Royce Dividend Value Fund Manager Commentary
article 06-30-2022

Royce Dividend Value Fund Manager Commentary

The Fund lost less than both its primary benchmark, the Russell 2500 Index, and its secondary benchmark, the Russell 2000 Index, for the year-to-date period ended 06/30/22.


Fund Performance

Royce Dividend Value Fund lost less than its primary benchmark, the Russell 2500 Index, for the year-to-date period ended 06/30/22, down 21.0% versus 21.8%, and also lost less than the Russell 2000 Index, its secondary benchmark, which fell 23.4% for the same period. The portfolio also outperformed both the Russell 2500 and Russell 2000 for the one-year period ended 6/30/22. It was the worst first-half performance for both indexes in their more than 40-year history.

What Worked… And What Didn’t

Six of the portfolio’s seven equity sectors had a negative impact on year-to-date performance. The sectors making the largest detractions were Financials, Industrials, and Materials while the only positive impact came from Energy. Information Technology and Health Care detracted least. At the industry level, capital markets (Financials), machinery (Industrials), and banks (Financials) detracted most in 2022’s first half. Oil, gas & consumable fuels and energy equipment & services (both from Energy) contributed while commercial services & supplies (Industrials) was flat.

The Fund’s top-detracting position in 2022’s first half was Carlyle Group, a global investment firm that manages vehicles across four segments, including corporate private equity, real assets, global credit, and investment solutions. The company reported solid results in April that nonetheless fell below analysts’ estimates. In addition, as the Fed continued to tighten in the first half, financing conditions became stricter and borrowing costs rose, which particularly hurt companies involved in private equity. Spirax-Sarco Engineering is a British manufacturer of steam management systems, peristaltic pumps, and other fluid control technologies for a global customer base. The firm reported strong organic revenue and earnings for fiscal 2021 in March and announced optimistic guidance in a late April trading update. However, general recessionary fears appeared to matter more than the company’s results, and its shares tumbled through most of the first half. Rent-A-Center operates rent-to-own stores. Investors shied away from its stock after the company said that both the end of Covid relief funds and rising inflation would likely hurt its customers’ ability to buy and/or make payments. We were equally concerned about how the company’s 2021 acquisition of lease-to-own solutions provider Acima Holdings put leverage on Rent-A-Center’s balance sheet while also adding credit losses to recent financial results. We held shares in the portfolio at the end of June in the hope that the company could engineer a turnaround.

The portfolio’s top contributor at the position level for the year-to-date period was Gaztransport Et Technigaz, a French multinational naval engineering company that specializes in membrane containment systems that are used to transport and store liquefied gas. While results reported in April were mixed, the company’s order book was robust and expected to remain strong into 2023. Although some exposure to Russia could slow its momentum, investors were happy to keep its share price rising through most of the first half. KBR is a global engineering & construction company that supports the energy, petrochemicals, and civil infrastructure industries. The company reported strong earnings growth for 2022’s fiscal first quarter while also raising fiscal 2022 guidance for revenue, earnings, and cash flow from operations thanks in large part to strong tailwinds in select global end markets that favor the company’s technological capabilities. USS is the leading Japanese operator of second-hand auto auction houses, serving a customer base of 48,000 B2B car dealers. In May, USS reported solid operational performance in which operating earnings grew more than 6% year over year. Despite constrained volumes, USS also continued to gain market share, reaching record highs for both vehicle consignments and completions. The company also provided a positive outlook for the fiscal year ended March 2023.

The Fund’s advantage over its benchmark was attributable to sector allocation decisions in the year-to-date period. At the sector level, stock selection in Industrials, our substantially lower weight in Information Technology, and our higher weighing in Materials had the biggest positive impact versus the benchmark. Conversely, stock picks in Financials, our much lower weighting in Energy, and having no exposure to Utilities detracted most from relative results.

Top Contributors to Performance Year-to-Date Through 6/30/221 (%)

Gaztransport Et Technigaz0.34
Reliance Steel & Aluminum0.03

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/222 (%)

Carlyle Group-1.91
Spirax-Sarco Engineering-1.66
Triumph Bancorp-1.10

2 Net of dividends

Current Positioning and Outlook

We are currently in what we would describe as a “sum of all fears” environment. War, inflation, slower growth, and rising rates are all understandably frightening investors. Both consumer and investor sentiment are near historic lows, and volatility has been high. We would challenge investors to think about whether our present moment is markedly worse than previous periods—including the Internet Bubble era, the months following the attacks on 9/11, and the Great Financial Crisis. We would argue against this current sentiment, in other words. We have found that the most opportune times to invest are when fear is high and trailing returns are low. Historically, subsequent returns from these levels have been attractive—but only for investors who possessed the necessary fortitude. Coming off a record negative first half during what may well be a late stage of the bear market, the current period looks like a pretty good entry point for prospective long-term small-cap returns.

Average Annual Total Returns Through 06/30/22 (%)

Dividend Value -16.00-21.05-18.872.123.997.455.897.41

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, 2023.

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, 2022, 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, 2022 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 6/30/22, the percentage of Fund assets was as follows: Gaztransport Et Technigaz was 1.7%, KBR was 5.5%, USS was 1.7%, Reliance Steel & Aluminum was 3.1%, TGS was 0.0%, Carlyle Group was 3.4%, Spirax-Sarco Engineering was 2.9%, Rent-A-Center was 1.2%, Triumph Bancorp was 1.7%, Sprott was 3.6%, Acima Holdings 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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