Fund Performance

Royce Small-Cap Fund advanced 9.0% in 2025, trailing its small-cap benchmark, Russell 2000 Index, which was up 12.8% for the same period. The Fund’s longer-term relative performance was much better as it outperformed its benchmark for the 3-, 5-, 10-, 20-, 25-, 30-, 35-, 40-year and 45-year periods ended 12/31/25.

What Worked… and What Didn’t

Five of the Fund’s 10 equity sectors made a positive impact on calendar year performance, led by Industrials, Financials, and Information Technology while the largest negative impacts came from Real Estate, Energy, and Consumer Staples. At the industry level, construction & engineering (Industrials), electronic equipment, instruments & components (Information Technology), and machinery (Industrials) contributed most, while software (Information Technology), professional services (Industrials), and specialty retail (Consumer Discretionary) were the largest detractors.

Our top contributor in 2025 was Alamos Gold, which operates as a gold producer in Canada, Mexico, and the U.S. The company’s positive earnings outlook, a renewed stock buyback program, and rising gold prices all helped its stock to climb throughout 2025.

Also headquartered in Canada, Sprott is a global alternative asset manager specializing in precious metals and real assets. The company operates a diversified platform of exchange-listed products, private equity funds, and lending strategies focused on gold, uranium, and energy transition metals. Sprott’s shares advanced in the first half of 2025 as gold prices broke out to record highs amid elevated geopolitical risk, central bank buying, and a weaker U.S. dollar. The company’s suite of physical bullion trusts and energy transition ETFs saw substantial inflows, driving strong growth in assets under management and recurring fee revenue. The firm also benefited from robust performance in its private strategies, particularly in uranium and critical minerals lending. Management continues to scale its global distribution, with new mandates secured across Europe and Asia. With strong operating leverage, a clean balance sheet, and secular tailwinds behind the resource transition, Sprott remains well positioned to compound earnings across commodity cycles.

TransMedics Group is a leader in the high-value transplant sector, with its organ care services (“OCS”) being the only FDA-cleared portable system that provides warm perfusion for heart, lung, and liver transplants. This technology preserves human organs designated for transplant in a near-physiologic condition, which expands the limitations of cold storage organ preservation. Management reported a 48% increase in total revenue for 1Q25 compared to 1Q24, driven by OCS liver and heart transplants. The company also increased its full-year 2025 revenue guidance by about 30%. TransMedics’ logistics services, including the use of its own planes for organ transport, are contributing to revenue growth and further streamlining the organ transplant process. In addition, the company is expanding its manufacturing capacity with a new facility in Italy and advancing next-generation OCS clinical programs. Finally, its shares strength in the second half of 2025 reflected continued adoption of OCS and rising investor expectations. We remain focused on execution, scalability, and Transmedics’ ability to convert growth into durable profitability over the long run.

Another Canadian holding, E-L Financial operates as an investment and insurance holding company in Canada in two segments, E-L Corporate and Empire Life. Management implemented a 100-for-1 stock split in May 2025, which made the stock more accessible to a wider range of investors while potentially increasing liquidity. Robust growth in revenue and profitability, combined with a low-debt balance sheet, seemed to draw more investors to its shares. Consistent with our long-standing view, the company remains conservatively managed, with a strong balance sheet and a disciplined approach to capital allocation. Performance in the second half of 2025 was steady as E-L Financial made progress across its portfolio while showing patience in compounding intrinsic, even when that progress is not immediately recognized by the market.

Sterling Infrastructure is a construction services company that specializes in infrastructure projects. Sterling generates more than 50% of its profits from site preparation for mission critical construction jobs such as data centers, which account for roughly 60% of its current backlog. The company’s scale (it’s five times larger than its next biggest competitor) and brand equity, along with the low cost but critical importance of site prep to the overall economic success of a construction project, generate customer lock-in. Sterling often has negative working capital thanks to favorable customer funding terms in this core site prep business while its legacy highway infrastructure segment provides excess cash flow which management has adeptly reinvested to fund high ROIC organic growth and M&A in higher margin businesses that broaden its capabilities. Sterling has also been benefiting from favorable secular tailwinds driving overall growth, including data center buildouts, reshoring, the entry-level housing supply gap, and infrastructure spending. Its shares jumped more than 104% in 2025 thanks to its strong and growing backlog, along with incremental industry datapoints that bolstered the case for continued growth in data center construction over the next few years. Additionally, the company announced the acquisition of an electrical contracting manufacturer for a reasonable multiple and that aligns perfectly with management’s strategic intent of adding additional services and building out its presence in the Southwest.

The Fund’s top detractor was PAR Technology, which provides Point of Sale (POS) and other software products to the hospitality industry. The enterprise end-market among restaurant customers continues to move away from complex point solutions and/or costly internally developed technology, shifts that benefit PAR’s broad and integrated cloud platforms. The company remains in the midst of a multi-year transition toward a more focused, software-driven business model. And while PAR has successfully landed a number of large accounts such as Burger King, implementations, particularly in mid-sized clients, have been slower than anticipated as customers have paused investments due to concerns over economic growth and tariffs. We expect the slower pace of implementations to be short lived, however, and expect PAR to continue to win more than its fair share of new business.

Myriad factors hurt the shares of another Canadian holding, Computer Modelling Group (“CMG”), which develops and licenses reservoir simulation software for energy companies that have to extract significantly increased amounts of oil and/or natural gas from their reservoirs. The company’s fiscal 3Q25 results fell short of investor expectations as the company faced falling oil prices and customer churn in its core reservoir and production solutions business, with clients showing more caution and requesting lengthened deal cycles. CMG also anticipates a $6-7 million reduction in professional services revenue for fiscal 2026 that will likely affect its growth. The company announced an acquisition in July of a software company specializing in geoscience solutions that should ultimately expand CMG’s capabilities. In addition, CMG reduced its quarterly dividend in October due to “ongoing financial pressures.” We reduced our position in December, though we remain constructive on the demand for precise simulation and forecasting tools in the Energy sector.

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.

Transcat is a global leader in test and measurement equipment as well as calibration services for a diverse set of industries, including life sciences, power generation, aerospace & defense, manufacturing, and food and beverage production. The company reported solid year-over-year revenue growth in November of 2025, but earnings were lower than expected, net income declined, and operating margins contracted, thanks to increased operating expenses tied to some recent acquisitions.

Mesa Laboratories supplies quality control instruments and services to regulated end markets, including life sciences, medical devices, and pharmaceuticals. As discussed in our earlier commentary, the company operates in specialized niches that offer both opportunity and complexity and has grown via product diversification and global reach. The shares were weak throughout 2025. Although revenues grew, they increased at a modest pace, likely disappointing some investors. We saw more promising opportunities elsewhere and sold the last of our shares in the portfolio during October.

The Fund’s underperformance versus the Russell 2000 in 2025 came from stock selection; sector allocation decisions were positive. At the sector level, the combination of a much lower exposure to Health Care (most impactfully in the index’s top performing biotechnology industry) and stock selection in the sector detracted most, followed by stock selection in Industrials and Materials. Conversely, stock selection in Financials and Information Technology were additive versus the benchmark, as was our much lower weighting in Real Estate.

Current Positioning and Outlook

We think the Fund has a compelling case for a better 2026 on both an absolute and relative basis. Our thinking is rooted in the somewhat rare and promising confluence of two important factors: Relatively low valuations for small-cap versus large-cap and the forecast for higher earnings for small-cap companies. We have always subscribed to the adage that psychology runs the market in the short run, but earnings run it in the long run. Earnings across asset classes were generally positive in 3Q25, with many companies handily beating estimates. Smaller companies generally fared better than their larger peers, however, in terms of earnings growth. Even more encouraging, the research we have seen forecasts accelerated earnings growth for small-cap stocks in 2026. The two Fed rate cuts provided a boost, and additional catalysts, including possible tariff relief, reshoring, and ongoing infrastructure improvements, should also help vault our risk-averse approaches into a sustained leadership role, as can the possibility of a healthy CapEx cycle and the benefits accruing to those small-cap companies that are providing AI’s ‘picks & shovels.’

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

Annual Operating Expenses: 0.93

¹ Not annualized.

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