Royce International Premier Fund Manager Commentary
article 06-30-2022

Royce International Premier Fund Manager Commentary

While our holdings will not be immune to an economic downturn, we also think that resilient demand, pricing power, and strong balance sheets are factors that should help our companies better weather economic headwinds.


Fund Performance

Royce International Premier Fund was down 27.0% for the year-to-date period ended 06/30/22 versus a decline of 22.9% for its benchmark, the MSCI ACWI ex USA Small Cap Index. Longer-term relative results were better—the portfolio outperformed its benchmark for the five-, 10-year, and since inception (12/31/10) periods ended 6/30/22.

What Worked… And What Didn’t

Seven of the portfolio’s eight sectors made a negative impact on year-to-date performance, with Industrials, Information Technology, and Materials having the largest negative effect. The only positive contribution came from Consumer Discretionary (and the impact of cash was incrementally positive) while Real Estate and Communication Services detracted least. At the industry level, software (Information Technology), machinery (Industrials), and chemicals (Materials) detracted most in 2022’s first half while specialty retail (Consumer Discretionary), where we held only USS, was the only positive contributor. Electronic equipment, instruments & components (Information Technology) and real estate management & development (Real Estate)—where our sole position was Canada’s Altus Group—detracted least. The United Kingdom, Japan, and Germany detracted most from first-half results at the country level while India, Brazil, and Poland were the top contributors.

The portfolio’s top detractor at the position level was Australia’s Bravura Solutions, which provides software solutions for the wealth management and fund administration industries. Sonata, its primary product, is a front-to-back-office platform that allows customers to quickly and easily develop and distribute new products, engage more intelligently with their customers, and navigate an increasingly complex regulatory environment. Its shares have been hampered by significant pandemic-related project deferrals that, when coupled with wage inflation, resulted in a revised near-term growth outlook. The combination of more muted near-term expectations and uncertainty around recent management departures led investors to avoid the stock. While we like the company’s strong balance sheet and its historically low earnings multiple, we decided to trim our position during 2Q22. Listed in the U.K., Learning Technologies Group provides professional services and digital tools to help companies recruit, train, manage, and retain their employees via a ‘Content & Services’ segment, which provides bespoke and often complex training to larger organizations, and a ‘Software & Platforms’ segment that offers software that helps companies hire, manage performance, administer and track learning, and handle organizational issues. After reporting positive results in April, the company delayed the release of full-year results by a week to sort out an accounting adjustment from the prior year that nonetheless caused a sell-off, even as it had no effect on net assets, cash flow, or the P&L, and was of inconsequential proportions. We added shares in the aftermath.

The Fund’s top contributor was LifeWorks, a Canada-based global leader that offers solutions for employee well-being. Its technology-enabled services include confidential counselling and therapy, employee engagement tools, health programs, and even outsourced design and administration of pension and benefit plans. The need for such services is vast, with nearly half of Americans, for example, expressing the need for mental health support and an increasing proportion at risk of anxiety disorders since the pandemic. We were attracted to LifeWorks due to its provision of a low-cost but mission-critical solution to a diversified customer base. Its shares rose sharply in mid-June when Telus, one of Canada’s three largest telecom firms, agreed to acquire the company at a significant premium. 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. In addition, the company provided a positive outlook for the fiscal year ending March 2023.

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

AIA Engineering0.15

1 Includes dividends

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

Bravura Solutions-1.13
Learning Technologies Group-0.95
DiscoverIE Group-0.91
New Work-0.87
XP Power-0.87

2 Net of dividends

Current Positioning and Outlook

The international small-cap market has been driven by inflation, rising interest rates, supply chain disruptions, consumers under pressure, and the war in Ukraine. As long-term investors, we do not attempt to anticipate how these issues may affect stock prices over the short term. As we have previously noted, however, we also believe that our holdings remain comparatively well positioned to maintain their profitability against these interrelated challenges via our focus on asset-light, B2B companies with high returns on invested capital (ROIC) and strong balance sheets that also enjoy resilient demand, enduring pricing power, and superior operating efficiency. More recently, a sixth issue has gained prominence in investors’ minds—the possibility of recession in the world’s main economies. Very few companies are truly acyclical, and ours will not be immune to an economic downturn. At the same time, we think that resilient demand, pricing power, operating efficiency, cash flow generation, and strong balance sheets are all factors that should help companies better weather economic headwinds. As always, we are sticking to our knitting while also noting that the negative returns of the last two quarters gave us the opportunity to invest in premier companies within our extensive hand-picked database at what we think are attractive earnings multiples.

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

International Premier -15.10-27.00-27.43-0.393.647.585.63

Annual Operating Expenses: Gross 1.54 Net 1.44

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 2% 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 1.44% 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: LifeWorks was 0.0%, USS was 1.1%, AIA Engineering was 1.0%, TOTVS was 0.7%, Zuken was 1.0%, Bravura Solutions was 1.7%, Learning Technologies Group was 1.9%, DiscoverIE Group was 1.7%, New Work was 2.1%, XP Power was 1.7%, Altus Group 1.3%, Telus 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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