Fund Performance

In a good year for small-cap growth stocks, Royce Smaller-Companies Growth Fund made an excellent showing on both an absolute and relative basis. The Fund advanced 19.3% in 2025, beating both Russell 2000 Growth Index, which was up 13.0%, and the Russell 2000 Index, which gained 12.8%, for the same period. The Fund also outperformed both indexes for the 3-year, 10-year, and since inception (6/14/01) periods ended 12/31/25 while also outpacing the small-cap growth index for the 5-year period.

What Worked… and What Didn’t

Nine of the portfolio’s 10 equity sectors made a positive impact on calendar year performance, with Health Care, Industrials, and Materials making the largest positive contributions while the only negative impact came from Consumer Staples. At the industry level, health care providers & services (Health Care), aerospace & defense (Industrials), and pharmaceuticals (Health Care) contributed most, while software (Information Technology), commercial services & supplies (Industrials), and food products (Consumer Staples) were the largest detractors.

Our top-contributing position was Palvella Therapeutics, a clinical-stage biopharmaceutical company focused on developing and commercializing novel therapies to treat patients suffering from serious, rare genetic skin diseases for which there are no FDA-approved therapies. Palvella is developing a broad pipeline of product candidates based on its patented QTORIN platform—a proprietary technology that focuses on delivering highly targeted technologies directly to the disease source. Palvella’s shares appreciated significantly in 2025 as investors grew more confident in the company’s pipeline following a grant from the FDA, patent wins, expanded indications and programs, and a positive Phase II readout, with an additional Phase III readout expected in 1Q26. QTORIN rapamycin has the potential to be the only approved therapy in multiple rare disease settings, supporting a potential $2 billion+ commercial opportunity. Palvella has recently expanded its pipeline to address additional opportunities across rare skin diseases. We began building a position in February of 2025, when it was a mostly undiscovered, and uncovered, company, with just a few sell side analysts covering the stock; today, there are 15.

Hims & Hers Health operates a telehealth consultation platform that provides consumers access to healthcare professionals for mental health, sexual health, dermatology, and primary care. Its shares outperformed in 2025 as the company saw positive revisions from +37% to +59% revenue growth expectations for 2025 that were driven by the company’s position in the weight loss segment. The company manufacturers a generic version of the GLP-1 via compounding operations that led its stock to rally on news that it had signed a distribution partnership agreement with leading branded manufacturer, Novo Nordisk. Shortly afterward, however, Novo Nordisk announced it had terminated the partnership. We began trimming the position on those headlines, ultimately exiting the position as our analysis showed a deteriorating risk-reward.

Impinj is a leading RAIN RFID provider helping businesses analyze, optimize, and innovate by wirelessly connecting everyday items to their systems. In short, Impinj’s tags can be attached to anything, from shipping boxes to items on the shelves in retail stores, to fresh food items in the grocery store. The tags are “read” from scanners and logged in real time on their systems, allowing customers to track data points relevant to each respective business and thus properly track and manage inventory at an item level. Impinj is a long time holding in the portfolio with a very large TAM (total addressable market) expansion opportunity, a strong patent portfolio, and an increasingly diversified customer base. After trimming our position in 2024 as their retail channel customers went through a period of digestion, we began adding to the position again early in 2025 once that period of digestion was complete, and we began to see positive revisions to earnings estimates.

AeroVironment designs, develops, produces, and supports the operation of unmanned aircraft systems and electric transportation solutions. The stock recovered after a sell-off on softer quarterly earnings earlier in 2025, followed by exceptional fiscal fourth quarter results (reported in April) and a spotlight on unmanned aerial vehicles becoming a larger part of the Department of Defense budget, as the U.S. looks to modernize its equipment and resources. Defense technology continues to be an area of investor focus entering 2026 and beyond given the potential of significant increases in military spending due to geopolitical uncertainty.

JFrog helps enterprises and their software developers track, secure, and protect “binaries,” or open source code developed outside the enterprise’s servers or systems of record. The company should benefit from the expected growth of AI-generated code. JFrog reported better-than-expected earnings and revenue in November, driven by success in its Cloud and Security segments and also raised its forecast for earnings and revenue for fiscal 2025 as a whole.

The biggest detractor at the holdings level was ACV Auctions, which provides used car wholesale auction services. Its stock underperformed in 2025 due to a deceleration of organic growth (after a robust 3Q24 of +30%), increased competition, and a continued weak used car auction environment. It remains a top holding in the Fund, given the potential for an industry rebound and several new growth drivers over the next three years.

Freshpet, the leading “fresh” ingredient and unfrozen pet food maker, endured decelerating organic growth after outperforming in 2023 and 2024 from improved capital management and production efficiencies. The Consumer Discretionary sector struggled in 2025, and despite growing faster than most businesses in the sector, Freshpet experienced valuation contraction along with the slower growth and estimate cuts. We have used the pullback as an opportunity to add to what we think is a high quality growth company.

An innovator in the restaurant industry payment solutions market, PAR Technology has continued to win new business from new and existing large restaurant chain customers but has also seen delays in project implementation from many customers. Its backlog continues to build, and we have used the pullback to add to our position, expecting revenue to accelerate from what should be a temporary slowdown.

Semtech is a semiconductor company that has been a successful turnaround after making a poor acquisition several years ago. New management have cut costs, increased exposure to data center infrastructure applications, and expressed interest in selling what is left of the acquired company (Sierra Wireless). We believe context is important with regard to this position as it was a massive outperformer in 2024, when its share price nearly quadrupled, before management announced a slower ramp in their datacenter product growth rate in early 2025, causing the shares to drop precipitously. Our timing of reducing and then adding back to this position was detrimental to performance, despite the stock itself finishing up over the calendar 12 month period.

Alvotech is a biopharmaceutical company that develops, manufactures, and distributes biosimilar medicines, which are lower-cost versions of complex biologic drugs whose patents have expired. These biosimilars treat serious diseases such as cancer, autoimmune disorders, and other conditions. In early November, Alvotech received a “complete response letter” from the FDA regarding its Biologics License Application for AVT05, a key product, in which the agency cited deficiencies following an inspection of its Reykjavik manufacturing site. The company then lowered its 2025 revenue and earnings guidance, which prompted us to exit our position since the investment case was based on a fourth-quarter launch of new products.

The Fund’s advantage over its benchmark came solely from stock selection in 2025 (sector allocation was marginally negative). At the sector level, stock selection in Health Care gave the Fund an outsized relative advantage, followed by stock selection in Materials and Energy. Conversely, stock selection and, to a lesser extent, a lower weighting detracted in Industrials. Stock selection also detracted in Consumer Staples (where our lower exposure was a positive), as did a combination of stock selection and a higher weighting in Information Technology.

Current Positioning and Outlook

Despite much noise and recent volatility, we are enthusiastic about the potential of small-caps to power ahead over the next several years. The Trump administration’s policies should continue to drive the economy and markets; it is increasingly clear that fiscal spending will continue (at the risk of growing the federal budget deficits) to rebuild aging defense and other infrastructure while developing domestic supplies of uranium, lithium, and other rare-earth materials. With a new Federal Reserve Chair looking more likely in 2026, a more accommodative money supply and rate environment may also contribute to economic growth across businesses, government, and consumers. AI, automation, and innovation of all sorts appear to be durable themes, despite the over-investment and supply chain disruptions that often occur during the early years of a major innovation. At the same time, we witnessed several pockets of speculative activity in 2025 that need to be monitored, particularly where valuations raced ahead of fundamentals, and in some cases lacked any fundamentals at all.

Our positioning continues to reflect our focus on growing companies in growth industries while managing positions (or themes) that have become overvalued in the short term. There are risks in every business and industry, of course, and we attempt to balance the risk/reward equation based on hard data, whether economic, company-specific, or valuation-related. New themes will emerge, while others will mature, a key component of our daily research efforts. It was also noteworthy that some of the highest quality small-cap growth companies underperformed during the year, offering better relative valuations than we have seen in some time, another development that bolsters our confidence in the small cap universe.

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

Annual Operating Expenses: Gross 1.55 Net 1.49

¹ Not annualized.

Important Performance and Disclosure Information