Fund Performance

Royce Small-Cap Value Fund advanced 6.7% in 2025 versus a 12.6% gain for its benchmark, the Russell 2000 Value Index, for the same period. The Fund outperformed its benchmark for the 5-year, and since inception (6/14/01) periods ended 12/31/25.

What Worked… and What Didn’t

Seven of the portfolio’s 10 equity sectors made a positive impact on calendar year performance. Information Technology, Financials, and Industrials made the largest positive contributions. The biggest negative impacts came from Energy, Consumer Discretionary, and Real Estate.

At the industry level, electronic equipment, instruments & components (Information Technology), banks (Financials), and commercial services & supplies (Industrials) contributed most in 2025, while oil, gas & consumable fuels (Energy), specialty retail (Consumer Discretionary), and ground transportation (Industrials) were the largest detractors.

Three of the Fund’s top five contributors provide electronics contract manufacturing services, or “EMS.” This business continues to experience robust demand—with many of the stocks being re-rated—because of their close involvement building AI data centers.

A top contributor from 2024, Sanmina Corporation offers these services to a global customer base. The company bought ZT Systems, a data center manufacturing business, from semiconductor behemoth Advanced Micro Devices (AMD) while also entering into a strategic partnership with AMD. As a result of the acquisition, Sanmina expects to “strengthen its leading end-to-end component technology, systems integration, and supply chain solutions.” Jabil provides EMS and solutions for several industries including automotive and transportation, capital equipment, and consumer companies. The company has enjoyed vibrant growth in its end markets, especially data center infrastructure, cloud computing, and solar energy, all of which helped Jabil to post better-than-expected earnings and raised guidance in 2025. Flex is an EMS company that designs and develops original design manufacturing (ODM) products for several industries, including aerospace & defense, cloud computing, digital health, lighting, housing, energy, industrial, and communications. Flex reported record adjusted operating margins for both fiscal 4Q25 and the full year in May of 2025, delivering the company’s fifth consecutive year of double-digit adjusted EPS (earnings per share) growth. Recent growth has come largely from AI data center components as well as from cloud computing and medical devices.

Sterling Infrastructure is a construction services company that specializes in infrastructure projects. Sterling generates more than 50% of its profits from site preparation for mission critical construction jobs such as data centers, which account for roughly 60% of its current backlog. The company’s scale (it’s five times larger than its next biggest competitor) and brand equity, along with the low cost but critical importance of site prep to the overall economic success of a construction project, generate customer lock-in. Sterling often has negative working capital thanks to favorable customer funding terms in this core site prep business while its legacy highway infrastructure segment provides excess cash flow which management has adeptly reinvested to fund high ROIC organic growth and M&A in higher margin businesses that broaden its capabilities. Sterling has also been benefiting from favorable secular tailwinds driving overall growth, including data center buildouts, reshoring, the entry-level housing supply gap, and infrastructure spending. Its shares jumped more than 104% in 2025 thanks to its strong and growing backlog, along with incremental industry datapoints that bolstered the case for continued growth in data center construction over the next few years. Additionally, the company announced the acquisition of an electrical contracting manufacturer for a reasonable multiple and that aligns perfectly with management’s strategic intent of adding additional services and building out its presence in the Southwest.

IBEX delivers tech-enabled customer-service solutions and business process outsourcing for digital marketing, sales and support, and brand management. In February, management reported record quarterly revenue that was generated by new customer wins and expanding business with existing clients, with most of the success rooted in AI-related services. More positive news came in November, when IBEX reported broad-based growth, improved profitability, and strong earnings. The company also raise guidance for fiscal 2026. Growth was particularly strong in its Retail & E-commerce segment, while HealthTech and Travel/Transportation/Logistics also showed impressive results.

Two of the Fund’s top detractors in 2025 were energy companies. Oil and natural gas producer SM Energy drills mostly in the Midland, South Texas, and Uinta Basins. Its stock fell sharply during 1Q25, partly due to tumbling commodity prices and more specifically due to a hefty increase in production costs associated with the Uinta Basin acquisition, which overwhelmed a 36% increase in SM’s total average net daily equivalent production year-over-year for the same period. Civitas Resources focuses on developing and producing crude oil, natural gas, and natural gas liquids in Colorado’s Denver-Julesburg Basin and the Permian Basin. The company closed on two acquisitions over the last two years that added leverage to its balance sheet, which helped keep investors away from its stock. The shares of both holdings remained sluggish when it was announced in November that SM Energy would be acquiring Civitas in all-stock deal for virtually no premium. If the synergies and cost savings from the merger materialize as forecasted, SM Energy’s stock should rebound as production levels remain solid.

J. Jill retails women’s apparel, accessories, and footwear. Potential tariffs and declines in consumer spending were largely to blame for the stock’s downward trajectory in 2025. However, we like the new CEO’s long-term strategy and prospects for the brand, which has evolved from catalogue only to a mix of online, catalogue, and brick and mortar. In 2025, management upgraded the company’s order management system to improve returns and logistics, invested $10.3 million in cloud-based software to bolster its digital operations, and added three new stores, giving J. Jill a total of 247 locations.

Two footwear retailers were among the Fund’s five biggest detractors in 2025: Shoe Carnival offers casual and athletic footwear for men, women, and children under well-known brands including Skechers, Clarks, Adidas, Crocs, New Balance, Converse, Roxy, Nike, and Vans. Its shares began to recover in May off their April lows, though not enough to stay out of the red through the remainder of 2025. As is the case with J. Jill, we think the company has managed the business effectively during a highly challenging period for many retailers, including the start of a rebranding of most of its stores to Shoe Station, which retails a broader and higher-end selection than Shoe Carnival itself. In March, management reported better-than-expected earnings on lower-than-anticipated revenues for fiscal 2024. Shoe Carnival then reported fiscal 1Q25 results in May that included higher-than-expected profits. This did little to reverse the downward trend, however, as net sales remained tepid, and operating income fell.

We were less confident in the long-term prospects for Caleres, which provides athletic, casual, and dress footwear products, operating through the Famous Footwear and Brand Portfolio segments. Famous Footwear offers branded footwear for the entire family while the Brand Portfolio—which includes Allen Edmonds, Dr. Scholl’s, and Vince—sources, manufactures, and markets branded, licensed, and private-labeled footwear primarily to online retailers, national chains, department stores, mass merchandisers, and independent retailers. The inflationary pressures on lower-income shoppers continued to crimp sales in the Famous Footwear segment, helping to lead the stock downward. We sold the last of our shares in July.

The Fund’s underperformance versus the Russell 2000 Value in 2025 came from stock selection; sector allocation decisions were positive. At the sector level, stock selection and, to a lesser extent, higher exposure in Consumer Discretionary and Energy detracted the most, followed by a combination of stock picking and a lower weighting in Materials. Conversely, stock selection and our larger weighting in Information Technology, a much lower weighting in Real Estate, and stock selection and a lower weighting in Financials were all additive relative to the benchmark.

Current Positioning and Outlook

The rally that boosted small-caps off the April lows was dominated by low-quality and more speculative companies, and left the kind of conservatively capitalized, quality businesses we focus on trailing. The most notable change in sector weights was bringing the Fund’s Health Care exposure close to the benchmark’s weighting for the first time in many years and finishing 2025 overweight in pharmaceuticals. Otherwise, sector weights did not change appreciably. The portfolio remained overweight in Consumer Discretionary and Information Technology, slightly overweight in Financials (and in banks, by far the sector’s largest industry weighting) and close to the benchmark in Energy. The market is currently in a peculiar place. The AI frenzy may well be a bubble as mega-cap companies keep passing enormous sums of money back and forth to each other—which looks to us like a strong warning sign. In addition, stocks as a whole are not cheap. Spring will bring a new Fed Chair, one who will presumably be amenable to further rate cuts. However, if the Fed continues lower rates because they want to protect employment, it’s likely to spur more inflation—and no one really knows how much of this the market may already be pricing in. Further complicating matters is the fact that lower-income households remain under severe pressure, which may get worse for people who are not poor enough for Medicaid but rely on ACA subsidies that are going away. This has created a challenging investment environment made more even more difficult by the state of equity valuations—which leaves less room for error if the economy slows or if the geopolitical situation gets hotter than it already is. We continue to watch for greater clarity and stability in both the market and economy.

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

Annual Operating Expenses: Gross 1.60 Net 1.49

¹ Not annualized.

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