Royce Micro-Cap Trust Manager Commentary
article 12-31-2019

Royce Micro-Cap Trust Manager Commentary

We were pleased with the Fund’s performance in 2019, and we believe the current backdrop looks favorable for solid to strong micro-cap performance over the coming year.


Fund Performance

Royce Micro-Cap Trust (“RMT”) advanced 22.4% on an NAV (net asset value) basis and 24.8% based on market price compared to respective gains of 22.4% and 25.5% for RMT’s unleveraged benchmarks, the Russell Microcap and Russell 2000 Indexes, for the same period. The Fund also outpaced the Russell Microcap on an NAV and market price basis for the three- and 15-year periods ended 12/31/19 while beating the micro-cap index on a market price basis for the 10-year period as well.

What Worked… And What Didn’t

Ten of RMT’s 11 equity sectors finished 2019 in the black, with its two largest—Information Technology and Industrials—making the biggest positive impact, followed by Health Care. Communication Services was the only sector that detracted from 2019 results while the smallest contributions came from Utilities and Real Estate. At the industry level, semiconductors & semiconductor equipment (Information Technology) had an outsized positive effect despite not having a single holding among the Fund’s top five contributors. Machinery (Industrials) and metals & mining (Materials) also made notable positive contributions while the most significant detractors at the industry level were media and interactive media & services (both in Communication Services), followed by textiles, apparel & luxury goods (Consumer Discretionary).

The Fund’s top contributor was CIRCOR International, a machinery company that makes precision valves. Its shares rose sharply after it received a takeover offer from a larger industrial company in May, which was rescinded in July. The company then reported favorable results in August, driven by new and existing platform growth across both its defense and commercial business sectors as well as margin expansion from volume, price, and low cost manufacturing initiatives. Zealand Pharma, which focuses on developing peptide-based therapeutics for metabolic and gastrointestinal diseases, was another notable contributor. The company’s two latest stage products targeting short bowel system and hypoglycemia in diabetics had positive results during the year. Zealand Pharma also completed its first ever acquisition, buying Encycle Therapeutics in October. National Research provides survey-based performance measurement, analysis, and tracking services to the healthcare industry. High demand helped to increase sales, keep earnings steady, and allow for an optimistic outlook for 2020.

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The biggest detractor at the position level was comScore, which provides digital marketing intelligence that helps its customers make business decisions and implement digital strategies. The firm faced accounting issues that led to two shakeups in upper management before the firm announced in August that it was exploring strategic alternatives to maximize shareholder value, including the potential sale of the company. The possibility of a profitable acquisition informed our decision to hold our shares at year-end. Red Lion Hotels was hurt in its efforts to transition from company-owned hotels to a franchise model. Selling its company-owned units took longer than anticipated, and Red Lion experienced greater-than-expected attrition in its newly acquired franchisees—factors that led us to begin reducing our position in November. Shares of biotech company Zafgen have yet to recover from a November 2018 FDA decision to put its major drug on a clinical hold amid safety concerns.

Relative to the Russell 2000, both stock selection and sector allocation hampered performance, with the first having the greater negative impact. Ineffective stock picks in Communication Services and Consumer Discretionary hurt most, while the Fund’s cash position also hindered results. At the industry level, poor stock picks in the media group (Communication Services) detracted most by a wide margin, followed by capital markets (Financials)—where stock selection had the biggest negative impact—and health care equipment & supplies (Health Care), where both our underweight and stock picks detracted. Conversely, savvy stock selection drove relative outperformance in the Energy, Information Technology, and Materials sectors. Successful stock picking in the oil, gas & consumable fuels group (Energy) and our greater exposure to semiconductors & semiconductor equipment (Information Technology) helped most versus the Russell 2000 at the industry level, as did better stock picking in metals & mining (Materials).

Top Contributors to Performance 20191 (%)

CIRCOR International1.10
Zealand Pharma1.07
National Research0.60
Impala Platinum Holdings Limited0.60
Solium Capital Inc.0.55

1 Includes dividends

Top Detractors from Performance 20192 (%)

Red Lion Hotels-0.43
Infrastructure and Energy Alternatives-0.36
YGM Trading Limited-0.25

2 Net of dividends

Current Positioning And Outlook

The backdrop looks quite favorable to us for solid to strong micro-cap performance in the months ahead. We have previously cited four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and ample access to capital. Each of these remains present and suggests that micro-cap returns can go higher. We see a global economy that’s showing signs of renewed life, an ISM Manufacturing Index that’s been incrementally rising (despite December’s setback), and, most important, valuations that range from reasonable to attractive among the many cyclical areas that we typically like best. Our focus has been on those areas that either didn’t participate in 2019’s upswing or trailed significantly, including several cyclical stocks at the larger end of our selection universe, an area that lagged meaningfully prior to 2019’s fourth quarter.

Average Annual Total Returns Through 12/31/19 (%)

RMT 8.2424.8224.8210.056.4711.836.3110.299.88 12/14/93
XOTCX (NAV) 9.5322.4422.448.396.5211.067.609.8410.53 12/14/93
Russell Microcap 13.4522.4322.436.396.5711.266.16N/AN/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.

Closed-End Funds are registered investment companies whose shares of common stock may trade at a discount to their net asset value. Shares of each Fund's common stock are also subject to the market risks of investing in the underlying portoflio securities held by each Fund, respectively. Royce Fund Services, LLC ("RFS") is a member of FINRA and may file this material with FINRA on behalf of each Fund. RFS is not an underwriter or distributor of the closed-end funds.

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, 2019, 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, 2019 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 12/31/19, the percentage of Fund assets was as follows: CIRCOR International was 0.8%, Zealand Pharma was 1.3%, National Research was 0.8%, Impala Platinum Holdings was 0.0%, Solium Capital was 0.0%, comScore was 0.4%, Red Lion Hotels was 0.3%, Zafgen was 0.1%, Infrastructure and Energy Alternatives was 0.2%, YGM Trading was 0.3%

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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