Royce Micro-Cap Trust Manager Commentary
article 12-31-2021

Royce Micro-Cap Trust Manager Commentary

The Fund not only outpaced its underleveraged small cap benchmarks on an NAV (net asset value) and market price basis in 2021, but it also beat both indexes on a NAV basis for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (12/14/93) periods ended 12/31/21.


Fund Performance

Royce Micro-Cap Trust (RMT) rose 19.2% on an NAV (net asset value) basis and 22.8% on a market price basis in 2021 versus respective gains of 14.8% and 19.3% for its unleveraged small-cap benchmarks, the Russell 2000 and the Russell Microcap Indexes, for the same period. On an NAV basis, RMT beat both the Russell 2000 and the Russell Microcap for the 3-, 5-, 10-, 15-, and 20-year periods while also beating the Russell 2000 for the 25-year and since inception (12/14/93) periods ended 12/31/21. In addition, the Fund beat both benchmarks based on market price for all of these applicable periods save the 15-year span. The Fund's average annual NAV total return for the since inception period ended 12/31/21 was 11.6%.

What Worked… And What Didn't

Ten of the portfolio's 11 equity sectors made a positive impact on calendar-year performance, led by Industrials, Information Technology, and Consumer Discretionary. The only negative impact came from Communication Services while Utilities and Real Estate-two of RMT's lowest weightings-made the smallest contributions. At the industry level, semiconductors & semiconductor equipment (Information Technology), trading companies & distributors (Industrials), and energy equipment & services (Energy) contributed most in 2021 while two areas in Information Technology-electronic equipment, instruments & components and software-as well as biotechnology (Health Care) were the three largest detractors.

At the position level, the Fund's top contributor was Transcat, which distributes test and measurement instruments and provides accredited calibration services for use across a diverse range of industries. Its shares rose more or less steadily during 2021, thanks to rising revenues and earnings in both its Distribution and Services segments. The former rebounded nicely in 2021. We see a number of attractive attributes in the company, including its niche, its conservatively capitalized balance sheet, its active M&A pipeline, and what we think are sustainable gross margins in its Service segment. The next top contributor was AutoCanada, a North American automobile business that sells multiple brands and operates 50 franchised dealerships in Canada and Illinois. In early May, the company reported record-setting revenue and earnings along with a ninth consecutive quarter of outracing the Canadian new vehicle retail market. In November, AutoCanada announced record third-quarter revenue driven by strong performance in its used vehicle, Finance & Insurance, and U.S. operations, along with an improved outlook for ongoing demand.

The Fund's biggest detractor was Upland Software, which provides cloud-based enterprise work management software. Its shares fell on mixed revenue performance following outsized presidential election-related growth in 2020 and disappointing execution of the transition of its go-to-market strategy. Profit margins contracted as the company sustained elevated investments in advance of an improvement in revenue productivity. Although we still appreciate much about its strategic allocation of capital, these factors led us to substantially reduce our position in the fourth quarter. The next biggest detractor was nLight, which designs and manufactures semiconductor laser products. While revenues have been strong and the company carries little debt, declines in net income as well as some exposure to both China and the recovering aerospace & defense industry appeared to keep investors selling through most of 2021. We trimmed our stake earlier in the year.

The portfolio's advantage over the Russell 2000 came almost equally from stock selection and sector allocation decisions in 2021. RMT's underweight in Health Care, along with savvy stock picking, helped most on the sector level as this sector was the biggest detractor within the Russell 2000. We also benefited from effective stock selection in Information Technology and our overweight in Energy, the latter one of the strongest sectors within small-cap in 2021. Conversely, stock picking and our lower weighting in both Real Estate and Financials detracted from relative results in 2021, as did stock picking in Communication Services.

Top Contributors to Performance 20211 (%)

Onto Innovation1.18
Aspen Aerogels0.89

1 Includes dividends

Top Detractors from Performance 20212 (%)

Upland Software-0.67
CIRCOR International-0.43
PAR Technology-0.40
Zealand Pharma-0.34

2 Net of dividends

Current Positioning And Outlook

Our outlook is very positive for small- and micro-cap value but is more nuanced for each asset class taken as a whole. The Russell 2000 enjoyed a third consecutive year of double-digit positive returns in 2021, which is rare for any equity index. It's happened only twice before since the inception of the Russell 2000 in 1979-from 1991-1993 and 1995-1997. In each instance, a fourth year of double-digit positive performance failed to materialize. We always place a lot of weight on history, and this pattern, along with a less accommodative Fed, makes us think that performance for the Russell 2000 will be more muted in 2022. History also tells us, however, that small- and micro-cap value and cyclical stocks do well, particularly on a relative basis, during periods of improving economic growth-which is consistent with the encouraging signs we've been seeing on a company-by-company basis. Micro-cap stocks began the year with very strong returns before struggling through the second half of 2021-which has created opportunities in many sectors. We are particularly optimistic about long-term opportunities in technology, where supply chain consolidation has allowed certain names to secure greater market share in a growing, high-demand sector.

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

RMT 3.7622.7822.7825.6116.1714.327.3110.6610.96 12/14/93
XOTCX (NAV) 3.1419.1719.1724.9215.1814.389.0310.6811.58 12/14/93
Russell Microcap -2.6619.3419.3420.9011.6913.627.519.04N/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 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, 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: Transcat was 2.1%, AutoCanada was 1.9%, Onto Innovation was 2.2%, Aspen Aerogels was 1.3%, Clearfield was 0.9%, Upland Software was 0.3%, nLIGHT was 1.2%, CIRCOR International was 1.0%, PAR Technology was 2.5%, Zealand Pharma was 0.6%

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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