Royce Micro-Cap Trust Manager Commentary
article 12-31-2020

Royce Micro-Cap Trust Manager Commentary

The Fund significantly outpaced its benchmarks, the Russell Microcap and Russell 2000 Indexes, on both an NAV (net asset value) and market price basis for the calendar year.

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Fund Performance

Royce Micro-Cap Trust (“RMT”) advanced 33.6% on an NAV (net asset value) basis and gained 29.3% based on market price, outpacing both of its benchmarks, the Russell 2000 and the Russell Microcap Indexes, which returned 20.0% and 21.0%, respectively, for the same period. The Fund also outpaced both indexes on an NAV basis for the three-, five-, 10-, 15-, and 20-year periods ended 12/31/20. In addition, RMT beat both benchmarks based on market price for all of these annualized periods except the 15-year span.

What Worked… And What Didn’t

For the calendar year, 10 of the Fund’s 11 equity sectors finished in the black. Information Technology, the Fund’s largest weighting, led by a wide margin, followed by Health Care and Industrials. Energy was the only sector that detracted, while Utilities and Consumer Staples made the smallest contributions. At the industry level, two of the top contributors were in Information Technology: electronic equipment, instruments & components and semiconductors & semiconductor equipment. Conversely, energy equipment & services and oil, gas & consumable fuels, two industries in Energy, were the largest sources of underperformance for the year.

The top performing security in 2020 was PAR Technology, which provides systems and service solutions for the hospitality industry. Despite the pandemic-driven challenges this industry faced, PAR remained relatively resilient and saw a 3% increase in revenue in 2Q20. The company was also aided by its recently released platform, Brink, which enables curbside pick-up and delivery while also improving back-office operations. Virgin Galactic Holdings, an aerospace and space travel company, was also additive to performance during the calendar year. Not yet profitable, the company still expects to begin commercial space flights in 2021. Although profitability may prove elusive in the next year, the company did win more payload business from NASA in the second half of 2020, which provides a potential source of near-term revenue. Rounding out the top three contributing securities was Arcturus Therapeutics Holdings, a biotech company that performs discovery and development of therapeutics for rare diseases with a focus on RNA. The stock initially surged early in 2020 when the company announced it was working on a single dose coronavirus vaccine. Its shares then advanced again in November on news of more progress for this treatment.


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The worst performing position in 2020 was offshore transport solutions specialist SEACOR Marine Holdings. In May, the company said it was anticipating a significant negative impact on revenues through the rest of 2020 because of the pandemic, which, along with plummeting oil and gas prices, greatly reduced demand for its services. The next biggest detractor was Computer Modelling Group, a Canada-based software company that produces reservoir simulation software for the oil and gas industry. Declining revenues and earnings resulted from the ongoing challenges endured by many companies exposed to the energy industry. Texas-based property & casualty insurer Hallmark Financial Services also detracted from performance as its revenues and earnings have not yet recovered from pandemic-related difficulties for its industry. However, we are confident that it can meaningfully participate in the industry rebound we think is likely to occur in 2021.

Relative to the Russell 2000 Index, performance was driven by savvy stock selection and sector allocation, with the former having a much larger impact. Financials helped most by a large margin due to savvy stock selection and our lower exposure to the sector. Stock picks and our higher weighting in Information Technology were additive, while our lower exposure and effective stock selection were beneficial in Real Estate. On the other hand, ineffective stock picking and lower exposure hurt relative results in Health Care. Relative performance was also hampered by our higher exposure to Energy and ineffective stock selection in Consumer Staples.


Top Contributors to Performance 20201 (%)

PAR Technology2.74
Virgin Galactic Holdings2.39
Arcturus Therapeutics Holdings1.92
Trupanion1.78
Simulations Plus1.69

1 Includes dividends

Top Detractors from Performance 20202 (%)

SEACOR Marine Holdings-1.05
Computer Modelling Group-0.75
Hallmark Financial Services-0.70
Heritage-Crystal Clean-0.62
Pason Systems-0.50

2 Net of dividends

Current Positioning And Outlook

The positive news on vaccines, in our view, was the critical element in the recent small-cap surge. We believe the reality of vaccines has allowed investors to see past the current economic uncertainty to a tangible return to something like normal. These very encouraging developments seem to have led them to take a fresh look at those companies, particularly in more cyclical areas, that had been relatively neglected for the last few years. Many of these companies should receive an additional boost from ongoing monetary and fiscal stimulus, along with an anticipated increase in the latter. We believe these measures will only add to the strength of the global economy, which was beginning to accelerate before the pandemic. Our outlook for cyclicals in 2021 and 2022 is therefore brighter than it was at the beginning of last year. Following the vaccine roll-out, all of these developments should support higher growth rates than we were looking for a year ago. However, growth is likely to be unevenly distributed—and that is where we think active managers can offer an edge. The ability to recognize patterns, understand industry dynamics, and evaluate management teams should all prove crucial in such a climate.

Average Annual Total Returns Through 12/31/20 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
RMT 33.9229.3229.3211.2716.0811.427.5410.9210.54 12/14/93
XOTCX (NAV) 29.5133.6033.6013.0715.7211.509.2310.8711.31 12/14/93
Russell Microcap 31.3920.9620.968.7811.8910.557.348.95N/A N/A

Annual Operating Expenses: N/A

1 Not annualized.

Important Performance, Expense, and Disclosure Information

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at www.royceinvest.com. The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund normally invests in micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss.

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, 2020, 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, 2020 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 12/31/20, the percentage of Fund assets was as follows: PAR Technology was 3.7%, Virgin Galactic Holdings was 0.6%, Arcturus Therapeutics Holdings was 0.7%, Trupanion was 1.4%, Simulations Plus was 1.2%, SEACOR Marine Holdings was 0.1%, Computer Modelling Group was 0.4%, Hallmark Financial Services was 0.1%, Heritage-Crystal Clean was 0.5%, Pason Systems was 0.2%


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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