Fund Performance

Royce Small-Cap Special Equity Fund was up 3.0% in 2024, lagging the Russell 2000 Value Index, which gained 8.1% for the same period. The portfolio outperformed the value index, however, for the 3-, 5-, 20-, 25-year, and since inception (5/1/98) periods ended 12/31/24 and trailed for the 1- and 10-year periods.

What Worked… and What Didn’t

Four of the portfolio’s nine sectors made a positive impact on calendar year period performance, led by Materials, Industrials, and Communication Services, while the largest detractions came from Consumer Discretionary, Consumer Staples, and Information Technology. At the industry level, construction materials (Materials), machinery (Industrials), and paper & forest products (Materials) contributed most in 2024, while electronic equipment, instruments & components (Information Technology), consumer staples distribution & retail (Consumer Staples), and textiles, apparel & luxury goods (Consumer Discretionary) were the biggest detractors.

At the position level, the top contributor was United States Lime & Minerals, which supplies lime and limestone to the steel, paper, agricultural, environmental, and construction industries. Demand, particularly in the company’s core geographic market, was strong throughout the year. Meanwhile incremental competitive supply has been constrained due to the costs associated with shipping lime over extended distances, as well as difficulties in permitting and construction of new mines. This supportive lime pricing environment resulted in strong margin and earnings growth during 2024.

Mueller Industries, a leading producer of copper tubing and fittings, maintained better-than-expected volumes and margins in 2024. The company has managed to bring selling prices above input costs through adept pricing and purchasing, supported by an elevated copper market. Mueller’s acquisitions in adjacent markets, such as flexible ducts to manage air flow, have also performed well. More recently, shares reacted positively to the acquisition of an electrical wire manufacturer, introducing adjacent product categories to the company’s core copper competencies.

Encore Wire is one of the top three producers of electrical building wire in the U.S. Similar to Mueller Industries, Encore’s earnings remained robust throughout the first half of the year as selling prices remained elevated over input costs, aided by elevated copper prices, strength in demand, and a limited ability for market supply to respond. Encore was acquired by an Italian cable manufacturer in the second half of 2024.

Sylvamo Corporation is a global leader and low-cost producer of uncoated papers. The company beat earnings expectations in each quarter reported in 2024 on strong operations globally, as paper pricing has remained supportive. Early in the year, its shares increased following the re-valuation of Brazilian forest assets. Since being spun off from International Paper, Sylvamo has focused on remaining a cost leader in its core paper market, as well as cash flow generation and return to shareholders.

Shares of TV broadcaster TEGNA appreciated following the November presidential election. An acquisition of Tegna was blocked under unprecedented circumstances during the Biden administration, while a more deregulatory FCC under Trump has spurred speculation that TEGNA may once again receive a takeover bid. Additionally, the new CEO hinted on TEGNA’s most recent earnings call that the company would be open to being acquired.

The top detractor in 2024 was Vishay Intertechnology, which manufactures semiconductors and other passive electronic components. Vishay struggled due to weakening end-market demand and margin compression as the most recent semiconductor cycle moderated. As a broad line supplier of many products to the industrial, automotive and A&D, and other markets, the cyclical downturn in the semiconductor industry, coupled with capacity and pricing challenges, created headwinds throughout the year. In addition, Vishay is currently bearing the costs associated with transitioning products into recently acquired facilities and elevated levels of investment. These investments should help Vishay to capture market share with distributors but have tempered performance in the meantime.

Atkore, a manufacturer of electrical raceway and steel infrastructure products. Atkore faced a challenging year across many segments of its business, and its shares declined substantially following weaker- than-anticipated commentary around 2025 profitability. Steel conduit pricing was pressured by increased import competition, the HDPE (high-density polyethylene) division saw a slower-than-expected rollout of funds from the Broadband Equity Access and Deployment Program, and competitor capacity increases and raw material declines all weighed on PVC conduit pricing. Finally, Atkore was named in a lawsuit alleging price fixing among PVC conduit manufacturers and distributors.

Ingles Markets operates grocery stores primarily in North Carolina, Georgia, and South Carolina, typically in more rural areas more than an hour away from large city centers. Early in 2024, its shares fell following a reversion to pre-covid margins driven by rising costs. Then in October, its stock again declined following a hurricane that devastated core markets, including the company’s distribution center. However, operations have since largely returned to normal.

Movado Group manufacturers watches under its Movado brand as well as in partnership with its licensed brand portfolio. The company maintains a large share of the mid-priced watch category. The stock was pressured throughout the year, as a slowdown in the watch category was heightened by inventory sensitivity with core retail and department store customers. An outsized non-recurring marketing spend aimed at building brand awareness, including a recently launched campaign featuring celebrity ambassadors, has also weighed on earnings.

The ODP Corporation, which provides business services and supplies, continued to navigate a difficult transition as demand for office products declined. Earnings disappointed throughout 2024, primarily due to weaker-than-forecasted consumer and business spending. While ODP’s new third-party logistics division has shown early promise, efforts in its B2B marketplace were unsuccessful, resulting in a write-off and subsequent sale of the division in the year.

The portfolio’s disadvantage versus the Russell 2000 Value was primarily driven by stock selection in 2024, with the Consumer Discretionary, Consumer Staples and Information Technology sectors making the most significant negative impact. Conversely, stock selection was a relative strength in Materials, as were stock selection and a significantly higher weighting in Industrials and a lack of exposure to underperforming Health Care stocks in the Russell 2000 Value.

Current Outlook and Positioning

Uncertainty continues to be present, as both companies and individuals are assessing the implications of the new administration. We should expect economic, and perhaps market volatility due to political uncertainty. In addition, the combination of surging ETF inflows, aggressive investor surveys, and low put/call ratios confirm that, despite lofty valuations at the end of 2024, expectations for further market advances seem high. This allows little room for surprises or errors in 2025. This lack of fear (also shown in lower-than average volatility) is alarming to us. Investors simply appear too bullish. In addition, the number of consumers who expect rates to fall compared to those who expect rates to rise has fallen to its narrowest gap since the pandemic. The same survey revealed that the number of respondents expecting stock prices to rise is higher than at the Tech bubble peak. Market expectations have become bolder, Bitcoin was at $105 at the end of December. The margin for error gets smaller the higher expectations go. In our view, a correction appears very likely in 2025. With that in mind, we think it merits mentioning that the Fund has a strong record in bear markets, having outperformed the Russell 2000 Value during all six downturns of 15% or more from the index’s prior historical high since the Fund’s inception.

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

Annual Operating Expenses: 1.22

¹ Not annualized.

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