Royce Dividend Value Fund Manager Commentary
article 06-30-2023

Royce Dividend Value Fund Manager Commentary

Royce Dividend Value Fund was up 11.9% for the year-to-date period ended 6/30/23, outperforming its benchmark, the Russell 2500 Index, which rose 8.8% for the same period. The Fund also outpaced its benchmark for the 1- and 3-year periods ended 6/30/23.


Fund Performance

Royce Dividend Value Fund was up 11.9% for the year-to-date period ended 6/30/23, outperforming its benchmark, the Russell 2500 Index, which rose 8.8% for the same period. The Fund also outpaced its benchmark for the 1- and 3-year periods ended 6/30/23.

What Worked… And What Didn’t

Six of the portfolio’s eight equity sectors made a positive impact on performance for the year-to-date period ended 6/30/23. The sectors making the largest positive contributions were Industrials, Financials, and Materials, while the only negative impacts came from Real Estate and Energy. Health Care made the smallest contribution. At the industry level, metals & mining (Materials), capital markets, and banks (both from Financials) made the biggest positive contributions while the biggest detractors were real estate management & development (Real Estate), insurance (Financials), and oil, gas & consumable fuels (Energy).

The top-contributing position in 2023’s first half was First Citizens BancShares, which we’ve owned for many years, due mostly to its strong liquidity position and stellar deposit franchise. Its valuation looked attractive to us in late 2022, when we began adding shares that were trading at roughly 5x earnings per share. More recently, First Citizens was chosen by the FDIC to acquire Silicon Valley Bank, most likely owing to its long history of buying failed banks. Silicon Valley’s travails notwithstanding, the purchase was accretive to First Citizens’ tangible book value and earnings, helping to spur a sharp rise in its stock. Hubbell Incorporated manufactures plugs, receptacles, connectors, lighting fixtures, high voltage test and measurement equipment, and voice and data signal processing components. During 2023’s first half, growing demand for grid modernization and electrification drove earnings and revenue growth, trends that the company expects to continue.

The Fund’s top detractor in 2023’s first half was Lindsay Corporation, which provides center pivot irrigation systems for commercial agriculture. Lindsay’s stock retreated as corn and wheat prices came off highs and farm income was forecasted to decline from peak levels. The company also faces difficult year-over-year comparisons later this year because several severe storms in 2022 drove higher pivot-replacement demand. Internationally, Lindsay has faced irrigation order delays in the high growth Brazilian market due to a political transition that pushed out implementation of a government financing program for agricultural products growers. BOK Financial is an Oklahoma-based bank holding company. Its shares were caught up in the widespread declines that affected many smaller regional banks in the wake of Silicon Valley and Signature Banks failing as well as fiscal first-quarter results that saw declines in net income from the same quarter in 2022 and declines in average deposits. Confident in its long-term prospects, we held our shares at the end of June.

The Fund’s advantage over the Russell 2500 was attributable to stock selection in 2023’s first half. This was most impactful in the Financials sector, where First Citizens BancShares, Artisan Partners Asset Management, and Brazilian stock exchange B3-Brasil, Bolsa, Balcao drove our relative edge. Stock picks were also additive in Materials, as was our much lower weighting in Energy. Conversely, our much lower exposures to resurgent Information Technology and Consumer Discretionary stocks, as well as our lack of exposure to Communication Services, detracted from relative results.

Top Contributors to Performance Year-to-Date Through 6/30/231 (%)

First Citizens BancShares Cl. A1.83
Hubbell Incorporated1.16
Worthington Industries1.06
Lincoln Electric Holdings0.89

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/232 (%)

Lindsay Corporation-0.97
BOK Financial-0.61
RMR Group (The) Cl. A-0.30
Assured Guaranty-0.11
State Street-0.09

2 Net of dividends

Current Positioning and Outlook

We see an array of potential triggers that could possibly jumpstart small- and mid-cap performance in the coming months. First, a soft landing looks more and more likely to us, and a recession—specifically the kind of deep and potentially lengthy contraction many have been anticipating since late 2021—looks less and less likely. We have already seen promising developments that seem to suggest a nascently robust economy: durable goods orders rose for the fourth consecutive month in June—and hit a record high for nondefense capital goods (excluding aircraft or core capital goods, a proxy for business equipment investment)—while homebuilding rose by 21.7% in May, a record monthly surge that also defied expectations for a slowdown. Even more important, in our view, is the ongoing sense of cautious optimism we have been hearing from many management teams—which was reflected by generally solid earnings for many holdings for the second quarter. Amid the difficulties of bear markets and periods of economic uncertainty, we think it’s crucial to remind investors of the opportunity to build their small- and/or mid-cap allocation at attractively low prices. History shows that investors who had the necessary patience and discipline to stay invested during periods of sluggish or negative performance have been rewarded. We continue to see the currently unsettled period as an opportune time to invest in select small- and mid-caps for the long run.

Average Annual Total Returns Through 06/30/23 (%)

Dividend Value 5.0211.9222.4412.856.127.348.148.15

Annual Operating Expenses: Gross 1.61 Net 1.34

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. 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 Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service 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 Service 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 1.34% through April 30, 2024.

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, 2023, 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, 2023 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 6/30/23, the percentage of Fund assets was as follows: First Citizens BancShares Cl. A was 2.7%, Hubbell Incorporated was 3.7%, Worthington Industries was 3.3%, Lincoln Electric Holdings was 2.9%, Graco was 3.5%, Lindsay Corporation was 0.7%, BOK Financial was 2.0%, RMR Group (The) Cl. A was 1.2%, Assured Guaranty was 1.6%, State Street was 1.8%.

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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