Royce Capital Fund-Micro-Cap Portfolio Manager Commentary
article 06-30-2021

Royce Capital Fund–Micro-Cap Portfolio Manager Commentary

We believe recent commodity price spikes will prove short lived as the supply base responds to strong demand. We have thus positioned our portfolio accordingly with a cyclical lean due to our value approach, which we think will bode well in the current environment.

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Fund Performance

Royce Capital Fund–Micro-Cap Portfolio advanced 25.2% for the year-to-date period ended 6/30/21, trailing its primary benchmark, the Russell Microcap Index (+29.0%), while outpacing the Russell 2000 Index (+17.5%). The Fund also outperformed the Russell 2000 for the one- and three-year periods and the Russell Microcap for three-year period ended 6/30/21.

What Worked… And What Didn’t

All 10 of the Fund’s equity sectors made positive contributions to performance in 2021’s first half. The most sizable positive impact came from Information Technology, the portfolio’s largest weighting, followed by Industrials and Consumer Discretionary. On the other hand, Consumer Staples, Real Estate, and Energy made the smallest positive contributions for the year-to-date period ended 6/30/21.

The Fund’s top contributing position for the first half was B. Riley Financial. The diversified financial services firm boasts operations that span from investment banking to retailer bankruptcy liquidations. The company’s earnings increased sizably during the pandemic as many of its end markets experienced record activity levels, including its investment banking and capital markets businesses. Citi Trends, a retail clothing chain selling discounted products targeted primarily at urban customers, was also additive to performance during 2021’s first half, benefiting from additional technology, such as merchandise planning software, that allowed the company to effectively target regional taste differences as well as refining its demographic focus. The company’s returns on capital have increased substantially over the last five years to 33%. Harvard Bioscience develops, manufactures, and markets life sciences equipment to support research and drug discovery. The company’s turnaround was sparked by an acquisition that significantly expanded its market. The company then restructured its management team, which proved beneficial as it put in a new operational structure. We maintained our position as we believe the company is relatively early in reaping the benefits of its restructuring.


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Motorsport Games, an international media and technology company that develops gaming software, detracted most for the year-to-date period ended 6/30/21, as it was negatively impacted by the disconnect between its recent IPO and the release of its forthcoming key product, NASCAR NXT. We have cautiously added to our position, although we remain cognizant of the inherent risks that a small company faces when it is highly dependent on one software title. We will reevaluate our position as we begin to see gaming influencers provide feedback on NASCAR NXT. LightPath Technologies, which creates optics, photonics, and infrared solutions for the defense, industrial testing and measurement, telecommunications, and medical industries, also detracted from performance. LightPath was hindered by a decline in order backlog caused by a lack of major contract renewals and fewer new orders—its inventory levels are tied to the next phase of the 5G rollout. We maintained our position as we view the price and fundamental volatility as typical of a small company that serves very large markets. Lastly, CIRCOR International—which designs, manufactures, and distributes flow and motion control products—declined as 1Q21 earnings failed to meet expectations, raising concerns about future growth. We were unfazed by the shortfall in the context of a rapidly reopening economy and were heartened by strong bookings growth that provides some visibility into the rest of 2021.

Relative to the micro-cap benchmark in 2021’s first half, performance was hurt most by stock selection—sector allocation was also negative but to a much lesser degree. Ineffective stock picks and sector allocation in Consumer Discretionary and Industrials detracted, with the former caused by our underweight and the latter due to our overweight. The portfolio’s cash position also created a drag on performance. Conversely, Health Care, Financials, and Consumer Staples all benefited from savvy stock selection and our lower weightings.


Top Contributors to Performance Year-to-Date Through 6/30/211 (%)

B. Riley Financial1.02
Citi Trends0.98
Harvard Bioscience0.83
Shoe Carnival0.83
Ultra Clean Holdings0.80

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/212 (%)

Motorsport Games Cl. A-0.30
LightPath Technologies Cl. A-0.26
CIRCOR International-0.20
American Superconductor-0.16
Unique Fabricating-0.16

2 Net of dividends

Current Positioning And Outlook

We’ve seen a significant change in market leadership away from growth stocks—which are more heavily weighted in Information Technology and Health Care—to value stocks, which we believe has been caused by the reopening economy. Fears of slower economic growth due to new COVID variants and questions of whether the Fed will maintain its commitment to managing the effects of inflation seem to be the focus of current market dynamics. We remain constructive on the economy and company growth prospects as the world recovers from lockdowns. We also suspect that many recent commodity price spikes will prove short lived—such as we have already seen with lumber prices—as the supply base responds to strong demand. Many services and/or digital business models that are less dependent on oil and commodities to fuel their expansion drive our domestic economy, and many of the transformations caused by the digitalization of the global economy seem to have been accelerated by the pandemic, likely resulting in permanent behavioral changes. Our portfolio positioning reflects this outlook—with a cyclical lean due to our value approach, which we believe is best suited in the current environment.

Average Annual Total Returns Through 06/30/21 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Capital Micro-Cap 6.4225.1974.8815.1716.217.146.848.5010.81 12/27/96
Russell Microcap 4.1429.0275.7714.4718.1313.068.739.26N/A N/A

Annual Operating Expenses: Gross 1.47 Net 1.33

1 Not annualized.

Important Performance, Expense 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. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. The Fund's total returns do not reflect any deduction for charges or expenses of the variable contracts investing in the Fund. Gross operating expenses reflect the Fund's total gross operating expenses for the Investment Class and include include management fees and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Investment Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.33% through April 30, 2022.

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 June 30, 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 June 30, 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 6/30/21, the percentage of Fund assets was as follows: B. Riley Financial was 1.1%, Citi Trends was 1.1%, Harvard Bioscience was 1.5%, Shoe Carnival was 1.2%, Ultra Clean Holdings was 1.1%, Motorsport Games Cl. A was 0.3%, LightPath Technologies Cl. A was 0.5%, CIRCOR International was 0.9%, American Superconductor was 0.8%, Unique Fabricating was 0.3%


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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