Royce Global Financial Services Fund Manager Commentary
article 06-30-2022

Royce Global Financial Services Fund Manager Commentary

The Fund’s narrow advantage over its benchmark in 2022’s first half helped it sustain its performance advantage for the one-, three-, five-, 10-, and 15-year periods ended 6/30/22.


Fund Performance

Royce Global Financial Services Fund lost 22.2% for the year-to-date period ended 6/30/22, losing marginally less than its primary benchmark, the MSCI ACWI Small Cap Index, which was down 22.3% for the same period. Even this slight relative edge helped the Fund to maintain its longer-term advantage over its benchmark. The portfolio outperformed its benchmark for the one-, three-, five-, 10-, and 15-year periods ended 6/30/22. It was the worst first-half performance for the MSCI ACWI Small Cap in its nearly 30-year history.

What Worked… And What Didn’t

The Fund had investments in five sectors during 2022’s first half, all of which detracted from performance: Financials, Real Estate, Information Technology, Materials, and Industrials. At the industry level, capital markets (Financials), real estate management & development (Real Estate), and banks (Financials) detracted most for the year-to-date period, while thrifts & mortgage finance (Financials), professional services (Industrials), and diversified financial services (Financials) detracted least. At the country level, the U.S., Canada, and the United Kingdom detracted the most for 2022’s first half while Bermuda, India, and Poland contributed most.

Canaccord Genuity Group, Canada’s largest independent investment dealer, was the top detractor at the position level in the first half. The company specializes in wealth management and brokerage in capital markets. Results for 2022’s fiscal fourth quarter, which ended on 3/31/22, saw declines in revenue and earnings from 2021’s fiscal fourth quarter. Along with a volatile investment banking climate, the news sent its shares downward. FirstService Corporation is another Canadian business, which offers real estate services for residential and commercial buildings. Results so far in 2022 have been positive, but the stock’s valuation was admittedly stretched after enjoying a stellar 2021, which hurt its shares in the first half of 2022. Sprott is a third Canadian business, providing portfolio management, broker-dealer activities, and consulting services to its clients, primarily in the precious metals area. The portfolio’s top contributor in both 2021 and 1Q22, Sprott’s shares began to fall in March as precious metals prices corrected. Each company was a significant holding in the Fund at the end of June, reflecting our confidence in the long-term prospects for all three.

The Fund’s top contributor was New York City-based financial services firm StoneX Group, which benefited from the robust operating environment in its global payments business and strong margin growth rooted in the effective management of its cost structure. Rising interest rates have also benefited the company’s asset sensitivity. Capital City Bank Group is a Florida based full-service bank. Its shares rose again after the company announced solid second-quarter results that were driven by loan growth, credit quality, rising rates, wealth management, and lower expenses. With headquarters in Bermuda, Axis Capital Holdings offers property, workers compensation, professional liability, casualty, and marine and aviation insurance to a global customer base. The company reported strong 1Q22 results in April, with 20% premium growth based on double-digit rate increases, along with record new business, particularly in its Excess & Surplus, Wholesale, and Specialty channels.

The portfolio’s narrow advantage over the MSCI ACWI Small Cap was attributable to sector allocation in the year-to-date period, with a lack of exposure to Consumer Discretionary and Health Care helping most—as did the Fund’s cash holdings. Conversely, our lack of exposure to Energy, stock selection in Real Estate, and lack of exposure to Utilities detracted most from relative results in the first half.

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

StoneX Group0.42
Capital City Bank Group0.11
Axis Capital Holdings0.10
FRP Holdings0.09

1 Includes dividends

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

Canaccord Genuity Group-1.73
FirstService Corporation-1.44
Carlyle Group-1.31
Intermediate Capital Group-1.27

2 Net of dividends

Current Positioning and Outlook

With anxieties around inflation, interest rates, energy prices, and recession, we appear to be at a “sum of all fears” moment. In this light, we have found that the most opportune times to invest are when fear is high and trailing returns are low. The VIX—the index that tracks volatility for the S&P 500 Index—is currently flashing a fear signal, ending June in the top 20% of its highest average monthly readings since its inception. Moreover, the annualized three-year return for the MSCI ACWI Small Cap Index at the end of June was 4.4%—almost half the level of its three-year monthly rolling average since inception of 8.3%. Historically, subsequent returns from these levels have been attractive—but only for investors who possessed the necessary fortitude to act. Financial stocks have performed in line with the market decline, when they have often dropped more in prior declines. We anticipate that when investor anxiety dissipates and optimism returns?, financial stocks may also outperform in the recovery as the assets under management for asset managers rebounds, securities underwriting recovers, and bank lending increases.

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

Global Financial Services -17.28-22.22-20.544.815.269.615.657.38

Annual Operating Expenses: Gross 1.98 Net 1.57

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 gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and 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 1.49% through April 30, 2023. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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: StoneX Group was 2.8%, Capital City Bank Group was 1.7%, Axis Capital Holdings was 2.4%, CRISIL was 2.1%, FRP Holdings was 1.8%, Canaccord Genuity Group was 2.7%, FirstService Corporation was 3.7%, Sprott was 5.2%, Carlyle Group was 2.5%, Intermediate Capital Group was 2.3%.

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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