Royce Premier Fund Manager Commentary
article 12-31-2020

Royce Premier Fund Manager Commentary

Premier Fund underperformed the Russell 2000 Index for the calendar year but beat the benchmark for the five-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended 12/31/20.


Fund Performance

Royce Premier Fund did well on an absolute basis in 2020, though it lagged its benchmark for the year, advancing 11.5% compared to 20.0% for the Russell 2000 Index, snapping a streak of four consecutive years of beating its benchmark. Relative results over longer-term periods were better as Premier tied its benchmark for the three-year period, while beating the small-cap index for the five-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended 12/31/20. The leadership of low-quality stocks since the market’s mid-March bottom, including those with low returns on equity and/or no earnings, created a difficult environment for the Fund’s high-quality strategy.

What Worked… And What Didn’t

For the full year, the largest sector contributor by far was Information Technology, followed by Health Care, a duo that led seven equity sectors with positive performance. Energy and Real Estate were the only two of the nine sectors where the Fund held investments that posted losses for the year.

Investment information specialist Morningstar was the top individual contributor for the year, though much of its advance came in the fourth quarter when its shares climbed more than 50% after the company reported solid quarterly operating results with expanding operating margins and notable revenue growth from recent acquisitions. We believe Morningstar’s leadership position in providing data, software, and other tools designed to improve investment decision making and serve advisors and financial institutions should only increase with a growing global investment class.

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Quaker Chemical, a global leader in industrial process fluids, followed in second place. Its business was a direct beneficiary of the global industrial recovery toward the end of 2020, when all of its business segments returned to growth, driven primarily by the global rebound in automotive production. We believe the company is still in the early stages of a multi-year opportunity, especially because Quaker serves diverse industrial end markets on a global scale and is thus poised to benefit from a worldwide economic recovery as well as from its ongoing efforts to pay down debt and a possible return to the M&A market.

In a very difficult year for energy-related stocks, Canada’s Pason Systems was the portfolio’s largest individual detractor. The company, which provides oil field instrumentation largely for onshore rigs, suffered as U.S. rig counts plummeted along with the price of oil in the second quarter before managing a modest recovery in the fourth quarter. The company has a solid balance sheet, a pipeline of new products in the early stages of roll-out, and an excellent competitive position, which lead us to believe it can gain market share in the next energy rebound. We had less confidence in the long-term prospects for Norway’s TGS-NOPEC Geophysical, which we exited in October. The company provides geophysical marine seismic data to oil exploration companies and was the second-largest detractor on a position basis. While we like TGS-NOPEC’s business model, we believe that structural changes in oil & gas exploration, as well as secular shifts toward cleaner energy, will ultimately reduce its long-term growth and consequently the rate at which it can compound value.

The Fund’s relative disadvantage in 2020 was due entirely to lagging stock selection as sector allocation decisions were additive. Health Care led the detractors, mostly due to our underweight in this leading sector, though stock selection also hurt. The bulk of our underperformance came from having no exposure to the biotechnology industry, one of the best performing areas within small cap. Industrials was the second largest source of underperformance, owing to lackluster stock selection—sector allocation was positive. Conversely, Financials helped performance versus the Russell 2000 in 2020, largely due to superior stock selection, though underweighting this lagging sector also helped. The top relative industry contribution came from having no exposure to banks, which posted negative results for the year. Real Estate also contributed to relative results as we also were underweighted in that trailing sector.

Top Contributors to Performance 20201 (%)

Quaker Chemical1.45
Cognex Corporation1.42
MKS Instruments1.36
Ritchie Bros. Auctioneers1.30

1 Includes dividends

Top Detractors from Performance 20202 (%)

Pason Systems-1.77
TGS-NOPEC Geophysical-1.66
CIRCOR International-1.48
Kirby Corporation-1.46
Genworth MI Canada-1.22

2 Net of dividends

Current Positioning and Outlook

We are guardedly optimistic about small caps enjoying a positive year in 2021. Based on history, it is rare for the asset class to see major declines in the absence of a recession or aggressive Fed actions, and neither looks likely in 2021. At the same time, highly positive expectations have driven the recent rally. While we suspect that this small-cap cycle has further to go, we also know that history suggests a 10-15% correction is more probable than not at some point in 2021. We are equally aware that the Fund lagged its benchmark in 2020, though that too follows a typical historical pattern. In the first year of market rebounds, the lowest profitability companies often outshine those with higher profitability. However, as market cycles progress, leadership often rotates to the type of higher profitability companies that Premier favors. We look forward to taking advantage of whatever volatility the market provides and are ready to invest in what we regard as superior businesses at temporarily depressed prices.

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

Premier 25.3111.5011.5010.2515.339.919.3310.7411.76 12/31/91

Annual Operating Expenses: 1.21

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 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: Morningstar was 3.1%, Quaker Chemical was 2.8%, Cognex Corporation was 2.4%, MKS Instruments was 3.0%, Ritchie Bros. Auctioneers was 1.8%, Pason Systems was 0.0%, TGS-NOPEC Geophysical was 0.0%, CIRCOR International was 0.0%, Kirby Corporation was 1.8%, Genworth MI Canada was 0.4%

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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