Royce International Premier Fund Manager Commentary
article 06-30-2020

Royce International Premier Fund Manager Commentary

Despite the highly volatile and challenging period that international small-caps faced in 2020’s first half, the Fund outperformed its benchmark for the year-to-date, one-, three-, five-year, and since inception (12/31/10) periods ended 6/30/20.


Fund Performance

The first two quarters of 2020 were highly volatile and extreme periods for international small-caps, so we were particularly pleased that Royce International Premier Fund outperformed its benchmark, the MSCI ACWI ex-USA Small Cap Index, for the year-to-date, one-, three-, five-year, and since inception (12/31/10) periods ended 6/30/20. We were also pleased that the Fund held its value effectively during an overall negative first half of 2020. For the year-to-date period ended 6/30/20, the Fund outpaced its benchmark, down 7.4% versus a decline of 12.8%.

What Worked… And What Didn't

Six of the nine sectors in which the Fund held investments in 2020’s first half detracted from performance. Industrials made the biggest negative impact by a considerable margin, followed by Energy and Communication Services. Modest positive contributions to first-half results came from Health Care, Information Technology, and Financials. Commercial services & supplies and professional services, both in Industrials, detracted most at the industry level while health care equipment & supplies (Health Care) and software (Information Technology) were the two areas that contributed most.

The leading detractor at the position level was Loomis, a Swedish company active in two primary and related areas: Cash in Transit (CIT)—the collection of cash from retailers and other businesses and its transportation to banks or, increasingly, to Loomis’s own depots—and Cash Management Services (CMS)—the holding and processing of cash on behalf of banks. The economic lockdowns in Europe and North America made a material impact on both activities, which fell by around 25% in April before improving slightly in May and June. Although a number of near-term uncertainties linger, we remain attracted by Loomis’s long-run prospects. The amount of bank notes in circulation continues to grow, contrary to popular belief, and the profitability of market participants is determined by relative share—and Loomis is a leading consolidator in the market. There is also considerable global growth in banks using CMS services. We chose to build our position in 2020’s first half at what we believe were very attractive valuations. We did the same—and for the same reasons—with TGS-NOPEC Geophysical, a Norwegian business that provides geoscience data to oil and gas exploration and production companies worldwide. Its shares suffered a material decline in the first half as oil prices collapsed, with a markedly negative impact on the exploration budgets of TGS-NOPEC’s customers. We have long been aware, of course, of the cyclical nature of its business. We have always sought to manage our position in an effort to take advantage of this cyclicality given the company’s ability to rapidly flex up and down its operating and capital expenditures to continue generating cash in even the most severe downturns.

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Japan’s Daifuku made the biggest positive impact on first-half performance. The company develops, manufactures, and provides a wide range of automation and logistics solutions and services. We like its leading global positions in a diverse selection of attractive end markets that range from automated warehousing to semiconductor manufacturing, as well as its large and increasing share of after-market revenues. This supports enduring customer relationships that can generate 15-20 years of repeat revenues. We trimmed our position during the first half as its shares climbed. The next-best contributor was DiaSorin, an Italian company that develops in vitro diagnostic tests (IVDs). We have long been drawn to the IVD market’s structural growth, DiaSorin’s growing array of assays, and the inherently recurring nature of reagent sales. The stock benefited from the company’s specialty in immunodiagnostic testing and the announcement in April that it was launching a test to detect COVID-19. We trimmed our stake when its shares powered to all-time highs based on a combination of valuation and concerns that its non-COVID-19 testing business could be temporarily constrained by disruptions to healthcare systems during the coronavirus pandemic.

Relative to the MSCI ACWI ex-USA Small Cap in the first half, the Fund benefited from both stock selection and sector allocation, with the latter having a larger positive effect. A stock-picking edge helped give Industrials and Financials the portfolio’s largest relative advantage on a sector basis while stock selection hindered relative results in Materials. The portfolio’s lack of exposure to Consumer Staples also hurt relative performance.

Top Contributors to Performance Year-to-Date Through 6/30/201 (%)

Fisher & Paykel Healthcare0.69
VZ Holding0.54
As One0.50

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/202 (%)

Loomis Cl. B-1.19
TGS-NOPEC Geophysical-1.16
Hyve Group-1.03
Norma Group-0.89

2 Net of dividends

Current Positioning and Outlook

With 2020’s first half marked by so much volatility, so many market extremes, and ample economic uncertainty, we think it’s important to state that our QARP (“Quality at a Reasonable Price”) investment process remains unchanged in face of these challenges. Our approach does not shift with the market environment, and during the tumultuous first half we continued to invest in companies with high returns on invested capital and strong balance sheets. By actively following business developments and speaking with company management teams, we have in some instances been able to take advantage of temporary share price dislocations that we believe were unwarranted based on the quality attributes that we see—which we believe should help the Fund in both the uncertain near-term market and in an eventual economic recovery.

Average Annual Total Returns Through 06/30/20 (%)

International Premier 21.53-7.412.397.418.927.25 12/31/10

Annual Operating Expenses: Gross 1.57 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, 2021.

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, 2020, 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, 2020 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 6/30/20, the percentage of Fund assets was as follows: Daifuku was 2.1%, DiaSorin was 1.1%, Fisher & Paykel Healthcare was 1.6%, VZ Holding was 2.1%, As One was 1.5%, Loomis Cl. B was 1.8%, TGS-NOPEC Geophysical was 1.5%, Restore was 1.7%, Hyve Group was 0.0%, Norma Group was 1.6%

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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