Fund Performance

Royce Premier Fund gained 5.6% in 2025, lagging its small-cap benchmark, Russell 2000 Index, which was up 12.8% for the same period. The portfolio outperformed its benchmark for the 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 12/31/25.

What Worked… and What Didn’t

Five of the Fund’s eight equity sectors made a positive impact on performance in 2025, with the biggest contributions coming from Industrials, Information Technology, and Consumer Discretionary while Health Care, Real Estate, and Consumer Staples had the largest negative effect. At the industry level, semiconductors & semiconductor equipment (Information Technology), machinery (Industrials), and construction & engineering (Industrials) contributed most for the calendar year period, and health care equipment & supplies (Health Care), real estate management & development (Real Estate), and chemicals (Materials) detracted the most.

MKS is a premier global provider of technology solutions that enable advanced manufacturing in the semiconductor, electronics, and specialty industrial markets. The company’s unique “wafer-to-board” strategy differentiates it from its competitors by integrating advanced vacuum, power, and photonics technologies with the specialty chemistry capabilities recently acquired through Atotech. We think this comprehensive portfolio makes MKS a premier business as it is an essential partner for the production of increasingly complex chips and high-density interconnects required for the AI era, which creates a high-barrier ecosystem with significant switching costs and deep technical moats. MKS combines high-value content on increasingly complex process steps (advanced logic/memory + advanced packaging) and deep engineering integration into customer processes, while offering a broad, cross-division toolkit rather than a single point solution that is reflected in dominant share positions.

MKS’s shares delivered exceptional performance in 2025, significantly outperforming the broader tech sector. The stock’s momentum was primarily driven by the cyclical upswing in the semiconductor capital equipment market, particularly within the AI and advanced packaging segments where MKS has a dominant footprint. Throughout the year, the company consistently delivered earnings beats. Investors rewarded the management team for the successful integration of Atotech, which realized significant cost synergies and enhanced the company’s recurring revenue profile through materials and services. Despite localized headwinds in MKS’s specialty industrial segment and high interest expenses from its debt load, the stock’s valuation was bolstered by strong free cash flow, as well as benefiting from visible balance-sheet progress via strong free cash flows and voluntary debt prepayments. Late in the year, reports that MKS was exploring a specialty-chemicals divestiture to sharpen focus on semiconductors also supported the company’s “focus + deleveraging” narrative.

Esco Technologies is a highly diversified provider of engineered products and solutions for the aerospace & defense industry and utilities. Its business model is characterized by its leadership in niche, mission-critical markets, such as RF shielding and advanced filtration systems, where it holds dominant market shares. Esco’s premier status is rooted in its high-margin, long-cycle contracts with the U.S. Navy and major commercial aerospace OEMs, providing a level of visibility and stability. Its ability to solve complex technical challenges in regulated environments creates significant intellectual property barriers and a robust competitive advantage. The company’s differentiated model is built around niche, technically demanding applications where reliability matters, qualification cycles are long, and customer relationships tend to be sticky, particularly across defense and navy programs, grid reliability diagnostics and monitoring, and specialized test & measurement systems. This creates a “premier” profile characterized by high value-add engineering, recurring aftermarket service streams in parts of the portfolio, and the ability to compound earnings through mix, price, and operational execution.

2025 was a transformative year for Esco Technologies, with the share price surging to reach all-time highs, an outperformance catalyzed by a record-breaking backlog that surpassed $1.1 billion. The company benefited from positive investor perceptions related to two capital allocation events: The successful integration of its Maritime (SM&P) business, which significantly expanded the company’s navy market presence, and it completed the divestiture of VACCO Industries (with VACCO presented as discontinued operations), further sharpening Esco’s portfolio mix. Performance was further bolstered by strong sales growth in the aerospace segment and a disciplined focus on margin expansion. While the Utility Solutions Group (USG) faced temporary headwinds in the renewables market due to tax credit expirations, the strength in commercial aerospace and defense more than offset these pressures. Investors remained bullish as the company effectively de-leveraged its balance sheet and demonstrated its ability to pass through price increases in an inflationary environment.

RBC Bearings is a leading manufacturer of highly engineered, precision-friction management solutions, specializing in mission-critical bearings and components for the aerospace, defense, and industrial markets. The company’s business model is uniquely differentiated by its focus on technically sophisticated products that require exact specifications and operate in harsh environments. We consider RBC a premier business because of its high degree of intellectual property, longstanding customer relationships with major aerospace companies like Boeing and Airbus, and a massive installed base that generates reliable, recurring aftermarket demand. The strategic integration of the Dodge industrial business has further diversified its revenue streams and enhanced its scale across the power transmission market.

Like Esco Technologies, RBC Bearings stock reached an all-time high in 2025, a performance underpinned by robust growth in the Aerospace & Defense (A&D) segment, which benefited from stabilizing production rates at major OEMs and continued strength in defense spending. RBC’s ability to drive margin expansion was a highlight of the year, with strong gross margins due to its favorable product mix and effective price realization. Investors were particularly encouraged by the company’s aggressive debt reduction following the Dodge acquisition with a significant free cash flow conversion rate. While a commercial aerospace strike briefly created headwind concerns, the company’s record backlog and a return to growth in the industrial segment toward the end of the year reinforced our bullish long-term outlook. RBC also completed the $275M cash acquisition of VACCO Industries—a maker of valves, manifolds, regulators, filters, and other precision subsystems for space and naval defense— from Esco, which supported both the growth narrative and the portfolio’s mission-critical defense content.

Woodward is a premier designer and manufacturer of control systems and components for the aerospace and industrial markets. The company’s unique value proposition lies in its deep integration into virtually every major aircraft engine platform, which creates a lucrative “razor-and-blade” business model with high-margin aftermarket revenue streams that usually persist for decades. Woodward’s technological leadership in fuel, combustion, and actuation systems makes it a premier partner for OEMs looking to increase engine efficiency and reduce emissions. This entrenched position, combined with high regulatory barriers to entry, provides a durable moat and consistent long-term growth potential. Woodward’s embedded position also tends to produce durable aftermarket and spares opportunities as utilization rises, while offering a balanced exposure to aerospace and industrial end markets that can diversify the earnings stream over time.

Woodward shares posted a robust gain throughout the year, driven by a powerful recovery in commercial aviation and record-breaking fiscal 2025 sales. The year was marked by exceptional strength in the Aerospace segment, where commercial aftermarket sales jumped due to high aircraft utilization rates and a surge in defense activity. Although the stock experienced a brief mid-year dip following a downward revision to free cash flow guidance—caused by the heavy capital investments needed to meet surging demand—investors quickly refocused on the company’s strategic expansion. The acquisition of Safran’s North American Electromechanical Actuation business and the authorization of a new large share repurchase program served as significant confidence boosters. Despite weakness in China’s natural gas industrial market, Woodward’s ability to maintain mid-teens margins and deliver record earnings solidified its standing as a top-tier industrial growth story. The company also completed the acquisition of Safran’s North American electromechanical actuation business in July 2025, adding strategic content and reinforcing the “more aerospace content per aircraft” narrative.

Headquartered in Canada, Stella-Jones provides treated wood infrastructure products, with 70% of its sales in the U.S. (from U.S.-based facilities). It holds leading market shares in wood utility poles (47% of sales) and railway ties (25% of sales), both of which are oligopoly industry structures. In addition to predictable sales from multi-year contracts with major customers to support the annual replacement of poles and rail ties, infrastructure spending should lift long-term growth as utilities invest to harden and expand their electricity grids in the face of rising demand. Stella-Jones recently expanded its addressable market by $5 billion with the purchase of a leading producer of steel high-voltage electric transmission lattice towers and poles. After taking advantage of the stock’s underperformance in 2024 to build our position, we were pleased to see the company’s strong financial performance (reported in early May) and strategic acquisitions spur a rise in the stock in early June.

Medical technology company, Enovis Corporation is a premier company focused on reconstructive surgery and rehabilitation, distinguished by its transformation from its industrial roots to a “MedTech” business. Its unique value proposition lies in its focus on high-growth orthopedic categories, particularly its market-leading positions in “Extremities” (shoulder and foot/ankle) and its proprietary augmented reverse glenoid system (ARG). Enovis has relentlessly focused on innovation while executing its strategic expansion into the European market through the acquisition of LimaCorporate, which solidified its position as a global leader in complex reconstructive solutions while creating a high-barrier ecosystem of specialized surgical tools and implants. Its business model is driven by clinically differentiated products that sit directly in surgeon and clinician’s workflows, supported by a continuous-improvement operating culture and a steady cadence of new product introductions. Its shares faced significant pressure in 2025. Enovis delivered decent organic growth and exceeded earnings expectations in the third quarter, but the stock was weighed down by a material, non-cash goodwill impairment charge. Investor sentiment was further dampened by the company’s high debt leverage and elevated interest expenses, which overshadowed double-digit growth in the shoulder segment. Despite management’s efforts to divest lower-margin businesses like Diabetic Footwear to focus on core Reconstructive growth, the market remained cautious, prioritizing balance sheet de-leveraging over the company’s fundamental operational improvements. Both management and operating results reinforced the fact that 2025 was a “transition/optimization” year rather than the clean, linear compounding story that many investors had come to expect.

Morningstar is a leading global investment research provider of data, research and advisory serving the broad spectrum of capital market players including retail, financial advisors, asset managers, retirement providers and sponsors and institutional investors. Morningstar’s value proposition of providing robust investment data and tools to improve investment decisions and investment services and software to better serve advisors and financial institutions only increases as the global democratization of investing continues. Specifically, Morningstar’s proprietary data sets, analytics, independent research, and investment strategies provided in powerful digital solutions remain in high demand by the global investment community. We think of Morningstar as a premier business thanks to the combination of high-trust brand equity in investment research, subscription/recurring revenue characteristics across data and platforms, and expanding adjacency engines such as PitchBook (which offers private markets data) and Morningstar Indexes.

While operating performance remained solid in parts of the business, investor concerns centered on growth mix and visibility, particularly given signs of moderation in some growth engines (e.g., PitchBook’s organic revenue growth moderated from a faster pace of growth. In addition, market sentiment drove underperformance in specific thematic segments, specifically in fintech and active management data, which created headwinds. While Morningstar’s fundamentals remained stable, and the company continued to return capital through dividends, investors recalibrated growth expectations. Further, the CRSP (Center for Research in Security Prices—a major provider of historical market data and indexes) acquisition—despite clear strategic logic as it helps Morningstar to deepen scale and capabilities in indexes that underpin trillions of dollars in indexed assets—invited debate around price, positioning, and potential conflicts, which can weigh on multiples for data businesses even when fundamentals are steady.

Kennedy-Wilson Holdings is a real estate investment manager whose stock began to fall precipitously in early March, despite the company continuing to execute on its transition to a more asset light model and divesting non-core assets. Persistently high mortgage interest rates and macroeconomic uncertainty have pressured commercial real estate valuations, and with it the firm’s stock price. We sold the last of our position in Premier in late June.

Innospec is a global specialty chemical company serving markets in high-performance fuel additives, oilfield chemicals, and personal care products. The company’s business model is uniquely positioned to benefit from the global transition toward cleaner energy, as its fuel specialties improve engine efficiency and reduce emissions for both marine and road transport. Innospec has additional specialized technical expertise—and a debt-free balance sheet that provides exceptional financial flexibility. Its ability to historically maintain healthy margins in niche chemical applications, where performance is critical and costs are a small fraction of the final product, creates a highly defensive and cash-generative profile. In 2025, management repeatedly emphasized the company’s balance-sheet strength and continued shareholder returns (in the form of dividend increases and buybacks).

Innospec’s share price decline reflected mixed operational performance across its segments. While its Fuel Specialties division showed remarkable resilience with strong growth in operating income, the stock was dragged down by double-digit revenue declines in its Performance Chemicals and Oilfield Services segments. Ample customer caution, along with a destocking trend in the broader chemical industry, impacted volumes. The company reported particular weakness in Oilfield Services due to a material shortfall in sales in Latin America, as well as gross margin and operating income pressure, enough to shift the narrative from “steady compounder” to “wait for the rebound.” Although management demonstrated confidence by increasing the semiannual dividend and initiating a share buyback, the market remained focused on the operational turnaround. Then in 3Q25 the company recorded sizable impairment and restructuring-related charges tied to the lack of near-term recovery in parts of the oilfield portfolio (including Mexico), and reported margin headwinds in Performance Chemicals, despite continued strength in Fuel Specialties. Collectively, those factors help explain why the stock de-rated even though the company maintained strong liquidity and a net cash position.

Haemonetics Corporation is a medical technology company with a global reach that’s focused on improving outcomes and efficiency in blood-related healthcare markets. Its portfolio spans end-to-end plasma collection technologies, products for blood centers, and hospital technologies. Haemonetics benefits from dominant market share and a high-margin recurring revenue model driven by single-use disposables. Additional benefits for its business include the structurally growing global demand for plasma-derived therapies and specialized surgical blood salvage. Haemonetics also possesses a key business attribute in the classic ‘installed-base + consumables dynamic’ (equipment placements pull through recurring disposables), which can create durable switching costs when paired with clinical performance and operational uptime. Management has of late emphasized margin expansion and share gains—particularly in plasma—while streamlining the portfolio to concentrate on higher-value growth vectors. While many positive attributes remain in place, we sold our stake based on our concerns about competitive threats to its Interventional Technologies segment that is a key pillar of the company’s future growth.

The Fund’s relative underperformance in 2025 was attributable to stock selection; our sector allocation decisions were positive. At the sector level, both stock selection and a substantially lower exposure to Health Care detracted most versus the Russell 2000, where the sector’s biopharma complex dominated in 2025. Next came stock selection in Materials and Real Estate. Conversely, stock selection was additive in Information Technology and Consumer Discretionary, as was the Fund’s lack of exposure to Energy, which was a laggard in the Russell 2000.

Current Positioning and Outlook

Given 2025’s sharp multiple expansion among lower quality small-cap companies, such as those with low returns on invested capital, no profits, and/or more speculative profiles, it would not be surprising to see small-cap leadership again follow its historical pattern and transition to higher quality companies in 2026. We believe many of our portfolio companies created measurable economic value in 2025 that was not fully reflected in their stock prices. This valuation disconnect, along with accelerating growth, underpinned by durable business models with identifiable, high return reinvestment opportunities, should drive further compounding of value, creating an attractive setup for quality small-caps in 2026. In addition, absolute valuations for many small-caps remain reasonable, and we find the case for their reversion to the mean of relative valuation versus large-caps highly compelling. Small-caps also only recently emerged from an earnings recession that lasted more than two years. The return to small-cap earnings growth, and, importantly, at a projected pace that is much faster than that of large-caps, could prove to be the key catalyst for sustained outperformance for quality small-caps in 2026. We saw some evidence of this in January of 2026, when the Fund gained 10.2%, not only advancing more than it had in 2025, but also substantially outperforming the Russell 2000, which was up 5.4% for the month.

Average Annual Total Returns Through 12/31/25 (%)

Annual Operating Expenses: 1.19

¹ Not annualized.

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