Royce Premier Fund Manager Commentary
article 02-15-2024

Royce Premier Fund Manager Commentary

The Fund gained 22.5% in 2023, outperforming its small-cap benchmark, the Russell 2000 Index, which was up 16.9% for the same period. The Fund also maintained longer-term advantages over the small-cap index, beating it for the 3-, 5-, 10-, 15-, 20-, 25-, 30-year and since inception (12/31/91) periods ended 12/31/23.


Fund Performance

Royce Premier Fund gained 22.5% in 2023, outperforming its small-cap benchmark, the Russell 2000 Index, which was up 16.9% for the same period. The Fund also maintained longer-term advantages over the small-cap index, beating it for the 3-, 5-, 10-, 15-, 20-, 25-, 30-year and since inception (12/31/91) periods ended 12/31/23.

What Worked… and What Didn’t

Eight of the portfolio’s nine equity sectors made a positive impact on calendar year performance, led by Industrials, Information Technology, and Materials. Communication Services was the only sector that detracted from performance while the smallest contributions came from Health Care and Real Estate. At the industry level, machinery (Industrials), capital markets (Financials), and semiconductors & semiconductor equipment (Information Technology) contributed most while the top detractors were two areas in Industrials—air freight & logistics and professional services—followed by interactive media & services (Communication Services).

The Fund’s top-contributing position was Stella-Jones, which dominates the railway tie and wood utility pole markets. The company saw significant growth in its residential treated lumber business, which benefited from rising lumber prices and vibrant home repair and remodeling activities. Further bolstering growth was increased demand for utility poles largely driven by expanding broadband networks, the robust renewable energy sector, and growing electric vehicle sales—each a key driver in leading utilities to strengthen their electrical grids. Simpson Manufacturing engineers and manufactures connectors, shear walls, and (through its Simpson Dura-Vent subsidiary) venting systems. Rising demand for its innovative construction and infrastructure products, along with successful expansion into global markets, helped its stock price to climb. Welding and cutting tools maker Lincoln Electric Holdings continued its streak of positive results with record sales, profitability, and cash flows. Recent acquisitions that focus on automation have helped Lincoln to expand its global presence while its focus on cost management and operational improvements led to a notable increase in adjusted operating income margins.

Premier’s top detractor was Valmont Industries, which makes products for the infrastructure and agricultural markets, including those used in utility grid resilience, solar energy, upgrades to lighting and transportation infrastructure, and the 5G rollout. The company’s Agriculture Technology unit was hampered by slower growth and lower-than-expected adoption rates, while the firm was also facing more widespread inflationary pressures and lower sales in its telecom business. To address these issues, Valmont initiated an organizational realignment that entailed executive leadership changes designed to improve efficiency and streamline decision-making. The ensuing short-term disruptions and uncertainty helped drive its stock down. Forward Air provides transportation services to air freight forwarders, air cargo carriers, and airlines. It also operates a truckload business. While the company endured a slow market for freight carriers, we were more alarmed by its acquisition of Omni Logistics for reasons including the purchase price and the dilutive effect of the merger on Forward Air’s less-than-truckload lanes that, post-merger, would see the company effectively competing with a core customer. After performing our own due diligence, we exited our position. Forrester Research is a research and advisory firm. Approximately half of its clients are in the technology sector, which began to experience a pullback in late 2022 that hurt its Consulting and Events businesses to the degree that Forrester revised full-year guidance, reducing both margin and earnings expectations.

The Fund’s advantage over the Russell 2000 in 2023 came from both sector allocation and stock selection, with the former having the bigger impact. Altogether, nine of 11 equity sectors finished the year ahead of the benchmark, led by stock selection in Materials, Financials, and Information Technology, while stock selection detracted in Communication Services and Consumer Discretionary.

Top Contributors to Performance 20231 (%)

Simpson Manufacturing1.67
Lincoln Electric Holdings1.50

1 Includes dividends

Top Detractors from Performance 20232 (%)

Valmont Industries-0.91
Forward Air-0.78
Forrester Research-0.67
Fox Factory Holding Corporation-0.67
Lindsay Corporation-0.58

2 Net of dividends

Current Positioning and Outlook

2023 marked the seventh consecutive year that small-cap lagged large-cap—which has created a relative valuation gap that is almost two standard deviations below the norm, an anomaly not seen since the Internet bubble more than 20 years ago. Moderating inflation, the decelerating pace of Fed Fund rate hikes, and a still expanding economy lend weight to the hope that small-cap’s 4Q23 rally—in which it outpaced large-caps by 200 basis points—could prove to be the start of a sustained reversion to the mean for relative performance. We see normalization of interest rates over the past two years from artificially low levels as adding further support to the case for quality recapturing small-cap leadership. Companies with strong balance sheets and the ability to self-fund their growth from free cash flow generation have been regaining importance in investors’ stock selection decisions. Given the Fund’s focus on buying high-quality small-cap companies, we remain optimistic about its long-term prospects. With conviction built from the extensive due diligence and information sharing that form the backbone of our investment process, we believe our portfolio of premier businesses—those with durable competitive advantages and reinvestment opportunities—can continue to compound shareholder value at attractive rates of return well into the future.

Average Annual Total Returns Through 12/31/23 (%)

Premier 12.5722.5322.536.4212.518.1911.659.9010.4910.8511.25

Annual Operating Expenses: 1.19

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, 2023, 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, 2023 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 12/31/23, the percentage of Fund assets was as follows: Stella-Jones was 2.6%, Simpson Manufacturing was 2.3%, Lincoln Electric Holdings was 3.0%, Kadant was 2.9%, FormFactor was 2.4%, Valmont Industries was 1.7%, Forward Air was 0.0%, Forrester Research was 1.4%, Fox Factory Holding Corporation was 0.0%, Lindsay Corporation was 1.6%.

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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