Royce International Premier Fund Manager Commentary
article 06-30-2023

Royce International Premier Fund Manager Commentary

While economic uncertainty may well linger for the next several quarters we are as optimistic about the future of Royce International Premier Fund as ever and believe we are well-positioned to capitalize on the inevitable dislocations between value creation and valuation.


Fund Performance

Royce International Premier Fund advanced 4.5% for the year-to-date period ended 6/30/23, trailing its benchmark, the MSCI ACWI ex USA Small Cap Index, which was up 6.8% for the same period. The Fund beat its benchmark, however, for the 10-year and since inception (12/31/10) periods ended 6/30/23.

What Worked… And What Didn’t

Five of the Fund’s eight equity sectors made positive contributions to performance in 2023’s first half, led by Information Technology, Industrials (its two largest sectors), and Financials, while Communication Services, Health Care, and Real Estate detracted.

The Fund’s biggest contributor at the position level was Odontoprev, Brazil’s largest provider of corporate dental care plans. We like Odontoprev’s high margin yet asset-light business model, which enables it to generate strong cash flows and returns on invested capital, as well as structural growth prospects supported by Brazil’s expanding middle class. Compared to almost 80% in the U.S., we estimate that only 14% of Brazilians have private dental coverage today. Its stock appeared to benefit earlier in the year from its perception as a quality stock, as Brazilian investors flocked to more defensive companies. Given the expectations for sustained high interest rates in Brazil, the market has been gravitating to companies with lower debt, making Odontoprev’s strong net cash position particularly appealing to local investors. In mid-May, the company’s share price also rose on first-quarter 2023 results, which saw an 11% year-on-year growth in revenues, with demand especially strong among small- to mid-sized businesses. Along with the lower-than-expected costs of providing dental services, adjusted earnings before interest, taxes, depreciation & amortization jumped by 22%.

Canada’s Open Text is the global market leader in enterprise content management software that collects, cleans, and analyzes unstructured data, including emails, PDFs, and human resources records. Its rising share price was mostly driven by better-than-expected results for 2023’s fiscal third quarter, released in May. Management also confirmed that a recent acquisition was progressing ahead of schedule, with cost synergies already bearing fruit and deleveraging underway, resulting in management raising full-year guidance.

Restore, the Fund’s biggest detractor, is a UK-based support services company, with roughly 70% of group operating profit coming from its Records Management segment, which provides storage and retrieval solutions to around 6,000 clients. Restore’s share price came under pressure in mid-May when it released a trading statement that showed 4% revenue growth year over year while also reducing full-year 2023 profit before tax guidance, primarily as a result of weakness in its office IT recycling business. In mid-June, the company’s CFO announced his intention to step down. Despite these headwinds, we remain confident in Restore’s long-term prospects. BML is Japan’s leading diagnostics testing service provider, with a diversified ‘B2B’ customer-base of 30,000 clinics and 1,000 hospitals. BML’s share price fell due to negative short-term earnings growth momentum associated with the phase-out of COVID-related testing revenues as well as cost inflation in testing consumables. We believe these pressures are transitory. With net cash equal to roughly 80% of its market capitalization, BML trades at what we think is a very attractive valuation. We also believe that this discount will narrow over time as earnings momentum recovers.

The Fund’s relative disadvantage versus the MSCI ACWI ex USA Small Cap came from stock selection. Stock picks in Industrials, Communication Services, and Health Care hurt most. In addition, each of the Fund’s five biggest detractors hampered both absolute and relative results. Conversely, our much lower exposure to Real Estate, stock selection in Financials, and lack of exposure to Energy were all additive relative to the benchmark.

Top Contributors to Performance Year-to-Date Through 6/30/231 (%)

Open Text0.69
Alimak Group0.65

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/232 (%)

Learning Technologies Group-0.48
Norva24 Group-0.43
NICE Information Service-0.42

2 Net of dividends

Current Positioning and Outlook

In 2023’s second quarter, we observed what we think was a meaningful operational stress test for many of our holdings. Companies across various regions and industries have been experiencing more cautious customer demand in the face of an uncertain macroeconomic climate, while inflation continues to be a persistent issue in many market segments. While near-term growth expectations may have slowed, we have found that our companies have solidly passed this operational stress test. Their customers remain loyal while their balance sheets are robust, they continue to create shareholder value, and our conviction in their ability to create value over the long run is unchanged. Many less steadfast market participants, however, have penalized businesses for even just a small miss on growth or margin expectations. This volatility offered us a window of opportunity to deploy cash at an accelerated rate during the quarter by building positions in existing holdings that are out-of-favor and by initiating four new positions. Economic uncertainty may well linger for the next several quarters, with share prices possibly behaving erratically as a result. But we are as optimistic about the future of our strategy as ever and believe we are well-positioned to capitalize on the inevitable dislocations between value creation and valuation. By investing in businesses with above-average returns trading at reasonable valuations, we believe the Fund should also achieve above-average performance over time.

Average Annual Total Returns Through 06/30/23 (%)

International Premier -2.604.454.160.182.386.175.51

Annual Operating Expenses: Gross 1.61 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, 2024.

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, 2023, 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, 2023 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 6/30/23, the percentage of Fund assets was as follows: Odontoprev was 2.1%, Open Text was 1.9%, Alimak Group was 1.4%, SimCorp was 0.0%, Marlowe was 2.3%, Restore was 2.6%, BML was 2.5%, Learning Technologies Group was 1.8%, Norva24 Group was 1.3%, NICE Information Service was 1.7%.

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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