Fund Performance

Royce Small-Cap Fund advanced 7.1% in 2024, trailing the Russell 2000 Index, which was up 11.5% for the same period. Although somewhat disappointing, this result did little to erode the Fund’s long-term outperformance record as it beat the Russell 2000 for the 3-, 5-, 10-, 20-, 25-, 30-, 35-, and 40-year periods ended 12/31/24. The Fund’s average annual total return for the 50-year period ended 12/31/24 was 14.8%, a long-term result in which we take great pride.

What Worked… and What Didn’t

Five of the portfolio’s 10 equity sectors finished 2024 in the black, led by Financials, Industrials, and Information Technology, which were also the Fund’s three largest sector weights at year-end. The top detractors in the calendar year were Health Care, Consumer Discretionary, and Energy. At the industry level, the three top contributing areas were capital markets (Financials), machinery (Industrials), and insurance (also in Financials) while health care equipment & supplies (Health Care), chemicals (Materials), and interactive media & services (Communication Services).

The Fund’s top contributor at the position level was First Citizens BancShares, a regional bank based in North Carolina, but with a national presence, including being the acquirer of Silicon Valley Bank in 2023’s banking crisis. The company had strong results throughout 2024 that, when coupled with an undemanding valuation at the start of the year, led to strong stock price performance.

PAR Technology is a leader in enterprise restaurant technology, offering a best-in-class product suite that generates revenue streams diversified across several platforms including Subscription Services, Guest Engagement, Operator Solutions, Back-Office Solutions, Hardware, and Professional Services. The enterprise end-market among restaurant customers is increasingly moving away from complex point solutions and/or costly internally developed technology, a move that benefits PAR’s broad and integrated cloud platforms. In 2024, the company showcased remarkable sales momentum with both new brand and location wins, as well as expansion with existing customers, most notably, Burger King and Wendy’s. In 2024, PAR further expanded its market by acquiring Stuzo, TASK, and, most recently, Delaget, which enhances back-office capabilities. We think PAR is positioned to capture market share from incumbent providers as “QSRs”—quick service restaurants—transition from legacy on-premises point of sale systems to cloud-based solutions and is poised to outpace its competition and capitalize on the digitalization of the restaurant and retail sectors while fundamentals improve meaningfully from its favorable product mix shift and cross selling opportunities.

Coherent is an engineered materials and laser technology company. While its offerings cover many different types of products and end markets, we see as producers of the foundational technologies that enable many technology growth trends, including electric vehicles, accelerating broadband speeds and capacity, autonomous driving, advanced display technologies, and semiconductor capital equipment, among others. One area that has been driving the company’s most recent positive financial results is its datacom transceivers offering, essentially selling the lasers that send optical communications across fiber channels. The datacom networking space has been experiencing unprecedented demand due to AI computer power driving massive expansion of bandwidth requirements. While this was the main contributor to the stock’s outperformance in 2024, the market also started to price in the future potential of many exciting strategic initiatives announced by Coherent’s new CEO, which should drive fundamental growth in addition to the overall end market growth.

Headquartered in Toronto, Alamos Gold is a precious metals miner and developer with active mines in Canada and Mexico. The company continues to consistently accumulate reserves at competitive costs in stable areas, with exploration optionality in an environment that is increasingly starved of attractive development assets. Further, Alamos continues to grow production at improved AISC, or all-in sustaining cost, margins while maintaining a fully funded capital program at attractive incremental free cash flow margins. We remain constructive on the outlook for the business.

SEI Investments provides technology and investment solutions that connect the financial services industry with capabilities ranging from investment processing, operations, and asset management. SEI works with corporations, financial institutions and professionals, and ultra-high-net-worth families to help drive growth, make confident decisions, and protect their futures. It has a dominant share within the U.S., serving 10 of the top 20 U.S. banks and 48 of the top 100 investment managers worldwide. A scaled provider, SEI has a combined $1.4 trillion in assets under management and assets under administration. Of late, it has also become the globe’s largest private credit fund administrator, with more than $1.5 trillion in assets under administration. Its value proposition involves managing operations so that its clients can focus on “front-office” responsibilities like security selection and relationship management. This creates sticky customer relationships because SEI’s services are embedded into their operations. SEI reported strong and improving results throughout 2024, specifically in its business pipeline, customer activity, and profits. Its most recently reported results showcased all-time record revenue, margins, and earnings. Equally important was management’s commentary becoming more positive as the year progressed around SEI’s many strategic initiatives designed to increase its addressable markets.

The top detractor at the position level was Enovis Corporation, an orthopedic-focused, medical technology company with leading a global market share in Prevention & Recovery (braces and other rehabilitation products) and a growing Reconstruction segment (e.g., surgical implants for extremities). The stock has been under pressure, however, since Enovis closed its acquisition of Lima in 2024, the company’s largest-ever deal. The strategic fit and valuation of the deal made sense to us, but the stock was hurt by near-term concerns about integration and sales dis-synergies, especially with the elevation of new leadership in the Reconstruction segment. Yet management actually delivered results consistent with what it had outlined and entered 2025 with most of these headwinds behind it. With several new product introductions in the pipeline and a sales force that is now focused on driving cross-selling across the combined customer base, Enovis should be positioned to deliver on its target model of high-single-digit annual organic growth and annual EBITDA margin expansion, while applying excess free cash flow to reduce debt.

Quaker Houghton produces, develops, and markets industrial chemical products, including heat treatment, metal forming, forging, and tin plating fluids, as well as cleaners, casting lubricants, greases, ground control agents, and metal rolling oils. We see Quaker as an attractive asset light business, with recurring revenues and strong customer loyalty. After a strong performance in 2023, its stock fell as the company faced more difficult sales growth comparisons as it lapped strategic price increases and volumes varied by geographic region, reflecting slower global industrial growth. Quaker Houghton recently promoted to CEO a respected, internal “rising star” who has overseen global growth initiatives and the merger integration of Houghton. We believe much of his focus is on reemphasizing the company’s “customer intimacy” sales process to accelerate new product growth and geographic expansion (e.g., to India), as well as more effectively capitalizing on cross-selling opportunities across its customer base.

Forrester Research is a subscription-based information technology research company geared toward helping businesses understand and determine their needs while maximizing the utilization of emerging technologies and key vendors. While we like the company’s asset light, high contribution margin model, management’s execution has admittedly been inconsistent in recent years. The company is in the midst of changing its go-to-market strategy, a shift that is taking time to gain traction, which influenced our decision to reduce our position in the stock.

OneWater Marine is a marine retailer with 96 dealership locations in the Southeast, Gulf Coast, Mid-Atlantic and Northeast U.S., as well as a distributor of marine-related parts and accessories. As a seller of a highly discretionary product, albeit one targeted at higher-end consumers, the company is exposed to macroeconomic factors and consumer sentiment, which have been choppy over the past three quarters. In addition, buyers typically finance more than 75% of new boat purchases, which makes OneWater sensitive to interest rate changes. Its business was adversely impacted by Hurricanes Helene and Milton given their significant store footprint in the Gulf Coast region, which led management to slash earnings per share guidance for fiscal 2025 by 45% and in turn caused its stock to underperform in 2024. In response to these developments, OneWater has taken cost actions and continues to maintain a conservative inventory position as it navigates through this challenging market.

Globalstar provides voice and data communications services, as well as wholesale capacity services, through a network of in-orbit satellites that cover approximately 99% of the global population and ground stations under its spectrum licenses in eleven countries. The company provides reliable connectivity in areas not served or underserved by terrestrial wireless and wireline networks and in circumstances where terrestrial networks are not operational due to natural or man-made disasters. Growth in mobile satellite services is being driven by the proliferation of high bandwidth applications and lower-cost data collection and asset-tracking services. While there is much about Globalstar’s business that we like, we chose to sell our position as income from operations was hurt by higher stock-based compensation and cost of services in the first half of 2024.

The Fund’s relative disadvantage in 2024 was attributable to stock selection. At the sector level, stock selection hurt relative performance most in Information Technology, Consumer Discretionary, and Industrials. In these three sectors, our respective overweight, underweight, and overweight were all additive, though not enough to overcome the effects of stock selection. Conversely, stock selection in Financials, our lower weighting in Energy, and lack of exposure o Utilities each helped relative performance in 2024.

Current Positioning and Outlook

2024’s disappointing showing notwithstanding, we feel very good about the prospects for the Fund, as well as for small-cap leadership. The highly promising earnings prospects for small-cap as a whole—the consensus for earnings per share growth in 2025 is 44% as of this writing—are a major factor in our thinking. Our conviction becomes even stronger when combined with small-cap’s far more attractive valuations compared to large-cap. Using our preferred index valuation metric of enterprise value over earnings before interest and taxes—or EV/EBIT—we see that the Russell 2000 finished 2024 still near its lowest levels relative to the Russell 1000 in 25 years. To us, this combination signals an ongoing opportunity for active small-cap managers to capture robust earnings growth at attractive—highly attractive in many cases—prices. Recent underwhelming relative performance has not made us any less confident in the long-term case for small-cap leadership or risk-averse and earnings-focused active management in our asset class.

Average Annual Total Returns Through 12/31/24 (%)

Annual Operating Expenses: 0.94

¹ Not annualized.

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