Royce Total Return Fund Manager Commentary
article 12-31-2021

Royce Total Return Fund Manager Commentary

Small-cap value, quality, and dividend payers—all of which are historically cheap versus their respective counterparts—look well positioned to us for 2022.

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Fund Performance

Royce Total Return Fund gained 25.8% in 2021, lagging its primary benchmark, the Russell 2000 Value Index, which was up 28.3%, and outpacing the Russell 2000 Index, which rose 14.8%, for the same period.

What Worked… And What Didn’t

All of the portfolio’s 11 equity sectors made a positive impact on calendar-year performance. Financials, Industrials, and Consumer Discretionary contributed most while the smallest positive impacts came from Utilities, Health Care, and Communication Services. At the industry level, banks (Financials), building products (Industrials), and insurance (Financials) contributed most while software (Information Technology), equity real estate investment trusts (REITs) (Real Estate), and commercial services & supplies (Industrials) were the largest detractors.

Triumph Bancorp, which offers traditional and more specialized banking services and products, made the largest positive contribution at the position level. Through most of 2021, the market’s recognition of the bank’s fintech expertise validated our original investment thesis. Triumph has developed a payment platform, for example, that is changing how payments and invoices are handled in the trucking industry by allowing much more efficient processing via better connecting carriers, shippers, factoring companies, and freight brokers. The robust market for trucking, in terms of the spot prices that drive Triumph’s revenue, led to an outstanding year in its core receivables factoring business, which allows companies to sell invoices for cash advances. While our long-term confidence is strong, returns for the payment platform may have been pulled forward, a concern that led us to reduce our position. Our second top contributor was Signature Bank, whose shares rose from a combination of the bank’s own exceptional fundamentals and the market recognizing that New York City remains a strong market. We sold our shares as it moved from a value opportunity to more of a growth stock.


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Full-service insurance management company Trean Insurance Group, which focuses on workers compensation insurance, was 2021’s largest detractor. Its business model is both asset light and, in our view, unique. Trean retains only around 20% of the risk written on behalf of third parties while also collecting fees for its claims handling services. Unfortunately, the distinctive features that appeal so much to us do not seem well understood by other investors—though we also believe that management could have done more to communicate its distinctive features. We also believe these attributes can help its shares to reverse course. The portfolio’s next biggest detractor, James River Group, focuses on the “Excess & Surplus” niche. Its stock saw its most severe dip in 2021’s first half. The company then took a charge in the fourth quarter related to its non-core reinsurance division that, while fairly small, came on the heels of the much larger charge taken earlier in the year in its commercial auto business (specifically Uber), which led its shares to drift lower. However, current management has been effectively fixing problems created by the prior team, and we like the company’s long-term prospects.

The portfolio’s disadvantage versus the Russell 2000 Value came entirely from stock selection in 2021. A combination of stock picking and our underweight hurt in both Energy and Consumer Discretionary, while stock selection detracted in Materials. Conversely, stock picks were a relative strength in Financials (as was our overweight in this strong sector). We also benefited from our significantly lower exposure to index laggards Health Care and Utilities.


Top Contributors to Performance 20211 (%)

Triumph Bancorp1.99
Signature Bank1.47
Kulicke & Soffa Industries1.08
Compass Diversified Holdings0.93
Carlisle Companies0.81

1 Includes dividends

Top Detractors from Performance 20212 (%)

Trean Insurance Group-0.86
James River Group Holdings-0.74
Healthcare Services Group-0.40
Teradata Corporation-0.27
CDK Global-0.24

2 Net of dividends

Current Positioning and Outlook

Supply chain issues, labor inflation/shortages, and price inflation dominated the headlines in 2021’s second half. And while these developments played a role in the more muted gains for small-caps in the second half of the year, we believe the market will return to its more typical forward-looking role, shifting to an environment that is more conducive to stock picking. This was not always the case in 2021. The property & casualty insurance group, which did not perform to our expectations in 2021 despite steadily improving fundamentals, was emblematic of a theme we saw in many of our underperformers: strong fundamentals in the underlying businesses, yet underperformance in the stocks, often driven by multiple contraction. Because the market is comprised of literally millions of participants, we can’t predict when investors will recognize the fundamental improvements in our holdings. We believe, however, that stock prices follow fundamentals over the long run, and it is only a matter of time before the market begins to reflect the improvements we anticipated. In this context, we entered 2022 with optimism for the long run. From a top-down perspective, the market climate appears far more conducive to our style of investing: Small-cap value, quality, and dividend payers—all of which are historically cheap versus their respective counterparts—look well positioned for 2022. From our bottom-up perspective, we are very confident in our portfolio, which we believe holds high-quality, undervalued businesses.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Small-Cap Total Return 6.8725.7825.7817.269.9111.177.879.1910.75 12/15/93

Annual Operating Expenses: 1.25

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, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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: Triumph Bancorp was 0.8%, Signature Bank was 0.0%, Kulicke & Soffa Industries was 1.2%, Compass Diversified Holdings was 1.6%, Carlisle Companies was 0.9%, Trean Insurance Group was 1.7%, James River Group Holdings was 2.0%, Healthcare Services Group was 0.5%, Teradata Corporation was 1.4%, CDK Global was 2.0%


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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