Royce Premier Fund Manager Commentary
article 12-31-2022

Royce Premier Fund Manager Commentary

In a bearish 2022, the Fund beat the Russell 2000 Index, down -15.5% versus -20.4%, while also outperforming the small-cap index for the three-, five-, 15-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 12/31/22.


Fund Performance

Royce Premier Fund beat the Russell 2000 in 2022, down -15.5% versus -20.4%, and outperformed the small-cap index for the three-, five-, 15-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 12/31/22.

What Worked… And What Didn’t

Eight of the portfolio’s nine equity sectors finished 2022 in the red, with Information Technology, Consumer Discretionary, and Industrials having the biggest negative effect. The only positive impact came from Materials, while Consumer Staples and Communication Services detracted least. At the industry level, semiconductors & semiconductor equipment, electronic equipment, instruments & components (both in Information Technology), and capital markets (Financials) detracted most while construction & engineering (Industrials), metals & mining (Materials), and software (Information Technology) made the biggest positive contributions in 2022.

The biggest detractor was Mesa Laboratories, a company that develops and manufactures electronic measurement instruments for industrial and hemodialysis customers. Mesa’s results were depressed by higher labor costs in its sterilization and disinfection segment and lost sales in its clinical genomics business in China due to Covid lockdowns. While management took actions to address its issues, we grew concerned by the stock’s lofty valuation and Mesa’s strategy of continuing to shift its portfolio exposure toward faster-growing health care markets that will require additional expensive and dilutive acquisitions. We opted to exit our position in order to reevaluate the name, particularly relative to other candidates and existing holdings where our conviction was higher. MKS Instruments makes components, subsystems, and process control solutions that measure, control, power, and monitor semiconductor manufacturing processes. The company reduced earnings guidance on continued shipment delays due to industry supply chain issues, followed by a drop-off in orders as slowing consumer electronics demand and more cautious IT spending looked likely to cause declines in wafer fabrication equipment spending in 2023 as semiconductor manufacturers rebalance chip inventories. While it will take several quarters to work through these cyclical pressures, longer-term secular tailwinds remain intact. Semiconductor usage continues to proliferate and at the leading edge are becoming more complex to manufacture. With roughly 40% of its sales from consumables, we believe MKS should continue to generate solid free cash flow that it will use to deleverage after its most recent acquisition, following a playbook it has successfully executed in the past.

The portfolio’s top contributor was Valmont Industries, which manufactures fabricated metal and concrete pole and tower structures as well as mechanized irrigation systems. Demand across all segments was strong in 2022, with Infrastructure seeing continued investments in utility grid resilience, clean energy solutions, lighting and transportation infrastructure upgrades, and telecommunications infrastructure driven by 5G rollout. Within Agriculture, strong farm sentiment and demand for irrigation equipment and precision agricultural solutions drove record income. Valmont is executing on a record global backlog, reflecting continued strong end market demand. Haemonetics Corporation is a global healthcare company that specializes in blood and plasma collection and transfusion services. Despite a myriad of events and pressures over the past several years, plasma collection showed a robust recovery due to the rising collection requirements needed to replenish inventory, increased donor activity, and favorable pricing strategies.

The portfolio’s advantage over its benchmark came exclusively from stock selection in 2022—sector allocation was marginally negative. Among sectors, stock selection, as well as our higher weighting, helped in Industrials and Materials while we also benefited from our lower exposure and some savvy stock picks in Health Care. Conversely, our lack of exposure to both Energy and Utilities, along with a lower weighting in Consumer Staples, detracted most from relative results.

Top Contributors to Performance 20221 (%)

Valmont Industries1.02
Haemonetics Corporation0.75
Meridian Bioscience0.70
Reliance Steel & Aluminum0.61
Fair Isaac0.47

1 Includes dividends

Top Detractors from Performance 20222 (%)

Mesa Laboratories-1.65
MKS Instruments-1.65
John Bean Technologies-1.15
Forrester Research-1.14

2 Net of dividends

Current Positioning and Outlook

The majority of the Fund’s holdings created economic value in 2022, producing returns on invested capital (ROIC) well in excess of their cost of capital. The fact that most of this value has not yet been capitalized in these companies’ valuations should, in our view, improve the portfolio’s long-term risk/reward profile. Investor sentiment is often focused on the near term, but over the long run the stock market has proven efficient at reflecting the economic value companies generate and compound in their market valuations. So, regardless of what 2023 may bring, experience has shown that our best course of action is to stick to our approach of trying to identify durable business models when they are trading at reasonable valuations and hold them for the long run (assuming, of course, that the underlying investment case remains intact or improves). Cyclical headwinds could pressure financial results in 2023, but we believe that the normalized earnings power and growth that our holdings can generate over time remain very attractive. This conviction is rooted in our holdings’ unique competitive advantages—such as switching costs, brand equity, and network effects—strong cash flows, and low-debt balance sheets, all of which should help them to not just weather a recession but also to go on offense and emerge from any downturn even stronger.

Average Annual Total Returns Through 12/31/22 (%)

Premier 9.98-15.46-15.463.135.688.647.7310.589.8810.7410.90

Annual Operating Expenses: 1.18

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, 2022, 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, 2022 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 12/31/22, the percentage of Fund assets was as follows: Valmont Industries was 3.4%, Haemonetics Corporation was 2.4%, Meridian Bioscience was 0.0%, Reliance Steel & Aluminum was 2.8%, Fair Isaac was 1.7%, Mesa Laboratories was 0.0%, MKS Instruments was 2.0%, FormFactor was 1.5%, John Bean Technologies was 2.1%, Forrester Research was 2.1%.

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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