Fund Performance

For the year-to-date period ended 6/30/25, Royce Capital Fund–Small-Cap Portfolio was down -5.1% versus a loss of -3.2% for its benchmark, the Russell 2000 Value Index, for the same period. Although the Fund trailed the Russell 2000 Value for the 1- and 10-year periods, it outperformed its benchmark for the 3-year, 5-year, and since inception (12/27/96) periods ended 6/30/25.

What Worked... and What Didn’t

Seven of the portfolio’s 10 equity sectors detracted from performance in the first half of 2025, with Consumer Discretionary, Energy, and Industrials making the biggest negative impact, while positive impacts came from Information Technology, Consumer Staples, and Materials. At the industry level, specialty retail (Consumer Discretionary), oil, gas & consumable fuels (Energy), and financial services (Financials) detracted most for the year-to-date period, while electronic equipment, instruments & components (Information Technology), construction & engineering (Industrials), and professional services (Industrials) were the largest contributors.

The portfolio’s top detractor at the position level for the year-to-date period was International Money Express, a money and data transfer business that focuses on foreign born customers in the U.S. who send money orders to Mexico and Guatemala in particular. The industry is increasingly moving toward digital payments, a transition that International Money Express has been slower to undertake, in part because much of its customer base is unbanked. The stock looked very inexpensive through much of the first half, so we built our stake.

J. Jill retails women’s apparel, accessories, and footwear. Potential tariffs and declines in consumer spending were largely to blame for the stock’s downward trajectory in the first half of 2025. Liking management’s long-term strategy and prospects for the brand, we began adding to our stake in late March of 2025.

Two footwear retailers were among the Fund’s five biggest detractors in 2025’s first half. Caleres provides athletic, casual, and dress footwear products, operating through the Famous Footwear and Brand Portfolio segments. Famous Footwear offers branded footwear for the entire family while the Brand Portfolio—which includes Allen Edmonds, Dr. Scholl’s, and Vince—sources, manufactures, and markets branded, licensed, and private-labeled footwear primarily to online retailers, national chains, department stores, mass merchandisers, and independent retailers. The inflationary pressures on lower-income shoppers have crimped sales in the Famous Footwear segment, helping to lead the stock downward.

Shoe Carnival offers casual and athletic footwear for men, women, and children under well-known brands including Skechers, Clarks, Adidas, Crocs, New Balance, Converse, Roxy, Nike, and Vans. Its shares began to recover in May off their April lows, though not enough to stay out of the red for 2025’s first half. As is the case with J. Jill, we think the company has managed the business effectively during a highly challenging period for its industry. In March, management reported better-than-expected earnings on lower-than-anticipated revenues for fiscal 2024. Shoe Carnival then reported fiscal 1Q25 results in May that included higher profits than had been expected. While we like management’s decision to move up market under its newer Shoe Station banner, it could take a couple of years before the company sees any positive impact on earnings. We reduced our position in the first half.

Rounding out the top five detractors, Civitas Resources focuses on developing and producing crude oil, natural gas, and natural gas liquids in Colorado’s Denver-Julesburg Basin and the Permian Basin. The company closed on two acquisitions over the last two years that added leverage to its balance sheet. Civitas also reported fiscal 1Q25 earnings in May that offered a mixed bag of margin expansion and better-than-expected earnings but lower revenues.

The top contributor at the position level was Jabil, which provides electronic manufacturing services (EMS) and solutions for several industries including automotive and transportation, capital equipment, and consumer companies. Similar to how retailers were prominent on the list of the portfolio’s top five detractors for the first half of 2025, companies involved in AI-adjacent electronic manufacturing and construction services were among the top contributors. In Jabil’s case, the company has enjoyed growth in end markets such as data centers infrastructure, cloud computing, and solar energy. Its intelligent infrastructure segment did particularly well due to heightened demand for AI. In June, Jabil also announced that it would be investing $500 million to expand its manufacturing footprint for the AI and cloud computing markets.

Sterling Infrastructure is a construction company that operates in three segments: Transportation Solutions, E-Infrastructure Solutions, and Building Solutions. The second of these has been particularly crucial in driving earnings and revenue growth as well as helping Sterling establish a very healthy backlog of business in performing site preparation work for AI data centers.

IBEX delivers tech-enabled solutions and business process outsourcing for digital marketing, sales and support, and brand management. In February, management reported record quarterly revenue that was generated by new customer wins and expanding business with existing clients, with most of the success rooted in AI-related services.

A top contributor in 2024, Flex is an EMS company that designs and develops original design manufacturing (ODM) products for several industries, including aerospace & defense, cloud computing, digital health, lighting, housing, energy, industrial, and communications. Flex reported record adjusted operating margins for both fiscal 4Q25 and the full year in May of 2025, delivering the company’s fifth consecutive year of double-digit adjusted EPS (earnings per share) growth. Recent growth has come largely from AI data center components as well as from cloud computing and medical devices

Another top contributor from 2024, Sanmina Corporation provides electronics contract manufacturing services to a global customer base. The company has experienced solid growth in revenue and earnings while also announcing the large acquisition of ZT Systems in May, to which the market responded positively.

The portfolio’s disadvantage versus the Russell 2000 Value was attributable to stock selection in the year-to-date period. At the sector level, stock selection in Consumer Discretionary, stock selection and a higher weighting in Energy, and stock selection and a lower weighting in Financials made the most significant negative impact versus the benchmark. Conversely, stock selection and a higher weighting in Information Technology, stock selection and lower exposure to Health Care, and stock selection in Consumer Staples contributed most to relative year-to-date results.

Current Positioning and Outlook

The first quarter was challenging for U.S. stocks as a whole and for small-caps specifically. This downturn was followed by a robust rebound in 2Q25. Yet the long list of uncertainties and challenges--including the wars in Ukraine and Gaza, the rapid shifts in tariff rates and implementation, and the pace of inflation--went largely unchanged between January and June. We are also facing the potential for a marked shift in politics and policy in next year’s mid-term elections. The Fed chose to adopt a wait-and-see position in the year’s first half, which seemed like a wise course to us. Against this backdrop, it seems odd that the market responded with such a powerful upswing that the major large-cap indexes (the Russell 1000, S&P 500, and Nasdaq Composite) each reached a new all-time high at the end of the second quarter. We think that much of the market is priced to perfection, an assessment that includes the kind of higher-quality, conservatively capitalized small-caps that we seek for the portfolio. We therefore made few changes to positioning in the second quarter, investing in a few Materials companies (chemicals, steel, and paper), an office furniture business, and a select number of small banks while we wait for greater clarity and stability in both the market and economy.

Average Annual Total Returns Through 06/30/25 (%)

Annual Operating Expenses: 1.14

¹ Not annualized.

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