Royce Pennsylvania Mutual Fund Manager Commentary
article 12-31-2021

Royce Pennsylvania Mutual Fund Manager Commentary

The Fund not only outpaced its benchmark for 2020, but it also held its advantage over the Russell 2000 for the 3-, 5-, 20-, 25-, 30-, 35-, 40-year periods ended 12/31/21. The Fund’s 45-year average annual total return for the period ended 12/31/21 was 13.2%.

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Fund Performance

Our flagship, Royce Pennsylvania Mutual Fund, advanced 22.0% in 2021, outperforming its small-cap benchmark, the Russell 2000 Index, which was up 14.8% for the same period. In addition to its calendar-year advantage, the Fund beat the Russell 2000 for the 3-, 5-, 20-, 25-, 30-, 35-, 40-year periods ended 12/31/21, all under the management of Chuck Royce. The Fund’s 45-year average annual total return for the period ended 12/31/21 was 13.2%.

What Worked… And What Didn’t

Nine of the portfolio’s 10 equity sectors made a positive impact on calendar year performance. The sectors making the largest positive contributions were Industrials, Information Technology, and Financials while the only negative impact came from Communication Services. Health Care and Energy made the smallest positive contributions to 2021’s performance. At the industry level, semiconductors & semiconductor equipment (Information Technology), banks (Financials), and machinery (Industrials) contributed most in 2021 while software (Information Technology), health care equipment & supplies (Health Care), and diversified telecommunication services (Communication Services) were the largest detractors.

At the position level, the Fund’s top contributor was Kulicke & Soffa Industries, which primarily supplies equipment for semiconductor wire bonding assembly and other capital equipment. The proliferation of demand for semiconductors is accelerating growth for Kulicke’s bonder equipment, in particular because 80% of the world’s semiconductor packages use wire bonding, while its new product innovations in advanced display and electronics have broadened its overall addressable market and improved its gross margin mix. Triumph Bancorp was our second largest contributor. Through most of 2021, the market’s recognition of the bank’s fintech expertise validated our original investment thesis. Triumph has developed a payment platform that is changing how payments and invoices are handled in the trucking industry. This platform will better connect carriers, shippers, factoring companies, and freight brokers in a way that allows much more efficient handling of invoices and other payments. The robust market for trucking, in terms of the spot prices that drive Triumph’s 

revenue, led to an outstanding year in its core receivables factoring business, which allows companies to sell invoices for cash advances. While our long-term confidence is strong, returns for the payment platform may have been pulled forward, a concern that led us to trim our position.


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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. We chose to sell our entire stake in SmileDirectClub, which manufactures clear aligners and braces. Achieving profitably and meeting its revenue targets became a longer-term issue than we were willing to accept, especially after the company removed profit guidance in August. It was also struggling with customer acquisition, which was hampered both by changes to Apple’s iOS privacy policy and inflationary pressures that hit hard on the spending of its low-to-middle income consumer demographic.

The portfolio’s advantage over its benchmark was primarily attributable to sector allocation in 2021, with our significant underweight in Health Care helping most on the sector level as that sector was the biggest detractor within the Russell 2000. We also benefited from both our higher exposure and savvy stock selection in Industrials, and primarily from the latter factor in Information Technology. Conversely, our underweight in Energy, which was strong within the Russell 2000, hurt relative results, as did the Fund’s cash position. Successful stock selection was not enough to outweigh the negative impact of our overweight in Materials, which also detracted from relative results in 2021.


Top Contributors to Performance 20211 (%)

Kulicke & Soffa Industries0.70
Triumph Bancorp0.61
First Citizens BancShares Cl. A0.56
Builders FirstSource0.50
SiTime Corporation0.47

1 Includes dividends

Top Detractors from Performance 20212 (%)

Upland Software-0.50
SmileDirectClub Cl. A-0.36
Bandwidth Cl. A-0.33
Haemonetics Corporation-0.27
Trean Insurance Group-0.21

2 Net of dividends

Current Positioning and Outlook

Our outlook is very positive for small-cap value but is more nuanced for small-cap 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-cap value and cyclicals 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. We also are optimistic of the relative performance outlook for high quality stocks—which we primarily define as companies with high returns on invested capital and stable returns on assets. We think the Fund’s combined focus on high-quality and value should be supportive for attractive returns, particularly relative to its benchmark.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 30YR 45YR
Pennsylvania Mutual 7.0022.0522.05 20.78 13.10 12.30 8.62 10.09 10.97 13.18
Russell 2000 2.1414.8214.82 20.02 12.02 13.23 8.69 9.36 10.07 N/A

Annual Operating Expenses: 0.92

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, 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: Kulicke & Soffa Industries was 1.1%, Triumph Bancorp was 0.9%, First Citizens BancShares Cl. A was 1.3%, Builders FirstSource was 0.9%, SiTime Corporation was 0.5%, Upland Software was 0.1%, SmileDirectClub Cl. A was 0.0%, Bandwidth Cl. A was 0.0%, Haemonetics Corporation was 0.6%, Trean Insurance Group was 0.2%..


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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