Royce Total Return Fund Manager Commentary
article 12-31-2020

Royce Total Return Fund Manager Commentary

Although dividend payers as a group underperformed for the full year within the Russell 2000, we continue to look for what we see as strong divided-paying businesses trading at attractive valuations.

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Fund Performance

Royce Total Return Fund gained 3.8% for 2020, trailing each of its benchmarks as the Russell 2000 Index advanced 20.0% and the Russell 2000 Value Index rose 4.6% for the same period. For context, we note that dividend payers as a group underperformed for the full year within the Russell 2000. The Fund nonetheless maintained certain long-term relative advantages, beating the Russell 2000 Value for the three-, five-, 15-, 20-, 25-year, and since inception (12/15/93) periods ended 12/31/20, while it outpaced the Russell 2000 for the 25-year and since inception periods.

What Worked… And What Didn’t

Seven of the Fund’s 11 equity sectors finished 2020 in the black, with Materials making the largest positive impact, with Information Technology and Consumer Discretionary following. Of the four sectors that detracted, Energy hampered performance most, followed by Utilities and Real Estate. At the industry level, capital markets (Financials) and chemicals (Materials) were the biggest contributors while energy equipment & services (Energy) and thrifts & mortgage finance (Financials) hurt performance most.

The Fund’s top-contributing position was Texas-based regional bank Independent Bank Group, which reaped the benefits of joining the S&P SmallCap 600 stock index in June before lower loan deferral rates appeared to help its shares rise in September. Investment management firm Artisan Partners Asset Management reported higher assets under management and a consequent boost in performance fees rooted in the recovery for global equity markets and outperformance for many of its equity funds.


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Bank and financial holding company CIT Group was the top detractor on a position basis. Pandemic-driven challenges hurt its fiscal first- and second-quarter results, and we sold our shares in October just before the announcement of its merger with First Citizens BancShares, which we also hold. Norway’s TGS-NOPEC Geophysical, which provides geophysical seismic data to oil exploration companies, was the second-largest detractor. Although we like its business model, we believe that structural changes in oil & gas exploration, as well as secular shifts toward cleaner energy, may ultimately reduce its long-term growth and consequently the rate at which it can compound value, an analysis that led us to reduce our stake in 2020. We also exited our position in Bank of Hawaii as the bank reported increased provision expenses related to the pandemic and its negative impact on the state’s tourism-driven economy.

Relative underperformance for 2020 was due to sector allocation and stock selection, with the former having a much larger impact. Health Care was the largest source of relative underperformance because of our lower exposure and, to a lesser degree, stock selection. Dividend-payers are scarce in this sector. Ineffective stock picks in Industrials also hindered relative results, while our lower exposure and stock selection negatively impacted Information Technology. Conversely, our lower exposure to Real Estate made it the top relative contributor while a lower weighting and savvy stock selection were beneficial in both Utilities and Consumer Staples.


Top Contributors to Performance 20201 (%)

Independent Bank Group1.08
Artisan Partners Asset Management Cl. A0.88
BankUnited0.84
Watsco0.79
Ares Management Cl. A0.78

1 Includes dividends

Top Detractors from Performance 20202 (%)

CIT Group-0.86
TGS-NOPEC Geophysical-0.72
Bank of Hawaii-0.71
Kimball International Cl. B-0.69
Alleghany Corporation-0.64

2 Net of dividends

Current Positioning and Outlook

Despite a strong run by small caps, we remain optimistic about the asset class for three reasons: First, we expect a strong recovery due to pent up services demand, limited excess capacity, a healthy U.S. consumer, and strong corporate balance sheets; second, stronger-than-expected operating leverage should accentuate the recovery as many companies have permanently reduced their cost structures; and finally, we see reasonable, and in some cases quite attractive, valuations for many of our holdings. The vaccine roll-out should spur economic growth, though we suspect it will initially be unevenly distributed—and that is where we think active managers can offer an edge. The ability to recognize patterns, understand industry dynamics, and evaluate management teams should all prove crucial in such a climate.

We continue to look for what we see as strong divided-paying businesses trading at attractive valuations. We are particularly optimistic about two areas within Financials that lagged in 2020: regional banks and property & casualty (P&C) insurance. Regional banks have held up well during the pandemic, consistent with our thesis that the industry’s risk profile was reduced dramatically following the Financial Crisis and that robust capital levels would prove a source of strength. We expect earnings to be strong in 2021 as provisions for credit losses drop sharply, loan growth resumes, and stronger economic growth steepens the yield curve. The P&C insurance industry has experienced an unwillingness to commit capital due to higher than normal levels of uncertainty. However, demand for insurance is relatively consistent and when capital becomes scarce, the incumbent insurers see pricing power shift in their favor, and prices begin to rise, which has historically portended a multi-year period of strong fundamentals. The P&C insurance industry had seen rising prices for several quarters prior to the pandemic, which has further accelerated these increases to the point where they look sustainable through at least the end of 2021.

Average Annual Total Returns Through 12/31/20 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Total Return 25.253.823.823.919.928.477.208.6910.23 12/15/93
Russell 2000 31.3719.9619.9610.2513.2611.208.918.749.42 N/A
Russell 2000 Value 33.364.634.633.729.658.666.928.549.58 N/A

Annual Operating Expenses: 1.23

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, 2020, 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, 2020 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 12/31/20, the percentage of Fund assets was as follows: Independent Bank Group was 1.9%, Artisan Partners Asset Management Cl. A was 1.1%, BankUnited was 1.4%, Watsco was 0.9%, Ares Management Cl. A was 0.9%, CIT Group was 0.0%, TGS-NOPEC Geophysical was 0.5%, Bank of Hawaii was 0.0%, Kimball International Cl. B was 0.0%, Alleghany Corporation 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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