Royce Pennsylvania Mutual Fund Manager Commentary
article 12-31-2020

Royce Pennsylvania Mutual Fund Manager Commentary

While our flagship portfolio underperformed the Russell 2000 Index for 2020, the Fund maintained its advantages for the five-, 20-, 25-, 30-, 35-, and 40-year periods ended 12/31/20.

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Fund Performance

After beating its small-cap benchmark in each of the four previous calendar years, our flagship portfolio Royce Pennsylvania Mutual Fund fell behind the Russell 2000 in 2020, advancing 14.1% versus 20.0% for its small-cap benchmark. The Fund held on to certain long-term relative advantages, beating the Russell 2000 for the five-, 20-, 25-, 30-, 35-, and 40-year periods ended 12/31/20. Penn’s average annual total return for the 45-year period ended 12/31/20 was 13.7%, all under the portfolio management of Chuck Royce.

What Worked… And What Didn’t

Seven of the portfolio’s 10 equity sectors finished 2020 in the black. Information Technology led by a large margin, followed by notably positive contributions for Health Care and Materials. Energy led the three sectors that detracted, followed by Financials and Real Estate. At the industry level, the top three contributors came from Information Technology: semiconductors & semiconductor equipment, software, and electronic equipment, instruments & components. Conversely, energy equipment & services (Energy) detracted most for the year, followed by banks and the thrifts & mortgage finance group, which are both in Financials.

The portfolio’s top-contributing position for 2020 was e-commerce retailer Etsy, which focuses on handmade or vintage items and craft supplies. Its business was growing at a steady pace prior to 2020, but revenues reached triple-digit rates in 2020’s fiscal second quarter and stayed enviably high in the third quarter. While much of its sales were attributable to face masks, the company also had success with several other major categories in 2020, including apparel, personal care, and homewares. Next came Alamos Gold, a Canadian gold mining company with operations at the development stage in Canada, Mexico, Turkey, and the U.S. Its stock began to recover in March and was later supported by improved fiscal third-quarter revenues and earnings as the company held the line on costs and enjoyed a sizable increase in its realized sales price of gold. We also like that Alamos paid off all of its debt in 2020 and increased its dividend, though we trimmed our stake as its price rose.


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Offshore transport solutions specialist SEACOR Marine Holdings detracted most at the position level. In May, the company reported that it was anticipating a significant negative impact on revenues through the rest of 2020 as a result of the pandemic, which, along with plummeting oil and gas prices, greatly reduced demand for its services. We opted to sell our position in May. Another significant detractor, G-III Apparel Group sells outerwear and sportswear, has licensing agreements with several sports leagues and universities, and operates retail stores. Faced with rapidly declining sales in this last segment, the company has been restructuring operations, permanently closing Wilsons Leather and G.H. Bass stores. Uncertain about its ability to rebound, we sold our shares between April and August.

Relative to the Russell 2000, the Fund’s disadvantage in 2020 came solely from stock selection—sector allocation decisions were additive. However, our lower weighting in Health Care, along with a lower impact from poor stock picks, hurt relative results most on a sector basis. The portfolio’s very low weighting in biotechnology, a stalwart performer within the index, was a major source of underperformance in Health Care. Ineffective stock selection hindered relative performance in Industrials—where our higher weighting was a positive—as well as in Consumer Discretionary, where our lower exposure hurt.

Conversely, stock picking in Financials had an appreciably positive effect, bolstered by our lower weighting in this lagging sector—especially in the underperforming banks group. The Fund’s low weighting in Real Estate, another lagging sector within the Russell 2000, helped as well, as did our stock selection in the sector (albeit to a lesser degree). The portfolio’s lack of exposure to Utilities provided another advantage versus the benchmark.


Top Contributors to Performance 20201 (%)

Etsy1.03
Alamos Gold Cl. A0.95
PAR Technology0.79
Bandwidth Cl. A0.78
Trupanion0.66

1 Includes dividends

Top Detractors from Performance 20202 (%)

SEACOR Marine Holdings-0.74
G-III Apparel Group-0.59
Genworth MI Canada-0.59
Webster Financial-0.56
TGS-NOPEC Geophysical-0.54

2 Net of dividends

Current Positioning and Outlook

The positive news on vaccines was the critical element in the recent small-cap surge. The reality of vaccines has allowed investors to see past the current economic uncertainty to a tangible return to something like normal. These very encouraging developments seem to have led them to take a fresh look at those companies, particularly in more cyclical areas, that had been relatively neglected for the last few years. Many of these companies should receive an additional boost from ongoing monetary and fiscal stimulus, in particular from the anticipated increase in the latter. These measures will only add to the strength of the global economy, which was beginning to accelerate before the pandemic. Our outlook for cyclicals in 2021 and 2022 is therefore brighter than it was at the beginning of last year. Following the vaccine roll-out, all of these developments should support higher growth rates than we were looking for a year ago. However, growth is likely to be unevenly distributed—and that is where we think active managers can offer an edge. The ability to recognize patterns, understand industry dynamics, and evaluate management teams should all prove crucial in such a climate.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 30YR 45YR
Pennsylvania Mutual 27.1414.0814.08 9.26 13.90 9.61 8.18 9.92 11.26 13.68
Russell 2000 31.3719.9619.96 10.25 13.26 11.20 8.91 8.74 10.96 N/A

Annual Operating Expenses: 0.95

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: Etsy was 0.5%, Alamos Gold Cl. A was 0.9%, PAR Technology was 0.9%, Bandwidth Cl. A was 0.6%, Trupanion was 0.0%, SEACOR Marine Holdings was 0.0%, G-III Apparel Group was 0.0%, Genworth MI Canada was 0.4%, Webster Financial was 0.0%, TGS-NOPEC Geophysical 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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