Royce Special Equity Fund Manager Commentary
article 12-31-2021

Royce Special Equity Fund Manager Commentary

We have positioned the portfolio with companies that we think are well positioned to withstand the effects of both higher levels of volatility and lower equity prices. Indeed, we believe that Special Equity’s valuation, leverage, and profitability metrics were very attractive at the end of 2021.

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Fund Performance

Royce Special Equity Fund advanced 22.5% in 2021, trailing its primary benchmark, Russell 2000 Value Index, which was up 28.3%, but well ahead of the Russell 2000 Index, which rose 14.8% for the same period. The portfolio outperformed the Russell 2000 Value for the 15-, 20-year, and since inception (5/1/98) periods ended 12/31/21.

What Worked… And What Didn’t

All of the portfolio’s nine equity sectors made a positive impact on calendar-year performance. The sectors making the largest positive contributions were Industrials, Information Technology, and Consumer Staples while the smallest came from Health Care, Real Estate, and Financials. At the industry level, semiconductors & semiconductor equipment (Information Technology), auto components (Consumer Discretionary), and electrical equipment (Industrials) contributed most for the year-to-date period while household durables (Consumer Discretionary), leisure products (Consumer Discretionary), and IT services (Information Technology) were the largest detractors.

The portfolio’s top contributor at the position level for 2021 was Kulicke & Soffa Industries, a leader in manufacturing equipment and tools used to assemble and package semiconductor devices. Approximately 50% of all semiconductors processed utilize the company’s wire bonding equipment. Kulicke is benefiting from record industry wafer fab equipment spending and a structural increase in the complexity of chip packaging due to increased advanced packaging or multi-die packaging techniques. Further, Kulicke has been benefiting from new product introductions in the mini-LED packaging market, which is growing quickly. Meredith Corporation, a premier media and digital marketing company, was the next best performer. Its media properties include magazine brands such as People and Time, which have a total readership of more than 120 million while its website properties receive nearly 135 million monthly unique visitors, making the company a top ten digital media company. Meredith recently embarked on a significant number of value creating events, including the spinoff of its television properties, which ultimately led to the sale of its remaining magazine and digital properties to IAC. Huntsman Corporation is a global maker of specialty chemicals that benefited from an ongoing transformation and portfolio optimization program towards higher valued products, which was reflected in a strong third-quarter earnings report issued in October.


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The Fund’s biggest detractor was Hooker Furnishings, which manufactures and imports home furniture primarily in the medium- to high price ranges. COVID created major difficulties for its business in 2020. While 2021 sales and earnings were positive, though somewhat mixed, investor sentiment—and thus its stock price performance—was influenced by 2021’s highly visible supply chain issues. Flexsteel Industries makes and imports upholstered and wooden furniture for the residential and commercial markets. Its business also showed encouraging, though mixed, signs of recovery through 2021 after a highly challenging 2020. In addition, Flexsteel was adversely affected by the supply chain issues that lingered throughout 2021 and their associated cost inflation. This all took place as the business itself continued to progress nicely, with much success related to strategic growth initiatives and backlog growth. Johnson Outdoors, which makes recreation products in four businesses: Fishing, Camping, Watercraft, and Diving, was the Fund’s third-biggest detractor. Though the company posted strong revenue and earnings in 2021, the market sentiment was muted due to the ongoing debate as to the sustainability of positive industry trends that have helped its business, particularly within the company’s Fishing segment, as well as logistical challenges.

The Fund’s disadvantage versus the Russell 2000 Value came primarily from sector allocation. Stock selection in Consumer Discretionary overcame the positive effect of our substantially larger weighting while our cash position and lack of exposure to Energy also hurt relative results. Conversely, Health Care, Communication Services, and Consumer Staples sectors contributed most to relative performance in 2021.


Top Contributors to Performance 20211 (%)

Kulicke & Soffa Industries3.00
Meredith Corporation2.00
Huntsman Corporation1.93
Ingles Markets Cl. A1.84
Encore Wire1.77

1 Includes dividends

Top Detractors from Performance 20212 (%)

Hooker Furnishings-0.90
Flexsteel Industries-0.69
Johnson Outdoors Cl. A-0.56
Miller Industries-0.25
TEGNA-0.22

2 Net of dividends

Current Positioning and Outlook

During the periods of low inflation wrought by the residual effects of the Great Financial Crisis, followed by the COVID pandemic, governments superimposed loose fiscal and monetary conditions. Too much liquidity has always created bubbles. However, it is now also creating CPI (Consumer Price Index) inflation well beyond their targeted level. To us, this is a warning sign that an already overheated market may be due for a correction. As always, we have positioned the portfolio with companies that we think are well positioned to withstand the effects of both higher levels of volatility and lower equity prices. Yet if one digs deeper, one will also find strong evidence that small-cap quality looks very attractive. Indeed, we believe that Special Equity’s valuation, leverage, and profitability metrics were very attractive at the end of 2021. We are thus faced with a general market valuation that gives us pause but a portfolio that looks very attractive to us against the backdrop of a pivoting Fed likely to initiate multiple rate increases in the not-too-distant future. Investors may want to fasten their seat belts.

Average Annual Total Returns Through 12/31/21 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Small-Cap Special Equity 8.5022.5022.5014.027.589.688.209.529.12 05/01/98

Annual Operating Expenses: 1.20

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, 2021, 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, 2021 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 12/31/21, the percentage of Fund assets was as follows: Kulicke & Soffa Industries was 3.9%, Meredith Corporation was 0.0%, Huntsman Corporation was 5.7%, Ingles Markets Cl. A was 5.8%, Encore Wire was 2.9%, Hooker Furnishings was 2.5%, Flexsteel Industries was 1.9%, Johnson Outdoors Cl. A was 3.9%, Miller Industries was 2.3%, TEGNA was 2.6%, IAC was 0.0%, Time 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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