Royce Value Trust Manager Commentary
article 02-22-2024

Royce Value Trust Manager Commentary

The Fund advanced 21.6% on an NAV (net asset value) basis and 18.8% on a market price basis 2023 versus respective gains of 16.9% and 15.9% for its primary small-cap benchmark, the unleveraged Russell 2000 Index, and the unleveraged S&P Small Cap 600 Index, for the same period.


Fund Performance

Royce Value Trust (RVT) advanced 21.6% on an NAV (net asset value) basis and 18.8% on a market price basis 2023 versus respective gains of 16.9% and 15.9% for its primary small-cap benchmark, the unleveraged Russell 2000 Index, and the unleveraged S&P SmallCap 600 Index, for the same period. The Fund also maintained its longer-term relative advantages over the Russell 2000, beating it on both an NAV and market price basis for the 3-, 5-, 10-, 15-, 25-, 30-, 35-year, and since inception (11/26/86) periods ended 12/31/23.

What Worked… And What Didn’t

All of RVT’S 11 equity sectors made positive contributions to calendar-year performance, led by Industrials, Information Technology, and Financials while Utilities, Consumer Staples, and Communication Services made the smallest contributions. At the industry level, machinery (Industrials), semiconductors & semiconductor equipment (Information Technology), and capital markets (Financials) made the biggest positive impact. The biggest detractors were communications equipment (Information Technology), biotechnology (Health Care), and air freight & logistics (Industrials).

The top-contributing position in 2023 was First Citizens BancShares, which we’ve owned for many years, due mostly to its strong liquidity position and stellar deposit franchise. We began adding shares in late 2022 that were trading at roughly 5x earnings per share. In March 2023, First Citizens was chosen by the FDIC to acquire Silicon Valley Bank, most likely owing to its long history of buying failed banks. Silicon Valley’s travails notwithstanding, the purchase was accretive to First Citizens’ tangible book value and earnings, and helped spur a sharp rise in its stock—as did the lack of a banking crisis in the subsequent months. IES Holdings designs and installs electrical and technology systems and provides infrastructure products and services to data centers, residential housing, and commercial and industrial facilities. It operates through four segments: Communications, Residential, Commercial and Industrial, and Infrastructure Solutions. Revenue, earnings, and profit margins all moved up in 2023, driven mostly by strength in its Communications, Residential, and Infrastructure Solutions groups.

The top-detracting position was Valmont Industries, which makes products for the infrastructure and agricultural markets, including those used in utility grid resilience, solar energy, upgrades to lighting and transportation infrastructure, and the 5G rollout. The company’s Agriculture Technology unit was hampered by slower growth and lower-than-expected adoption rates, while the firm was also facing more widespread inflationary pressures and lower sales in its telecom business. To address these issues, Valmont initiated an organizational realignment that entailed executive leadership changes designed to improve efficiency and streamline decision-making. The ensuing short-term disruptions and uncertainty helped drive its stock down. San Francisco-based regional bank, First Republic Bank was the third bank to declare insolvency in 2023 (following Silicon Valley and Signature Banks) and the second-largest failure since the fall of Washington Mutual in the 2008 Financial Crisis. It was hurt by having too many uninsured deposits and too many reserves in long-term debt instruments, which began losing value when interest rates began to rise. The result was a bailout by JPMorgan Chase in May.

RVT’s advantage over the Russell 2000 came mostly from both sector allocation and stock selection in 2023, with the former having the most impact. Altogether, seven of 11 equity sectors contributed to the Fund’s relative edge. Both stock selection and our higher weighting in Industrials, stock selection and, to a lesser degree, our slightly lower allocation in Financials, and having virtually no exposure to Utilities drove relative outperformance most. Conversely, stock selection in Information Technology, Consumer Staples, and Health Care detracted most.

Top Contributors to Performance 20231 (%)

First Citizens BancShares Cl. A0.88
IES Holdings0.78
Alamos Gold Cl. A0.57
APi Group0.56
CIRCOR International0.53

1 Includes dividends

Top Detractors from Performance 20232 (%)

Valmont Industries-0.32
First Republic Bank-0.26
Driven Brands Holdings-0.25
Forward Air-0.23

2 Net of dividends

Current Positioning And Outlook

Our outlook is constructive. First, we suspect that returns are likely to be spread more widely over the next few years and that the reign of the Magnificent 7—the mega-cap cohort of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—may be coming to an end, especially if 2023’s fourth quarter and early January 2024 are any indication. The backdrop of moderating inflation, normalized interest rates, and a still growing U.S. economy also bolsters our belief that small-cap’s lengthy stretch in the relative performance wilderness has run its course. We believe moderate economic growth and the more normalized rate environment should support a broadening of equity market returns where small-caps could be clear beneficiaries, especially those businesses that have largely sat out the mega-cap performance regime. Even more important is what we’ve been hearing from management teams—most of whom remain cautiously optimistic about 2024. We see an increasing likelihood, for example, that the U.S. economy will achieve the much-desired soft landing—which is encouraging for many reasons. The next few years will see even more tangible benefits of reshoring, the CHIPS Act, and numerous infrastructure projects, and many of our holdings are poised to benefit from these developments. So, we’re looking forward to what we think should be a favorable cycle for small-cap stocks.

Average Annual Total Returns Through 12/31/23 (%)

RVT 15.4618.8318.835.3513.528.2312.297.859.3410.609.74
XRVTX (NAV) 13.3921.6221.624.7512.818.1612.368.559.2810.5710.32

Annual Operating Expenses: N/A

1 Not annualized.

Important Performance, Expense, and Disclosure Information

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund invests primarily in securities of small-cap and micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments.

Current month-end performance may be obtained at our Prices and Performance page.

Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2023, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Royce’s investment intentions with respect to those securities reflect Royce’s opinions as of December 31, 2023 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.

As of 12/31/23, the percentage of Fund assets was as follows: First Citizens BancShares Cl. A was 0.6%, IES Holdings was 1.0%, Alamos Gold Cl. A was 1.4%, APi Group was 1.0%, CIRCOR International was 0.0%, Valmont Industries was 0.5%, First Republic Bank was 0.0%, Driven Brands Holdings was 0.1%, Calix was 0.1%, Forward Air was 0.2%.

Sector weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI.

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The Russell 2000 Index is an index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 2000 Value and Growth Indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The returns for the Russell 2500-Financial Sector represent those of the financial services companies within the Russell 2500 index. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI ACWI Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks.The MSCI ACWI ex USA Small Cap Index is an index of global small-cap stocks, excluding the United States.The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information.

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to:

-the Funds’ future operating results,

-the prospects of the Funds’ portfolio companies,

-the impact of investments that the Funds have made or may make, the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

-the ability of the Funds’ portfolio companies to achieve their objectives.

This discussion uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Royce Funds have based the forward-looking statements included in this commentary on information available to us on the date of the commentary, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see ""Primary Risks for Fund Investors"" in the prospectus.)



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