Fund Performance

Royce Small-Cap Special Equity Fund advanced 3.3% in 2025, trailing its benchmark, Russell 2000 Value Index, which was up 12.6% for the same period. The portfolio outperformed its benchmark for the 20-, 25-year, and since inception (5/1/98) periods ended 12/31/25.

What Worked.. and What Didn’t

Five of the portfolio’s 10 equity sectors made a positive impact on calendar year performance, with Consumer Discretionary, Industrials, and Financials making the biggest positive contributions while the largest negative impacts came from Materials, Information Technology, and Real Estate. At the industry level, automobile components (Consumer Discretionary), machinery (Industrials), and capital markets (Financials) contributed most, and paper & forest products (Materials), construction materials (Materials), and semiconductors & semiconductor equipment (Information Technology) were the largest detractors.

The Fund’s top contributor at the position level was Mueller Industries, a leading producer of copper tubing and fittings, enjoyed particularly noteworthy second half performance. Mueller’s margins are impacted by the company’s ability to manage selling prices above the underlying pricing of copper, and Mueller has maintained higher than historic margin as it has been able to continue to capture this spread in a high copper price environment. The company has also deployed capital prudently into market adjacent acquisitions.

Standard Motor Products manufactures and sources aftermarket auto parts in engine management and temperature control. Standard Motor contributed meaningfully as the stock initially rallied off post “Liberation Day” lows, as fears from risks of Mexico based production subsided. Throughout the year, the company reported strong results across the legacy Vehicle Control and Temperature Control segments, as traditional aftermarket demand remained strong. This was complemented by the strong performance of an acquired European business that operates in similar and complementary markets.

It was a tale of two halves for iconic multi-line retailer, Macy’s in 2025, with performance pressured in the first half of the year amid concerns over consumer sentiment, tariffs, and the risks associated with announced store closures. Under its “Bold New Chapter” strategy, the company has taken steps to reimagine the Macy’s nameplate by focusing on fashion, value, and shopping experience. Results in the second half showed that this strategy has begun to take hold, as comparable sales metrics have improved, particularly at reimagined stores. Macy’s has also likely benefited from financial struggles at peers.

Insteel Industries is a leading manufacturer of prestressed concrete (PC) strands and welded wire reinforcements used in concrete construction. The stock reacted to results in April that saw shipments rebound, while at the same time selling prices increased relative to inputs costs, lifting gross margins to the mid teens versus the low teens a year earlier. Management also highlighted the benefit of increased trade protections which had previously harmed certain product lines. This combination of higher volumes, better spreads, and tariff protection produced strong earnings throughout the period.

Federated Hermes is a leading asset manager known for their money market franchise. The interest rate environment remained favorable for the firm’s money market assets under management, while the MDT equity franchise continued to grow assets. Additionally, the GENIUS Act provided clarity around stablecoin legislation, which may drive further demand for money market products.

Our largest detractor was Sylvamo Corporation, a global low cost producer of uncoated paper. First quarter results weighed on the stock, as forward guidance was weaker than anticipated, in part due to outsized levels of maintenance. Europe remains a weak market, in part due to higher wood costs and a soft demand and pricing environment. At mid-year, the company’s former owner, International Paper, executed its right to convert some of Sylvamo’s supply, reducing available volumes.

United States Lime & Minerals appeared among the detractors despite strong financial performance throughout the period. The stock entered the year at elevated levels, and after a multi year rally, the share price consolidated early in 2025. This was likely a bout of profit taking amid questions of how long elevated lime pricing can persist, leaving strong the company’s fundamentals overshadowed by a valuation overhang. The stock rallied in the second half of the year, likely due to perceived data center exposure.

NVE Corporation is an electronics component manufacturer focusing on components such as sensors and isolators. NVE’s shares suffered from a weakening revenue profile throughout the year, in part due to the inherent lumpiness of a smaller, specialized technology business. In NVEC’s case, its defense business was impacted due to volatile procurement cycles. The company’s margins were also pressured throughout the period on a weaker product mix.

Marcus & Millichap operates as a commercial real estate brokerage, focused primarily on sub $10 million transactions, a market that remains challenging, as the elevated cost of debt has inhibited transactional activity. Wide bid-ask spreads and challenges in retaining agents during this period of disruption have contributed to weaker volumes.

Miller Industries, which manufactures vehicle towing and recovery equipment, has faced several headwinds in the current environment, including excessive inventory in the distributor channel, rising insurance costs for operators of tow trucks, and regulatory pressure in key markets—all of which weighed on the stock throughout the year.

The Fund’s relative underperformance versus the Russell 2000 Value was mostly due to stock selection, though sector allocation also detracted. At the sector level, stock selection in Materials and Information Technology detracted most in 2025, followed by our substantially lower exposure to Health Care. The Fund’s cash position also detracted from performance. Conversely, stock selection in Consumer Discretionary, stock selection and a significantly lower weighting in Financials, and a much lower weighting in Energy were the most additive relative to the benchmark.

Current Outlook and Positioning

It is much too soon given all the uncertainties, but there does appear to be some positive inflection in the economy and, interestingly, more interest in cyclical equities. In fact, it is also visible in commodities. The government has reopened, jobless claims remain range bound with a downward bias, and holiday sales seemed to be brisk. It just might be the initial stages of reflation in the economy absent a curve ball. Given that the unemployment rate is a lagging indicator, it could drift higher into early 2026 even while the labor market is stable. Further, there appears to be broadening out in the appetite for asset classes beyond the Magnificent Seven. Should this continue, we believe small-caps will regain much of their lost relative performance over the past several years. We also see this broadening out in the strong performance of the equal weight S&P 500.

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

Annual Operating Expenses: 1.22

¹ Not annualized.

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