Royce Micro-Cap Fund Manager Commentary
article 06-30-2021

Royce Micro-Cap Fund Manager Commentary

We have positioned the portfolio to reflect our belief that recent commodity prices will be short lived. In addition, our value approach continues to have a cyclical lean that we see as well suited for the current climate.

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Fund Performance

Royce Micro-Cap Fund rose 25.3% for the year-to-date period ended 6/30/21, lagging the Russell Microcap Index (+29.0%), its primary benchmark, while outpacing the Russell 2000 (+17.5%) Index. The Fund also outperformed both indexes for the one- and three-year periods ended 6/30/21.

What Worked… And What Didn’t

All 10 of the equity sectors in which the Fund held investments made positive contributions to performance for the year-to-date period ended 6/30/21. Information Technology made the most sizable positive impact, followed by Industrials and Consumer Discretionary. Conversely, Consumer Staples, Real Estate, and Energy made the smallest positive contributions.

At the position level, B. Riley Financial, a diversified financial services firm that boasts operations spanning from investment banking to retailer bankruptcy liquidations, contributed most. Many of the company’s end markets experienced record activity levels, including investment banking and capital markets business, which benefited the company’s earnings. B. Riley Financial also paid a special dividend. Citi Trends, which is a retail clothing chain selling discounted products targeted primarily at urban customers, was also additive. Additional technology, such as merchandise planning software, proved helpful as it allowed the company to effectively target regional taste differences. Refining its demographic focus also benefited the company, whose returns on capital have increased substantially over the last five years to 33%. Lastly, Harvard Bioscience positively impacted performance during the year-to-date period ended 6/30/21. The company develops, manufactures, and markets life sciences equipment to support research and drug discovery. An acquisition significantly expanded its addressable market, sparking a turnaround. Harvard Bioscience also restructured its management team, and the new operational structure had a positive effect. We maintained our position as we believe the company is relatively early in recognizing the benefits of its significant restructuring activities.


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Conversely, Motorsport Games, an international media and technology company that develops gaming software, detracted most for the year-to-date period ended 6/30/21. The disconnect between its recent IPO and the release of its forthcoming key product, NASCAR NXT, caused a drag on performance. While we added it to our portfolio, we remain cognizant of the inherent risks that a small company faces when it’s highly dependent on one software title. We will reevaluate our position as we begin to see gaming influencers provide feedback on NASCAR NXT. LightPath Technologies also detracted from performance. The company creates optics, photonics, and infrared solutions for the defense, industrial testing and measurement, telecommunications, and medical industries. A decline in order backlog caused by a lack of renewals of major contracts and fewer new orders hindered the position—its inventory levels are tied to the next phase of the 5G rollout. We maintained our position in the shares as we view the price and fundamental volatility as typical of a small company serving very large markets. CIRCOR International—which is a designer, manufacturer, and distributor for flow and motion control products—was the third largest detractor. The company’s 1Q21 earnings failed to meet expectations, raising concerns about guidance for the rest of the year. We view the shortfall as typical in an environment associated with the rapid reopening of the economy.

Relative to the Russell Microcap Index in 2021, performance was hurt entirely by stock selection. Consumer Discretionary and Industrials were hampered by ineffective stock picks and sector allocation decisions, with the former caused by our underweight and the latter due to our overweight. The portfolio’s cash position also had a negative impact on performance. On the other hand, our lower weightings and savvy stock selection benefited Health Care, Financials, and Consumer Staples.


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

B. Riley Financial1.00
Citi Trends0.99
Harvard Bioscience0.86
Shoe Carnival0.83
Ultra Clean Holdings0.81

1 Includes dividends

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

Motorsport Games Cl. A-0.30
LightPath Technologies Cl. A-0.28
CIRCOR International-0.20
Profound Medical-0.18
American Superconductor-0.18

2 Net of dividends

Current Positioning and Outlook

We’ve seen a significant change in market leadership away from growth stocks, which are weighted in Information Technology and Health Care, to value stocks. This is reflected in the relatively weak performance in these two sectors compared to the strong performance in Financials, Energy, and Consumer Discretionary. We believe this shift from growth to value has been caused by the reopening of the economy. Even as current market dynamics appear to us to be focused primarily on fears of slower economic growth prospects due to new COVID variants and whether the Fedpolicy maintains its commitment to managing the effects of inflation, we remain constructive on the economy and growth prospects as the world recovers from lockdowns. We also believe many recent commodity price spikes will prove short lived, which we have already seen with lumber prices, as the supply base responds to strong demand. In our belief, many of the transformations caused by the digitalization of the global economy were accelerated by the pandemic, and this is likely to result in a permanent behavioral change. We have positioned our portfolio to reflect this outlook. Our portfolio continues to have a cyclical lean due to our value approach, which we believe is best suited in the current environment.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Micro-Cap 6.4725.2776.4716.0116.957.297.388.9511.52 12/31/91
Russell Microcap 4.1429.0275.7714.4718.1313.068.739.26N/A N/A
Russell 2000 4.2917.5462.0313.5216.4712.349.519.2610.34 N/A

Annual Operating Expenses: Gross 1.29 Net 1.24

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 total gross annual operating expenses for the Investment Class and include management 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 Investment 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 1.24% 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: B. Riley Financial was 1.1%, Citi Trends was 1.1%, Harvard Bioscience was 1.5%, Shoe Carnival was 1.1%, Ultra Clean Holdings was 1.1%, Motorsport Games Cl. A was 0.3%, LightPath Technologies Cl. A was 0.5%, CIRCOR International was 0.9%, Profound Medical was 0.6%, American Superconductor was 0.8%


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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