s limited communication about the departure, which followed an earlier management departure and the pending retirement of the company’s CFO. Our call with the company’s outgoing CFO, however, underlined Bravura’s strong ongoing customer retention, M&A pipeline, and positive long-term outlook supported by recovering client demand.

The second biggest detractor was Japan’s OBIC Business Consultants, an accounting software company with a leading market share among small- to medium-sized businesses. OBIC allows these companies to digitize and more efficiently conduct mission critical accounting processes. We suspect that 2021’s underperformance came from profit taking, as the year saw a broad reversal in the Japanese equity market. This reversal was particularly pronounced in the IT sector, where several companies that were in top performers in 2020 wound up correcting in 2021.

In 2021, non-U.S. small-cap companies in the top quintile of leverage underperformed those in the bottom quintile—and our holdings carry little to no debt. As such, our disadvantage came from stock selection in 2021, with the Information Technology, Health Care, and Financials sectors making the most significant negative impact on that basis while Industrials, Consumer Staples, and Real Estate contributed most to relative performance—mostly the result of sector allocation decisions.

Top Contributors to Performance 20211 (%)

Hansen Technologies1.17
Croda International0.97

1 Includes dividends

Top Detractors from Performance 20212 (%)

Bravura Solutions-0.69
OBIC Business Consultants-0.66
TKC Corporation-0.61
NICE Information Service-0.47

2 Net of dividends

Current Positioning and Outlook

During 2021, ultra-low interest rates, substantial asset purchases by central banks, and unprecedented levels of COVID support packages from governments combined to soak financial markets with liquidity. At the same time, we believe the volatile nature of the pandemic continued to affect commerce and social behaviors, providing investors with both the means and the opportunity to bet on shorter-term stock market outcomes. The result, in our view, was a more speculative three-way tug of war between ‘growth at any price,’ ‘cheap re-opening plays,’ and ‘inflation hedges.’ Given that our investment philosophy is rooted in the focus on long-term value creation rather than the pursuit of short-term price appreciation, the market backdrop was difficult, to say the least. While the stock market hasn’t so far, in our view, correctly priced in the value that our portfolio companies created in 2021, we continue to believe that our approach will be rewarded with correlated price appreciation in the long run. Of course, we cannot predict when the market will refocus on ‘mathematics’ rather than ‘thematics.’ However, we do believe that such a moment is long overdue, and that, in the meantime, our companies continue to create additional shareholder value.

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

International Premier -1.465.785.7818.0114.9211.948.96

Annual Operating Expenses: Gross 1.54 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, 2022.

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: IMCD was 1.6%, Hansen Technologies was 2.5%, Croda International was 1.8%, IPH was 3.3%, Marlowe was 1.6%, Bravura Solutions was 2.3%, OBIC Business Consultants was 2.2%, TKC Corporation was 2.9%, GVS was 2.1%, NICE Information Service was 2.0%, BGH Capital was 0.0%, Telefonica 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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