Fund Performance

Royce Small-Cap Opportunity Fund advanced 11.9% in 2025, trailing its benchmark, Russell 2000 Value Index, which was up 12.6% for the same period. Relative results over long-term periods were better: the Fund beat its benchmark for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 12/31/25.

What Worked… and What Didn’t

Five of the portfolio’s 10 equity sectors made a positive impact on performance in 2025, with Industrials, Information Technology, and Financials making the largest positive contributions were while Consumer Discretionary, Energy, and Consumer Staples had the biggest negative effect. At the industry level, aerospace & defense (Industrials), electronic equipment, instruments & components (Information Technology), and construction & engineering (Industrials) contributed most for the calendar year period, and IT services (Information Technology), textiles, apparel & luxury goods (Consumer Discretionary), and software (Information Technology) were the largest detractors.

Our top contributor at the holdings level was nLIGHT, which designs, manufactures, and sells a range of high-power semiconductor and fiber lasers that are typically integrated into laser systems or tools built by its manufacturing customers. The company also provides components and integrated solutions to high-energy laser systems for directed energy and laser sensing systems used in a wide range of defense applications. nLIGHT differentiates its business by its vertical integration, domain knowledge, and manufacturing capabilities to combine dedicated resources and facilities with deep technical expertise to deliver cutting edge solutions, increasingly to government and defense organizations. Its shares have outperformed due to upward revisions to the outlook for its aerospace & defense customers. We remain constructive on the prospects for addressable market expanding product launches and a recovery in manufacturing-driven end-markets.

Astronics Corporation supplies flight critical electrical power, inflight entertainment and connectivity, lighting and safety, and test solutions to the aerospace, defense, and mass transit industries. The company holds a dominant market share in in-seat power systems for commercial aircraft. Accelerating activity levels related to improving aircraft production rates and ramping defense contracts drove its stock price performance in 2025. With more than two-thirds of revenue related to commercial aircraft, split close to equally between line fit and retrofits, Astronics will also benefit from airline fleet updates. We believe that sustained progress with process efficiencies and portfolio simplification will further benefit its through-cycle earnings power.

Defense technology provider Kratos Defense & Security Solutions outperformed in 2025 as the builder of UAS (unmanned aerial systems) and drones, missile defense, and space & satellite systems benefited from robust DOD demand for its products. We think that Kratos sits in a great strategic position due to its focus on smaller, faster programs at lower unit cost with proven technology that is ready for deployment today, not in the development stage. Its focus on asymmetric warfare is ideally suited to the military transformation that has begun with the changing nature of warfare exhibited in both the Middle East and the Ukraine. Kratos also has microwave electronic and electronic warfare components and systems embedded in larger defense platforms. We see a long runway of demand growth for the types of products and systems Kratos makes.

CECO Environmental provides environmental solutions such as air, water, and noise filtration products for industrial end markets. We have held CECO its shares for a few years. It’s is a successful turnaround that has morphed into an undervalued growth stock. Historically, the company earned 70% of its revenue from the energy market and was highly cyclical with volatile margins. The current CEO (who has been in that role 2020) and CFO (who joined in 2022) have turned CECO into a more diversified business with attractive and stable profitability. Today, only 30% of revenue comes from energy, and CECO’s entire energy exposure is levered to structural trends such as the energy transition and the strong demand for natural gas. The company also changed its go to market strategy to leverage a platform approach and get much closer to customers’ operations. This approach has enabled CECO to identify natural adjacencies to its products within its customers’ ecosystems and, consequently, win a greater share of customers’ wallets. In 2025, CECO continued its stellar execution, reporting strong growth in backlog and healthy margins each quarter. Further, in December 2025 investors received evidence that CECO’s efforts in its newer markets are beginning to bear fruit when management announced a large new order win within a data center project and reported that 2025 bookings will likely exceed $1 billion, compared to TTM (trailing twelve month) revenue of $718 million. The strong quarterly results and order announcements fueled its outperformance in 2025. And while CECO’s stock price reflects this successful turnaround and its latest order wins, we still see it as reasonably valued relative to its growth prospects and its true margin potential. Our expectation is for compounding returns from CECO over the next few years.

Specialty metals producer ATI was an outperformer again in 2025 as demand was robust for the metals used in aerospace & defense markets. As commercial aftermarket demand has continued to grow with air travel, and Boeing has increased production of its 737 MAX after years of delays, ATI has benefited thanks to its unique asset base used to manufacture nickel based alloys for both airframes and jet engines. Additionally, growing military spend both in the U.S. and NATO countries has benefited ATI’s defense business, which makes similar products used in a variety of equipment and weapons systems. With limited capacity additions on the horizon, ATI remains well positioned as one of only a few companies capable of providing these critical materials to a growing market.

The Fund’s top-detracting position was Lakeland Industries, which manufactures industrial protective gear, with a focus mostly on the firefighting market. Management has been concentrating on consolidation opportunities with a focus on providing firefighting gear from “head to toe.” As sometimes happens with smaller cap consolidation investments, Lakeland has not executed as well as we would have anticipated on integrating some of its recent acquisitions. This has been compounded by tariff related headwinds, as well as the fact that tenders for firefighting gear tend to be lumpy. We see a large backlog of business that we expect to be let in 2026 and have maintained our position.

Grid Dynamics Holdings provides digital engineering and AI-focused IT services to large enterprises. Its shares performed poorly in 2025 largely because its fundamentals failed to meet the market’s elevated expectations coming into the year. While reported revenue growth remained solid (roughly 17–18% for fiscal 2025), growth was uneven and back-end loaded, with meaningful deal ramps pushed into 2026 rather than materializing in early 2025. At the same time, margins deteriorated sharply, driven by FX headwinds, higher delivery costs, acquisition mix, and continued investment in AI capabilities and global headcount. Investors also grew frustrated with periodic softness in the core retail vertical and repeated messaging that demand recovery was largely a “timing issue,” which reduced confidence in near-term earnings power. The result was multiple compression in a year when the market increasingly rewarded AI beneficiaries with visible operating leverage rather than companies still investing ahead of monetization. While we were early in our belief that demand would improve in 2025, we still adhere to the thesis that growth will resume as enterprises are forced to spend on their AI initiatives.

Ichor Holdings is a key component supplier to the semiconductor industry. While from a revenue perspective the company has benefitted from a strong position with key customers, a nascent effort to drive margin improvements through a vertical integration strategy has struggled with poor execution, resulting in lower-than-expected margin and earnings performance, and a CEO transition. We still view the company as a key player in the industry and ultimately expect supply chain issues to be fixed and so added to our position on Ichor’s share price weakness.

Similar to Grid Dynamics, Endava is a digital engineering and IT services provider with historical strength in payments and financial services. Its stock performed poorly in 2025 as investors reassessed the durability of its growth model in a weaker demand environment. Revenue growth disappointed as discretionary digital transformation spend remained subdued, pipeline conversion fell short of management’s expectations, and the company was forced to lower guidance, undermining credibility with investors. These pressures were exacerbated by underinvestment in U.S. brand-building, which constrained new-logo wins outside its core verticals, and by skepticism that Endava’s AI positioning represented true differentiation rather than incremental efficiency gains. Together, weaker growth visibility, pricing compression risk, and questions around competitive positioning drove a significant de-rating of the shares during the year. We exited the position and redeployed capital into our other IT services holdings where management teams have messaged greater confidence in improved business prospects.

Criteo operates a large retail media platform and a legacy re-targeting business, both of which enable retailers such as Best Buy to reach potential customers during moments of high online purchase intent and induce them to transact with them over their competitors (e.g., bestbuy.com vs. amazon.com). When we invested in Criteo a few years ago, it was trading at a very cheap valuation because of overblown fears around the existential risk to its legacy re-targeting business if and when Google discontinued third-party cookies. When we first invested, Criteo was getting little to no credit for building the world’s largest retail media platform with several marquee customers. Although Criteo’s retail media business continues to scale as expected, in 2025 Criteo was beset with customer losses: one large customer insourced certain high margin services previously performed by Criteo, while another customer moved to a competitor as part of a larger partnership with that company in a domain unrelated to Criteo’s business. These customer losses, while isolated, called into question the relevance of Criteo’s services amid heavy competition, causing the stock to underperform. We reallocated our capital to investments with better risk-reward profiles

The Fund’s narrow disadvantage versus the Russell 2000 Value was attributable to stock selection in 2025; our sector allocation decisions were additive. At the sector level, stock selection and, to a lesser extent, a substantially lower exposure to Health Care, specifically in biotechnology, detracted most, followed by stock selection in both Communication Services and Information Technology. Conversely, stock selection in Industrials was far ahead of the sector’s results in the benchmark. Relative advantages also came from the portfolio’s substantially lower exposure to the lagging Real Estate sector and stock selection, along with a much lower weighting, in Financials.

Current Positioning and Outlook

We think the most compelling case for small-cap leadership in 2026 comes from a relatively rare and promising confluence of factors: Relatively low valuations for small-cap versus large-cap and the forecast for higher earnings for small-cap companies. We have always believed in 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, however, generally fared better 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 small-caps 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 infrastructure ‘picks & shovels.’

One of the most compelling aspects of the AI revolution is how it is spreading from the cloud-based datacenters training LLMs (large language models) to the physical world requiring a significant infrastructure buildout. This effort requires a physical upgrade of the economy compared to the industrialization of electricity. The benefits did not occur until the electrification of factories and homes allowed for machines and motors to replace physical labor. We are seeing something similar happening now as AI is deployed across enterprises, devices, vehicles, etc., with large areas of the economy starting to make use of AI to analyze real time data and perform physical tasks. Many of our portfolio holdings are involved in this buildout at the “edge,” which we believe will result in a broadening out of AI spend to areas such as healthcare and transportation, to name just two examples. It is important to point out that many of our industrial holdings already have the assets and technology in place to meet this growing demand without the large R&D investments required by the large hyper-scalers to create the “brains” of AI. This is an exciting and disruptive phenomenon. We are already seeing bottlenecks in certain supply chains, particularly power generation, but we believe our portfolio is well positioned to benefit from these areas of required investment.

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

Annual Operating Expenses: 1.22

¹ Not annualized.

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