Royce Micro-Cap Trust Manager Commentary
article 02-22-2024

Royce Micro-Cap Trust Manager Commentary

The Fund advanced 16.6% on an NAV (net asset value) basis and 15.9% on a market price basis in 2023, versus respective gains of 16.9% and 9.3% for its primary unleveraged benchmark, the small-cap Russell 2000 Index and its secondary benchmark, the unleveraged Russell Microcap Index, for the same period.


Fund Performance

Royce Micro-Cap Trust (RMT) advanced 16.6% on an NAV (net asset value) basis and 15.9% on a market price basis in 2023, versus respective gains of 16.9% and 9.3% for its primary unleveraged benchmark, the small-cap Russell 2000 Index and its secondary benchmark, the unleveraged Russell Microcap Index, for the same period. The Fund beat the Russell 2000 on both an NAV and market price basis for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (12/14/93) periods ended 12/31/23.

What Worked… And What Didn’t

Eight of the Fund’s 11 equity sectors made positive contributions to performance in 2023, with the biggest coming from Industrials, Information Technology, and Energy, while the detractors were Communication Services, Consumer Staples, and Real Estate. The biggest contributors at the industry level were semiconductors & semiconductor equipment (Information Technology), machinery, and trading companies & distributors (both in Industrials). Communications equipment (Information Technology), entertainment (Communication Services), and professional services (Industrials) were the biggest detractors.

The top contributor at the position level was CIRCOR International, which makes pumps, valves, and other flow-control products for the aerospace & defense, chemicals, and refineries industries. The company agreed to be acquired by KKR in June at a roughly 50% premium before a second suitor made a better offer later that month. KKR then upped its price, which sent CIRCOR’s shares soaring. In October, CIRCOR announced the successful completion of its acquisition by KKR. Camtek manufactures metrology and inspection tools for the semiconductor equipment industry. Its Advanced Packaging segment has been benefiting from the shrinking line widths of semiconductors and the corresponding need to stack many semiconductors together to drive improved performance. This phenomenon is even more acute for semiconductors being developed for AI applications, where Camtek is beginning to see significant orders. Transcat provides accredited calibration, repair, inspection and laboratory instrument services and distributes professional grade handheld test, measurement, and control instrumentation. The company continued to execute on its automation and process improvement initiatives while demand in its distribution business remained robust.

RMT’s top detractor in 2023 was Clearfield, which provides equipment and cable products principally to more rural cable companies. It has been hurt by inventory corrections as supply chains have normalized post Covid. Mesa Laboratories develops and manufactures electronic measurement instruments for industrial and hemodialysis customers. Its shares fell in 2023’s first half on currency headwinds across the company’s divisions, slower biopharmaceutical spending that affected its Biopharmaceutical Development Division, a significant decrease in Covid-driven revenues, and the loss taken in its high-margin Sema4 business, which is part of Mesa’s Clinical Genomics division. Later in the year, Mesa reported disappointing results due to sluggish capital equipment orders in its biopharmaceutical vertical and a key customer loss in its Clinical Genomics division. Confident that its business can rebound, we added shares in 2023. Chicken Soup for the Soul Entertainment produces and distributes video content. The hoped for spikes in DVD rental activity never materialized in 2023, and its streaming video business also disappointed. We trimmed our position substantially in 2023’s second half.

The Fund’s advantage over the Russell 2000 in 2023 came from our sector allocation decisions. At the sector level, stock selection in Industrials (along with a smaller impact from our higher weighting) and Energy (helped by our lower weighting), along with having virtually no exposure to Utilities helped relative results most. Conversely, stock selection in Communication Services and Financials, as well as both stock selection and a lower weight in Consumer Discretionary, detracted most from relative results.

Top Contributors to Performance 20231 (%)

CIRCOR International1.91
PAR Technology1.08
Dorian LPG0.91

1 Includes dividends

Top Detractors from Performance 20232 (%)

Mesa Laboratories-0.82
Chicken Soup for the Soul Entertainment Cl. A-0.54
B. Riley Financial-0.51

2 Net of dividends

Current Positioning And Outlook

As 2023 drew to a close, investors became more hopeful that the Fed had reached the end of its tightening cycle and may be on the verge of cutting rates in 2024. We view financial liquidity as a key element of micro-cap performance, which could be seen in 4Q23’s strong results. Although we believe we have not yet seen the full lagged impact of the Fed’s tightening cycle, the U.S. economy remains fairly resilient and inflationary pressures have eased as supply chains have normalized from Covid related disruptions. In spite of lingering macro uncertainty, we remain upbeat on the intermediate to long-term opportunities for companies in our domestically focused portfolio. Key among these is the ongoing trend towards re-industrialization of the U.S. economy, which we believe is being driven by a desire to shorten supply chains as well as an increasing realization of the strategic importance of domestic semiconductor manufacturing. The increased fiscal spending on domestic infrastructure projects is also just beginning to take hold, which we expect to provide tailwinds to many of our companies in the near to intermediate term.

Average Annual Total Returns Through 12/31/23 (%)

RMT 14.3515.8615.865.9013.908.0313.278.5210.2210.07
XOTCX (NAV) 12.5716.6416.644.9313.588.1613.248.9010.2110.65
Russell Microcap 16.069.339.330.618.565.7910.656.39N/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 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, 2023, 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, 2023 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 12/31/23, the percentage of Fund assets was as follows: CIRCOR International was 0.0%, Camtek was 1.8%, Transcat was 2.9%, PAR Technology was 2.4%, Dorian LPG was 0.7%, Clearfield was 0.3%, Mesa Laboratories was 1.8%, Chicken Soup for the Soul Entertainment Cl. A was 0.0%, Cutera was 0.0%, B. Riley Financial was 0.8%.

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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