Royce Dividend Value Fund Manager Commentary
article 06-30-2021

Royce Dividend Value Fund Manager Commentary

We believe our dividend value approach is well positioned for a period of growth and rising prices in the U.S. economy.


Fund Performance

Royce Dividend Value Fund advanced 16.9% for the year-to-date period ended 6/30/21, very narrowly underperforming its benchmark, the Russell 2500 Index, which gained 17.0%, and trailing the Russell 2000 Index, which returned 17.5%, for the same period.

What Worked… And What Didn’t

Seven of the Fund’s nine equity sectors finished the year-to-date period in the black. Industrials and Financials made by far the biggest positive impact, followed by Consumer Discretionary. Energy and Real Estate—among our lowest sector weights during the first half—were the only detractors while Consumer Staples made the smallest contribution. At the industry level, capital markets, from Financials, made an outsized positive impact, followed by professional services and machinery, each from the Industrials sector. Chemicals (Materials) detracted most, along with oil, gas & consumable fuels (Energy) and software (Information Technology).

The Fund’s top contributor at the position level was The Carlyle Group, which manages investment vehicles across four segments: corporate private equity, real assets, global credit, and investment solutions. The firm reported record levels of fee-related earnings with strong margins and a confident outlook in February. In late April, Carlyle then announced healthy fee-based and other earnings, increased net performance revenues, and a record high in assets under management, all of which helped its shares to rise. KBR, the portfolio’s next-best contributor, is a global engineering & construction company. The company made an acquisition in 2020 in order to move further into the aerospace & defense markets and in January 2021 signed an agreement with Mura Technology to offer an advanced plastics recycling process. KBR then announced strong 4Q20 results and optimistic guidance for 2021 in February. All of these developments helped lead its shares upward.

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The biggest detractor at the position level was B3-Brasil, Bolsa, Balcao, a stock exchange located in Sao Paulo, Brazil. Its decline in the first half seems to have been a case of investors expecting more. Brazil’s economy and equity markets have been recovering in 2021, and the company reported slightly better-than-expected profits and earnings in May. We maintained our position at the end of June. Quaker Chemical develops and produces a range of formulated chemical products for heavy industrial and manufacturing applications. In February, the company reported a modest sales decline of 1% and lower sales volume for 2020’s fourth quarter, which proved more than enough to inspire a wave of selling even as Quaker also offered an optimistic view, reporting new business gains, improved market share, and business growth in the Asia Pacific region, all of which helped to offset the effects of the coronavirus in certain depressed end markets, such as aerospace. In May, Quaker announced strong first quarter results, with sales up 11% compared to 4Q20 and all of its regions and segments showing healthy revenue growth. These improvements did little to change investor’s minds, however, which may be due to management leaving its earlier, cautiously optimistic guidance unchanged. Confident that its stock can recover in the rebounding economy, we held shares at the end of June.

In 2021’s first half, the Fund’s narrow disadvantage versus the Russell 2500 came entirely from stock selection—sector allocation decisions were additive. On a sector level, both our lower exposure and stock picks hurt most in the resurgent Energy sector while the positive effect of our higher weighting in Materials could not overcome our stock selection miscues in the sector. Similarly, the additive impact of our higher weighting in Consumer Discretionary’s specialty retail group was not enough to compensate for ineffective stock selection throughout the entire sector. Conversely, both our higher weighting and stock selection helped in Industrials while stock picks and our lower weighting did the same in Information Technology. Relative results also got a boost from our substantially lower exposure to the lagging Health Care sector.

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

Carlyle Group1.65
Lindsay Corporation0.96
FLIR Systems0.91

1 Includes dividends

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

B3-Brasil, Bolsa, Balcao-0.25
Quaker Chemical-0.19
Gaztransport Et Technigaz-0.17
Ashmore Group-0.16

2 Net of dividends

Current Positioning and Outlook

While the market’s recent preoccupation with meme stocks may have dampened the attraction of more prosaic stocks—those that pay dividends, generate cash, and have low debt—we have been happy to hold positions in these consistent business models at what we believe are very attractive valuations. We remain especially constructive on Industrials and Financials. Our largest industry weight at the end of June remained capital markets, an industry with what we think are promising long-term prospects in a revived global economy. We also anticipate that our holdings in both machinery and professional services should reap the benefits of economic growth. In the first industry, our holdings focus on companies that innovate and/or help other companies to automate, while in the second our positions include staffing businesses that should benefit from the rapidly growing need for skilled professional workers. Finally, we continue to closely monitor inflation, which virtually all of our holdings are experiencing, and believe that the portfolio is well positioned for a period of rising prices in the U.S. economy.

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

Dividend Value 4.8116.8844.6610.6512.479.238.659.18 05/03/04

Annual Operating Expenses: Gross 1.54 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, 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: Carlyle Group was 4.3%, KBR was 3.9%, Lindsay Corporation was 3.7%, Sprott was 3.0%, FLIR Systems was 0.0%, B3-Brasil, Bolsa, Balcao was 1.5%, Quaker Chemical was 2.8%, USS was 1.2%, Gaztransport Et Technigaz was 0.8%, Ashmore Group was 1.7%, Mura Technology 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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