Royce Opportunity Fund Manager Commentary
article 12-31-2020

Royce Opportunity Fund Manager Commentary

Our theme-based Opportunity Fund performed markedly better than the Russell 2000 Value Index in 2020 while also beating its benchmark for the three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 12/31/20.

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Fund Performance

Royce Opportunity Fund advanced 26.5% in 2020 outpacing its primary benchmarks, the Russell 2000 Value (+4.6%) and the Russell 2000 (+20.0%) Indexes for the calendar year. The Fund’s performance edge in 2020 also helped it to maintain impressive long-term relative advantages. Opportunity outperformed the Russell 2000 Value for the three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 12/31/20 while also outperforming the Russell 2000 for each of these spans except the three- and 10-year periods.

What Worked… And What Didn’t

Eight of the portfolio’s 11 equity sectors were positive contributors to 2020’s performance, with Information Technology, Consumer Discretionary, and Health Care making especially outsized impacts. Energy, Financials, and Utilities each detracted from performance. Semiconductors & semiconductor equipment, a perennially large weighting in Information Technology, led the portfolio’s industry groups, followed by health care providers & services (Health Care), household durables (Consumer Discretionary), and electronic equipment, instruments & components, another industry in Information Technology. Conversely, two groups a piece in Energy and Financials were the top detractors at the industry level: oil, gas & consumable fuels, banks, energy equipment & services, and thrifts & mortgage finance.

Owens & Minor was the top-contributing position for 2020. The company distributes medical and surgical supplies throughout the U.S. It also provides supply chain management, logistics, technology services, and testing and monitoring supplies for diabetics. The company saw high demand in 2020, particularly for its PPE products, while executing effectively. Each of these factors helped Owens & Minor to post significant gains in adjusted net income and revenues. Magnite, the world’s largest independent sell-side advertising platform, provides technology for businesses to monetize their content across all screens and formats, including desktop, mobile, and audio. The market was highly enthusiastic about the company’s success in the growth of OTT, or ‘over the top,’ media, which bypasses the cable, broadcast, and satellite TV platforms that traditionally control or distribute this kind of content. Optoelectronics specialist II-VI was another success in 2020. The company makes lasers and optical components chiefly for telecommunication and data center applications. II-VI reported a positive quarter in May 2020, driven both by new products, such as facial recognition lasers, and higher demand for data communications equipment spurred by the dramatic increase in people working from home. Its shares rose further in November after profits exceeded expectations.


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Car and truck rental specialist Hertz Global Holdings was the biggest detractor at the position level for the year. Our initial analysis showed strong turnaround potential, an evaluation that changed significantly with the outbreak of the coronavirus. The pandemic’s negative impact further exposed the risks of Hertz’s cash-poor balance sheet and its heavy reliance on business at airports. We began to exit our position in the spring before the firm filed for Chapter 11. Astronics Corporation manufactures specialized lighting, control systems, and electronics for aircraft. While we are confident in the long-term prospects for the aerospace industry—increasing our exposure in 2020—we reduced our position in Astronics as its price declined. We also exited our position in retail store operator Stage Stores in January 2020 following poor holiday season sales for most of its outlets in 2019.

For the calendar year, both sector allocation decisions and stock selection contributed to relative outperformance, with the former making the larger positive impact versus the Russell 2000 Value. Both our overweight and effective stock picking in Information Technology gave the Fund a sizable relative advantage, as did our lower exposure and, to a lesser degree, stock selection in Financials. Our larger weighting in Health Care, along with savvy stock picks, also helped. On the other hand, the portfolio’s exposure to Energy, its lower weighting in Consumer Staples, and its cash holdings all hurt relative results in 2020.


Top Contributors to Performance 20201 (%)

Owens & Minor3.14
Magnite1.82
II-VI1.62
Lumber Liquidators Holdings1.39
CareDx1.32

1 Includes dividends

Top Detractors from Performance 20202 (%)

Hertz Global Holdings-1.22
Astronics Corporation-0.86
Stage Stores-0.70
Independent Bank Group-0.68
Cross Country Healthcare-0.66

2 Net of dividends

Current Positioning and Outlook

As we head into 2021, many are crediting liquidity, solely or mostly, for higher prices in stocks, commodities, and a host of other assets. Yet when we closely analyze individual companies and the overall environment, we also see tight inventories, significant pent-up demand in certain end markets, and the possible continuation of better employment numbers, the combination of which paints a brighter picture for small-cap prospects. At the same time, we face a number of less attractive challenges: contentious politics, indiscriminate money printing, and thorny trade issues top the list of risks. As always, we look for stocks that will improve over the life of our investment from the not-so-rosy condition in which we first find them to a better state (and higher price), typically via earnings improvement or recovery. A backdrop that includes better GDP growth, low rates, and ample liquidity should prove helpful in this task.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Opportunity 38.9526.5226.529.0915.4910.479.1310.7312.26 11/19/96
Russell 2000 Value 33.364.634.633.729.658.666.928.549.06 N/A
Russell 2000 31.3719.9619.9610.2513.2611.208.918.748.92 N/A

Annual Operating Expenses: 1.22

1 Not annualized.

Important Performance and Disclosure Information

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

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: Owens & Minor was 0.8%, Magnite was 1.2%, II-VI was 0.7%, Lumber Liquidators Holdings was 0.6%, CareDx was 0.4%, Hertz Global Holdings was 0.0%, Astronics Corporation was 0.0%, Stage Stores was 0.0%, Independent Bank Group was 0.0%, Cross Country Healthcare was 0.5%


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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