Royce Opportunity Fund Manager Commentary
article 12-31-2019

Royce Opportunity Fund Manager Commentary

Our theme-based Deep Value strategy outperformed its benchmarks in 2019 and did well on an absolute and relative basis in a year when many value stocks underperformed.

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Fund Performance

Royce Opportunity Fund gained 28.2% in 2019, outperforming both the Russell 2000 and Russell 2000 Value Indexes, which were up 25.5% and 22.4%, respectively, for the same period. The Fund also outpaced the value index for the three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 12/31/19 while it beat the Russell 2000 for the 20-year and since inception periods. We were especially pleased that the theme-based Deep Value strategy we use in the portfolio did well on both an absolute and relative basis in a year when many value stocks underperformed.

What Worked… And What Didn’t

Each of the portfolio’s 11 equity sectors finished 2019 in the black. Information Technology and Industrials—its two largest—made the biggest positive contributions to calendar-year performance while the smallest came from Utilities and Real Estate. At the industry level, semiconductors & semiconductor equipment (Information Technology) had an outsized positive impact—without placing a single holding among the portfolio’s five top contributors—followed by machinery (Industrials). The impact of detractors was far more modest, led by energy equipment & services (Energy) and health care technology (Health Care).

Of the portfolio’s four investment themes, we enjoyed the most success in 2019 with holdings in the Turnaround and Undervalued Growth categories, while many in Interrupted Earnings began to do well in the second half of the year. Dorian LPG, a company that owns and operates tankers for liquefied petroleum gas transportation, was the portfolio’s top contributor at the position level. Its success in 2019 was driven by the expansion of U.S. export capacity and increasing demand in Asia from the petro-chemical sector. Dorian looks well-positioned to benefit from growth in the liquefied petroleum gas transportation market, which we think is in its early stages. The downturn in 2018’s fourth quarter gave us an opportunity to build our stake in Forterra, a manufacturer of water and drainage infrastructure pipes and products. Its shares were especially beaten down and therefore looked very attractive to us. Its business improved in concert with robust expansion in the construction industry, and new management was able to raise pricing, both of which helped attract investors to its stock.


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The portfolio’s top detractor in 2019 was Resideo Technologies, which offers home automation solutions, including smart thermostats and security cameras. Initially drawn to Resideo’s position in the growing “smart home” market, we chose to sell our shares in October when the company cut guidance and announced a management change, signs that further convinced us that the company would continue to fare poorly in an intensely competitive industry. We built our stake in KLX Energy Services, which provides mission critical, asset light oilfield services. Weak pricing throughout the oil services industry depressed earnings, but we like its turnaround potential when oil and gas prices rebound.

Relative outperformance was driven entirely by stock selection in 2019—sector allocation was slightly negative. Superior stock selection and our overweight boosted relative results in Information Technology, where our significant exposure to semiconductors & semiconductor equipment stocks was a plus. Savvy stock selection and, to a lesser degree, our overweight in Industrials provided another advantage versus the benchmark. Hurting calendar-year relative performance was poor stock picking in Health Care—one of the top-contributing sectors in the Russell 2000 in 2019. Our lower weighting in Real Estate also hampered relative results as that sector turned in an index-beating performance in 2019. In addition, the portfolio’s cash holdings were a drag on relative results.


Top Contributors to Performance 20191 (%)

Dorian LPG0.87
Forterra0.82
EverQuote Cl. A0.77
Stage Stores0.74
Herc Holdings0.68

1 Includes dividends

Top Detractors from Performance 20192 (%)

Resideo Technologies-0.42
KLX Energy Services Holdings-0.36
Bloom Energy Cl. A-0.31
Tupperware Brands-0.29
Whiting Petroleum-0.24

2 Net of dividends

Current Positioning and Outlook

We have been populating the portfolio with names from almost all sectors that share the dual characteristics of looking both cheap and capable of recovery based on growth catalysts that we have identified. During 2019, we trimmed some positions in the semiconductor and housing areas when share prices were moving beyond our sell targets, though we still have ample exposure to both. We also continue to like the long-term prospects for healthcare companies that can bend the cost curve as we believe this is a secular trend that is reshaping the industry. Examples include Surgery Partners, a firm that manages surgical facilities, physician-partnered hospitals, and diagnostic laboratories; RadNet, which operates outpatient diagnostic imaging centers in California and IntriCon Corporation, an industrial company that makes microelectronic body-worn devices, including insulin pumps and hearing aids. Slumping oil and gas prices have also provided us with buying opportunities in the Energy sector, especially as many exploration & production budgets are being re-set after a reasonably long period of lower spending. Several positions throughout the portfolio look primed for solid returns in 2020 (others, of course, will require more patience). While the list of macro and micro events that could hamper markets remains as long as ever—and thus continues to present us with what we think is advantageous pricing for patient, long-term investors like ourselves—we are optimistic about both the markets and economy in 2020.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Opportunity 9.9328.2128.217.747.0211.097.7710.4311.68 11/19/96
Russell 2000 9.9425.5225.528.598.2311.837.927.598.47 N/A
Russell 2000 Value 8.4922.3922.394.776.9910.566.929.419.25 N/A

Annual Operating Expenses: 1.20

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, 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: Dorian LPG was 1.1%, Forterra was 1.0%, EverQuote Cl. A was 0.3%, Stage Stores was 0.7%, Herc Holdings was 0.9%, Resideo Technologies was 0.0%, KLX Energy Services Holdings was 0.2%, Bloom Energy Cl. A was 0.3%, Tupperware Brands was 0.0%, Whiting Petroleum 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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