Royce Small-Cap Value Fund Manager Commentary
article 02-14-2025

Royce Small-Cap Value Fund Manager Commentary

Royce Small-Cap Value Fund outperformed the Russell 2000 Value Index for the 3-year and since inception (6/14/01) periods ended 12/31/24 while lagging for the 1-, 5-, and 10-year periods.

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Fund Performance

Royce Small-Cap Value Fund gained 3.2% in 2024, trailing both the Russell 2000 Value Index, which was up 8.1%, and the Russell 2000 Index, which increased 11.5%, for the same period. The portfolio outperformed the Russell 2000 Value for the 3-year and since inception (6/14/01) periods ended 12/31/24 while lagging for the 5- and 10-year periods.

What Worked… and What Didn’t

Six of the portfolio’s 10 equity sectors made a positive impact on calendar year performance, led by Financials, Industrials, and Information Technology, while Consumer Discretionary, Communication Services, and Materials had the largest negative effects. At the industry level, banks (Financials), electronic equipment, instruments & components (Information Technology), and professional services (Industrials) contributed most in 2024, while hotels, restaurants & leisure (Consumer Discretionary), communications equipment (Information Technology), and marine transportation (Industrials) were the biggest detractors.

The Fund’s top contributor at the position level was Flex, an electronics manufacturing services company that designs and develops original design manufacturing (ODM) products for several industries, including aerospace & defense, cloud, digital health, lighting, housing, energy, industrial, and communications. Flex’s stock moved higher thanks to strong earnings and revenues in 2024. In May, and then again in January 2025, the company raised revenue and earnings per share guidance, thanks in large part to focusing on its higher-margin business mix.

Investment bank Evercore offers advisory services on mergers, acquisitions, divestiture, restructuring, and other corporate transactions while also providing investment management services. The market has been excited—arguably over-excited—about expectations for a revived M&A landscape under the second Trump Administration, which helped Evercore’s shares to climb even higher through the year’s last two months We have been trimming our stake as its stock price rose.

Allison Transmission Holdings manufactures fully-automatic transmissions for medium and heavy-duty commercial vehicles, medium and heavy-tactical U.S. military vehicles, and hybrid-propulsion systems for transit buses. Its shares had mostly been sluggish prior to 2024, as the market appeared to be expecting a significant cyclical downturn that never materialized. Rising off what we thought was a very cheap valuation, the market then seemed to recognize that Allison was paying down debt and executing effectively against the backdrop of a robust U.S. trucking industry.

Sanmina Corporation provides electronics contract manufacturing services—aka “EMS”—to a global customer base. Inventories for a lot of networking and communications gear had been full but began thinning out in 4Q24. As this inventory overhang abated, its shares began to rise.

Unity Bancorp is a full service commercial bank operating in New Jersey. In October, Unity announced the highest quarterly earnings results in its history, driven by increased commercial loan volumes and deposit growth.

The top detractor in 2024 was Bloomin’ Brands, a consortium of casual dining restaurants that includes Outback Steakhouse and Carrabba’s Italian Grill. Spending by middle- and lower-income consumers continues to be slow, resulting in declining restaurant traffic. Along with the retirement of the company’s CEO in May, this dynamic has put pressure on its shares. We trimmed our stake in the first half of 2024 but began buying again when the stock looked attractively cheap to us in the second half of the year.

Aviat Networks provides IP solutions to wireless public and private telecommunication operators. Aviat completed its acquisition of the Wireless Transport Business of a Japanese company in November of 2023. Early optimism that the move would enrich and diversify Aviat’s business wilted in the face of disappointing earnings. We sold the last of our shares in November.

We also lost confidence in the long-term prospects for Cross Country Healthcare, which provides healthcare staffing services such as travel and per diem nurses and clinical research trials staffing. The company over-earned during the pandemic and the wait for its business to normalize proved much longer than we initially anticipated, so we chose to exit our position, selling the last of our shares in July.

We also exited our position in Ryerson Holding, which purchases, processes, and distributes various forms of stainless steel, aluminum, carbon, alloy steel, nickel, and red metals, as weakness in many of its end markets continued to pressure margins.

Electronics contract manufacturing services business Kimball Electronics offers engineering, manufacturing and supply chain services to the automotive, medical, industrial, and public safety industries. Much of the EMS industry has faced headwinds, Kimball included. A slowdown in the manufacture of automotive components used for power steering and regenerative braking was especially rough, prompting us to exit the stock.

The portfolio’s disadvantage versus the Russell 2000 Value came from both stock selection and sector allocation in 2024, with the former having the biggest impact. At the sector level, stock selection and our much larger weighting in Consumer Discretionary, stock selection in Industrials, and stock selection and a lower weighting in Communication Services hurt relative performance the most. Conversely, stock selection in Financials, stock selection and lower exposure in Health Care, and our lack of exposure to Utilities all helped versus the Russell 2000 Value in 2024.


Top Contributors to Performance For 20241

Flex
Evercore Cl. A
Allison Transmission Holdings
Sanmina Corporation
Unity Bancorp

1 Includes dividends

Top Detractors from Performance For 20242

Bloomin' Brands
Aviat Networks
Cross Country Healthcare
Ryerson Holding
Kimball Electronics

2 Net of dividends

Current Outlook and Positioning

There is a tremendous amount of uncertainty as we enter 2025. We can begin with the incoming administration and the possibility of widespread tariffs. Inflation remains sticky and stubborn, and adding significant tariffs into the economic mix would potentially worsen an already challenging problem. Considering the razor-thin majority in the House, the size and scope of tax cuts is also hard to see with any clarity. Potential battles over the debt ceiling and budget deficit are also looming in the months ahead. Moving beyond the U.S., there are geopolitical conflicts and largescale displeasure with government in Germany, France, and Canada while China’s economy remains mostly in neutral. A robust market that seems to be overlooking these challenges is, needless to say, worrisome. Federal Reserve Board of Governors member Lisa Cook recently described several capital markets, including equities, as priced to perfection and therefore susceptible to significant declines, a sentiment with which we largely agree. We see the market as long overdue for a correction. Most small-cap names look inexpensive for good reasons while others have reached lofty levels that in our view would discourage a risk-conscious buyer. That said, we still like pockets of the market, such as homebuilders, where long-term prospects look positive. We made no significant changes to positioning as we look forward to an environment with a larger number of fundamentally sound, attractive purchase candidates.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT.
(06/14/01)
Small-Cap Value -2.013.253.255.407.035.687.146.918.62

Annual Operating Expenses: Gross 1.62 Net 1.49

1 Not annualized.

Important Performance and Disclosure Information

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Gross operating expenses reflect the Fund's gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.49% through April 30, 2025.

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, 2024, 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, 2024 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 12/31/24, the percentage of Fund assets was as follows: Flex was 1.9%, Evercore Cl. A was 1.4%, Allison Transmission Holdings was 1.9%, Sanmina Corporation was 1.9%, Unity Bancorp was 1.7%, Bloomin' Brands was 1.0%, Aviat Networks was 0.0%, Cross Country Healthcare was 0.0%, Ryerson Holding was 0.0%, Kimball Electronics was 0.0%.


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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