Royce Micro-Cap Trust Manager Commentary
article 02-21-2025

Royce Micro-Cap Trust Manager Commentary

Royce Micro-Cap Trust (RMT) advanced 13.5% on an NAV (net asset value) basis and 14.2% based on its market price in 2024 versus a gain of 11.5% for the Russell 2000 Index for the same period. The Fund also beat the Russell 2000 on both an NAV and market price basis for the 3-, 5-, 10-, 15-, 20-, 25-, 30-year, and since inception (12/14/93) periods ended 12/31/24.

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Fund Performance

Royce Micro-Cap Trust (RMT) advanced 13.5% on an NAV (net asset value) basis and 14.2% based on its market price in 2024 versus a gain of 11.5% for its benchmark, the small-cap Russell 2000 Index, and an increase of 13.7% for its benchmark, the Russell Microcap Index, for the same period. RMT also beat the Russell 2000 on both an NAV and market price basis for the 3-, 5-, 10-, 15-, 25-, 30-year, and since inception (12/14/93) periods ended 12/31/24.

What Worked… and What Didn't

Nine of the portfolio’s 11 equity sectors contributed to calendar-year performance, led by Industrials, Information Technology, and Financials. The only negative impacts came from Utilities and Real Estate, while Materials made the smallest positive impact. At the industry level, construction & engineering (Industrials), capital markets (Financials), and electronic equipment, instruments & components (Information Technology) contributed most in 2024, while specialty retail (Consumer Discretionary), trading companies & distributors and professional services (both in Industrials), detracted the most.

The Fund’s top contributing position was IES Holdings, which provides critical infrastructure and electrical services to several end markets. IES’s thoughtful consolidation strategy focused on accretive acquisitions that management can leverage across its existing infrastructure efforts has led to an almost fourfold increase in EBITDA over the past couple of years. Cellebrite DI offers digital intelligence solutions for law enforcement, governments, and the enterprise market. The company reported strong 3Q24 results in November when it also announced a new partnership with Amazon Web Services and a patent for Remote Mobile Collection, which equips corporate investigators with immediate, targeted remote data collection. PAR Technology is a leader in enterprise restaurant technology, offering a best-in-class product suite that generates revenue streams diversified across several platforms including Subscription Services, Guest Engagement, Operator Solutions, Back-Office Solutions, Hardware, and Professional Services. The enterprise end-market among restaurant customers is increasingly moving away from complex point solutions and/or costly internally developed technology, a move that benefits PAR’s broad and integrated cloud platforms. In 2024, the company showcased remarkable sales momentum with both new brand and location wins, as well as expansion with existing customers, most notably, Burger King and Wendy’s.

RMT’s biggest detractor at the position level was Quanterix Corporation, which offers a digital immunoassay platform for research and in-vitro diagnostics. Its shares fell sharply in March due to the FDA’s concerns about another company’s similar technology. Second-quarter results released in August showed net losses and revised guidance. Both of these developments influenced our decision to exit the position. Luna Innovations provides advanced optical technology for test and measurement applications. The company ran into accounting issues that kept it from filing financial statements, resulting in being delisted from Nasdaq (and now trading on the OTC Market). While disappointed, we maintained a small position as we believe its products have immense technological value. Forrester Research is a subscription-based information technology research company geared toward helping businesses maximize the use of emerging technologies. Declines in IT spending during 2023, as well as Forrester’s ongoing change to its go-to-market strategy, which includes culling smaller clients and retraining its existing sales force, weighed on contract value and sales growth in 2024. Although the pace of progress is testing investor patience, we acted in a contrarian fashion by adding shares in 2024.

The Fund’s advantage over the Russell 2000 in 2024 came from both sector allocation decisions and stock selection. At the sector level, stock selection and, to a lesser extent, our higher weighting in Industrials, stock selection in Communication Services, and both stock selection and our lower exposure to Health Care did most to boost relative performance. Conversely, stock selection and a lower exposure to Financials, a higher weighting and stock selection in Materials, and our lower exposure to Consumer Staples (where our stock selection was additive) hurt relative results the most.


Top Contributors to Performance For 20241

IES Holdings
Cellebrite DI
PAR Technology
Applied Optoelectronics
Universal Technical Institute

1 Includes dividends

Top Detractors from Performance For 20242

Quanterix Corporation
Luna Innovations
Forrester Research
AutoCanada
Arcturus Therapeutics Holdings

2 Net of dividends

Current Positioning And Outlook

With the election over, we have more clarity on the outlook for fiscal and regulatory policies, which we view as generally positive for equities. We continue to see a significant opportunity set associated with broad macroeconomic trends. We believe the reindustrialization of the U.S. economy and the rapid adoption of AI are providing investment opportunities across the micro-cap universe and inform our overweight positions in Industrials and Information Technology. These opportunities often arise in tangential areas such as the significant increase in power demand associated with AI data centers. These trends fit well with our U.S.-centric microcap universe. Of course, there remain numerous areas of potential volatility outside our control. First among these is the pace of future interest rate cuts, but the outside geopolitical world also remains highly volatile. As always, we will seek to use these periods of volatility to our advantage.

Average Annual Total Returns Through 12/31/24 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 25YR 30YR SINCE INCEPT.
(12/14/93)
RMT 3.7014.1714.173.3711.899.1411.857.6810.6110.8010.20
XOTCX (NAV) 3.5313.4713.473.2311.869.1611.338.6510.2410.9410.74
Russell 2000 0.3311.5411.541.247.407.8210.337.797.559.028.77
Russell Microcap 5.8913.7013.70-1.006.976.779.816.36N/AN/AN/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, 2024, 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, 2024 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 12/31/24, the percentage of Fund assets was as follows: IES Holdings was 0.8%, Cellebrite DI was 1.0%, PAR Technology was 1.4%, Applied Optoelectronics was 1.1%, Universal Technical Institute was 1.6%, Quanterix Corporation was 0.0%, Luna Innovations was 0.3%, Forrester Research was 0.6%, AutoCanada was 0.0%, Arcturus Therapeutics Holdings 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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