Royce Special Equity Fund Manager Commentary
article 12-31-2019

Royce Special Equity Fund Manager Commentary

Despite challenges the Fund faced in 2019, we saw certain higher-quality value names improve in 4Q19 and we believe there is more to come.

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Fund Performance

Royce Special Equity Fund gained 12.6% in 2019, lagging respective gains of 25.5% and 22.4% for its small-cap benchmarks, the Russell 2000 and Russell 2000 Value Indexes, for the same period. While our results began to improve in late August, we were still challenged by the success for many growth stocks, including biotechs (seven of the year’s 10 best performers in the Russell 2000 were biotech stocks), an industry to which we have no exposure. Ultimately, 2019 was largely a snapback market off the calamitous fourth quarter of 2018—when Special Equity held its value significantly better than its benchmarks, down 9.8% versus respective losses of 20.2% and 18.7% for the small-cap and small-cap value indexes. Despite 2019’s strong headwinds, we saw certain higher-quality value names start to perform better during the fourth quarter, and we believe there is more to come.

What Worked… And What Didn’t

Six of the eight equity sectors in which the Fund had investments finished 2019 in the black. Information Technology made by far the biggest positive contribution, followed by Industrials and Consumer Staples. Communication Services and Energy detracted, the latter on a very modest basis, while Real Estate made the smallest positive contribution. At the industry level, food products (Consumer Staples) led, followed by IT services (Information Technology) and electrical equipment (Industrials) while media (Communication Services), aerospace & defense (Industrials), and food & staples retailing (Consumer Staples) had the biggest negative effect.

At the position level, the portfolio’s five top contributors for 2019 were the same companies—in the same order—as the top contributors for the year-to-date period ended 6/30/19. Each holding built on its earlier net gains. Snack food company John B. Sanfilippo & Son made the biggest positive contribution in 2019, followed by Computer Services, which offers bank, payment processing, and related services. Hubbell Incorporated, which manufactures, designs, and sells electrical and electronic products, came next. AVX Corporation, which manufactures passive electronic components including ceramic and tantalum capacitors that store, filter, and regulate electric energy in electronic products, was fourth. Its shares rose in November on news that Japanese conglomerate Kyocera, which already owns more than 70% of AVX’s stock, wants to acquire the entire company. Recreational vehicle maker Winnebago Industries also enjoyed a strong year.


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Only 12 stocks detracted from performance in 2019. The portfolio’s six largest detractors at the position level had a disproportionate effect on performance, accounting for more than 90% of the detraction in the Fund. Diversified publishing and broadcasting company, Meredith Corporation, was the top detractor by a significant margin. It was followed by one of 2018’s contributors, diversified manufacturing company National Presto Industries, which saw its stock decline steadily through 2019. Value-priced apparel and accessories retailer, The Children’s Place, also disappointed in 2019 as did supermarket operator Weis Markets and RPC, which provides a broad range of specialized oilfield services and equipment to companies engaged in the exploration, production, and development of oil and gas properties throughout the U.S. and in selected international markets. The sixth-biggest detractor was Bassett Furniture Industries, which manufactures and sells furniture.

Performance relative to the Russell 2000 in 2019 was hurt by both sector allocation and stock selection, with the latter making the largest negative impact. This pattern held in the two sectors that detracted most from results versus the benchmark—Communication Services and Consumer Discretionary. Poor stock selection in the media industry had the biggest negative effect in the first sector while in the second the primary detractors were household durables, specialty retail, and auto components. The portfolio’s cash position also hurt relative performance in 2019. Conversely, stock picking was a relative strength in Consumer Staples, particularly in food products, and Information Technology, where IT services stood out on a relative basis. The portfolio’s lack of exposure to Energy—the only small-cap sector to finish 2019 in the red—also helped versus the benchmark.


Top Contributors to Performance 20191 (%)

John B Sanfilippo & Son2.88
Computer Services2.82
Hubbell Incorporated2.36
AVX Corporation1.63
Winnebago Industries1.24

1 Includes dividends

Top Detractors from Performance 20192 (%)

Meredith Corporation-2.41
National Presto Industries-0.85
Children's Place-0.74
Weis Markets-0.51
RPC-0.31

2 Net of dividends

Current Positioning and Outlook

We have maintained for a while that value was deeply neglected and therefore attractive, particularly if global economic conditions bottomed and interest rates and commodity prices firmed. To some degree, this has occurred. The yield curve is its steepest since September 2018, consistent with the view that the global economy has bottomed. In addition, commodity prices are rising, as are global economic diffusion indexes. If this continues, we maintain that we are only in the early innings of the rotation to value. One no longer has to pay steep multiples for growth stocks; earnings growth can be bought much less expensively in value stocks. While known for the caution inherent in our strategy, we must admit that equities could go still higher given the current continued state of more-than-ample liquidity and signs of economic bottoming. The challenge we face is that adhering to our long-established discipline in the current market climate makes it difficult to find new names that meet our stringent selection requirements, though a correction of course would likely produce some new portfolio entries.

Average Annual Total Returns Through 12/31/19 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Special Equity 7.6312.6312.633.074.888.657.0910.328.62 05/01/98

Annual Operating Expenses: 1.21

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. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

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, 2019, 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, 2019 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 12/31/19, the percentage of Fund assets was as follows: John B Sanfilippo & Son was 1.0%, Computer Services was 6.0%, Hubbell Incorporated was 5.7%, AVX Corporation was 4.4%, Winnebago Industries was 1.5%, Meredith Corporation was 4.3%, National Presto Industries was 3.3%, Children's Place was 2.8%, Weis Markets was 1.7%, RPC was 0.0%, Bassett Furniture 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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