Royce International Premier Fund Manager Commentary
article 06-30-2021

Royce International Premier Fund Manager Commentary

It’s our belief that the portfolio is well positioned for an inflationary environment as the companies we invest in have customers that lack either the incentive or ability to be price aggressive.


Fund Performance

Royce International Premier Fund advanced 6.4% for the year-to-date period ended 6/30/21, lagging its benchmark, the MSCI ACWI ex-USA Small Cap Index, which rose 12.2% for the same period. However, the Fund beat the benchmark for the three-, five-, 10-year, and since inception (12/31/10) periods ended 6/30/21.

What Worked… And What Didn’t

Five of the nine equity sectors in which the Fund held investments contributed to 2021’s first half performance, led by Industrials, Information Technology, and Materials. Energy, Communication Services, and Consumer Discretionary had the biggest negative effect of the four sectors that detracted.

Australia’s Hansen Technologies, a leading global provider of billing software and customer care technologies for utilities and the telecom industry, was the top-contributing position in 2021’s first half. Hansen reported stronger-than-expected first half of 2021 earnings, announced in late February. Then in early June, Hansen’s share price again gained sharply after the company received an unsolicited proposal from private equity firm BGH Capital to acquire 100% of the company’s outstanding shares at a 25% premium. The next top contributor was Marlowe, a firm based in and focused on the United Kingdom that provides a range of commercial services and software in four areas: Health and Safety, Fire Safety, Water Safety, and Air Quality. We like the company’s position in essential, critical, and/or mandated services in growing markets, each with a highly fragmented customer base. Marlowe is also an acquisition-led consolidator of its large and fragmented markets, which enables it to re-deploy its cash flows into M&A and breeds cross-selling opportunities and scale advantages. The second quarter saw a steady flow of positive news, including M&A announcements and the release of final results at the end of June that showed improved revenue and earnings.

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The two positions that detracted most for 2021’s first half were also 2020’s top two contributors. TKC Corporation is a Japanese firm that provides tax-related software and services to smaller companies and their tax accountants. 2021 has so far seen no material events that would reverse its previous positive trajectory. In fact, first-half results published in May showed operating profits that were well ahead of TKC’s projections. Its recent share price weakness seems to have resulted from profit taking off its surging stock price in 2020. Japan’s Daifuku is the globe’s leading manufacturer of material handling and distribution solutions, covering a wide range of markets from automated warehousing to semiconductor manufacturing. We like the longevity of its customer relationships, which typically last 15-20 years. During the first half, its shares fell, in our view, due to profit-taking, the company’s seemingly underwhelming medium-term business plan (announced in February), and the broader unwinding of thematic buying as Daifuku was associated with Japan’s shift to online consumption. Our calls with management, however, confirmed that its medium-range targets are conservatively based on highly visible project pipelines, reaffirming our view that Daifuku is in a favorable position to grow its installation base and widen its deep customer relationships.

Relative to the MSCI ACWI ex-USA Small Cap in 2021’s first half, underperformance came entirely from stock selection—sector allocation was modestly additive. At the sector level, both stock selection and, to a lesser extent, our larger portfolio weightings in Information Technology and Health Care hurt relative results most while ineffective stock picking also detracted in Materials. By contrast, savvy stock selection and a significantly lower weighting in Real Estate helped relative results, as did having no exposure to the lagging Consumer Staples and Utilities sectors.

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

Hansen Technologies1.54
dormakaba Holding0.50

1 Includes dividends

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

TKC Corporation-0.62
As One-0.35
Karnov Group-0.31

2 Net of dividends

Current Positioning and Outlook

In 2021’s first quarter, we identified the peculiar contrast between the Fund’s relative underperformance and our conviction that our holdings had likely never possessed higher quality, an anomaly we ascribed to the market’s fixation on investing in short run ‘thematics’ (in this case, related to the pandemic) at the expense of long run ‘mathematics’—that is, a company’s ability to create shareholder value. We were therefore very pleased with the Fund’s improved performance in 2Q21, which suggested to us that the global stock market— forward looking by nature—may have started to look past the effects of COVID-19 to a return to something resembling normality. Given our own focus on companies with sustainably high returns on operating capital and strong balance sheets, a return to investing in business fundamentals should benefit the Fund’s performance. There has also been much debate over the last few months regarding inflation. While not explicitly positioning the Fund for such an outcome, we do believe that the portfolio is well positioned for an inflationary environment as a happy byproduct of our investment style. Central to our strategy is the desire to invest only in companies whose customers lack either the incentive or ability to be price aggressive—or the incentive or ability to easily leave. This, we think, gives our companies the requisite pricing power to pass on any cost pressures they may see in their businesses.

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

International Premier 9.096.4033.0014.1614.639.539.48 12/31/10

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, 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: Hansen Technologies was 2.8%, Marlowe was 2.4%, IPH was 3.3%, IMCD was 2.4%, dormakaba Holding was 2.0%, TKC Corporation was 2.8%, Daifuku was 0.8%, As One was 1.6%, Karnov Group was 1.8%, NSD was 1.4%, BGH Capital 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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