Royce Global Financial Services Fund Manager Commentary
article 06-30-2021

Royce Global Financial Services Fund Manager Commentary

The Fund not only boasted strong performance on an absolute and relative basis, but it also sustained its long-term advantages.

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Fund Performance

Royce Global Financial Services Fund enjoyed a strong first half on both an absolute and relative basis. The Fund advanced 17.7% for the year-to-date period ended 6/30/21, beating its global benchmark, the MSCI ACWI Small Cap Index, which rose 15.4%, and very narrowly outperforming the small-cap Russell 2000 Index, which was up 17.5%, for the same period. We were even more pleased that the Fund outpaced the MSCI ACWI Small Cap for the three-, five-, and 10-year periods ended 6/30/21.

What Worked… And What Didn’t

Sprott, a Canadian asset manager with a specialty in precious metals, was the position that contributed most to results in the first half of 2021. Its shares peaked during 1Q21, no doubt boosted by the announcement of 2020 results in February, when the company reported an 88% increase in assets under management to an all-time record high that helped earnings considerably. Next came First Citizens BancShares, a financial holding company that we have long seen as a highly valuable bank franchise. It holds a dominant deposit market share in both North and South Carolina as well as a negligible cost of funds due to its strong client relationships. The company also has a history of successfully acquiring other banks. The major story for First Citizens over the past year has been its acquisition of CIT. We see significant value creation potential in the acquisition that lies in the considerable expansion in HOA (homeowner’s association) deposits for First Citizens as well as its own far lower cost of capital, which should allow it to compete much more effectively in some of CIT’s core verticals. The market has begun to recognize these benefits, leading its shares to rise in 2021’s first half.


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The portfolio’s biggest detractor at the position level was MarketAxess Holdings, which operates an electronic trading platform for corporate bonds and other fixed-income securities. Its shares typically do best during periods of high trading volume and volatility. For example, fixed income instruments saw higher-than-usual volatility and trading activity throughout 2020 and into 1Q21, boosting the company’s revenues and earnings. However, its stock slipped in 2Q21 as volatility fell in the fixed-income space, trading activity slowed, and analysts re-rated its shares.

Our next-largest detractor, Bottomline Technologies, markets and provides electronic payment and invoice solutions to corporations, banks, and other financial institutions. While the company has an enviable strategic position in two businesses that are benefiting from secular forces driving the increased adoption of B2B payments and spending on digital banking, executing the transition from potential to profits has been slow. Bottomline disappointed investors recently with a below expectation profit outlook for its next fiscal year that led its shares rapidly downward. We continue to hold a moderately sized position, watching for further operational improvements.


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

Sprott1.69
First Citizens BancShares Cl. A1.52
Popular1.38
KKR & Co.1.02
Carlyle Group0.96

1 Includes dividends

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

MarketAxess Holdings-0.45
Bottomline Technologies-0.43
B3-Brasil, Bolsa, Balcao-0.30
Great Elm Group-0.18
Ashmore Group-0.17

2 Net of dividends

Current Positioning and Outlook

During 2021’s first half, we marginally lowered our exposure to the U.S. and Canada, though they remain our two largest country weightings by a wide margin. We continue to lean heavily toward capital markets businesses, which again accounted for more than half of the Fund’s assets at the end of June. We see this industry as growing increasingly global and diverse, and as such have invested primarily in three sub-categories. First are those asset managers that offer conventional strategies and products in a specialized niche where they have demonstrated the ability to add long-term value, such as top-20 holdings Sprott, U.S. Global Investors, and Ashmore Group. Another sub-category would be alternative asset managers and/or those that offer private vehicles along with other important financial services. This cohort would include The Carlyle Group, Intermediate Capital Group, and KKR & Co. Finally, we see excellent prospects for both non-U.S. exchanges—such as Tel Aviv Stock Exchange and B3-Brasil, Bolsa, Balcao, and specialist trading platforms. We think that the secular trends in global finance and investment look more promising for these more specialized businesses than for many more traditional companies and/or business models.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR SINCE INCEPT. DATE
Global Financial Services 5.2917.7345.8412.4314.9511.418.359.24 12/31/03
MSCI ACWI SC 5.6815.4354.0712.2014.139.908.6410.02 N/A
Russell 2000 4.2917.5462.0313.5216.4712.349.519.92 N/A

Annual Operating Expenses: Gross 2.07 Net 1.68

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 www.royceinvest.com. 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, 2022. 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, 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: Sprott was 3.7%, First Citizens BancShares Cl. A was 3.6%, Popular was 3.5%, KKR & Co. was 2.7%, Carlyle Group was 2.4%, MarketAxess Holdings was 1.7%, Bottomline Technologies was 0.9%, B3-Brasil, Bolsa, Balcao was 1.4%, Great Elm Group was 0.6%, US Global Investors was 2.4%, Ashmore Group was 2.0%, Intermediate Capital Group was 2.7%, Tel Aviv Stock Exchange was 4.0%


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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