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

Royce Micro-Cap Trust Manager Commentary

The Fund’s longer-term relative advantages were substantial as RMT beat the Russell 2000 on an NAV basis for the one-, three-, five-, 10-, 15-, 20-, 25-year, and since inception (12/14/93) periods ended 6/30/21.

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Fund Performance

For the year-to-date period ended 6/30/21, Royce Micro-Cap Trust (RMT) rose 21.1% on a net asset value (NAV) basis and 26.2% based on market price versus respective gains of 17.5% and 29.0% for its unleveraged benchmarks, the Russell 2000 and Russell Microcap Indexes, for the same period. The Fund’s longer-term relative advantages were substantial. RMT beat the Russell 2000 on an NAV basis for the one-, three-, five-, 10-, 15-, 20-, 25-year, and since inception (12/14/93) periods ended 6/30/21—and missed only for the 15-year period based on market price. The Fund also outperformed the micro-cap index for the three-, five-, 10-, 15-, and 20-year periods ended 6/30/21 on both an NAV and market price basis—while also beating the Russell Microcap for the one-year period based on market price. (Data for the Russell Microcap only goes back to 2000.)

What Worked… And What Didn’t

For the year-to-date period ended 6/30/21, all 11 equity sectors in which the Fund held investments finished in the black. The biggest positive contributions came from Information Technology, Industrials, and Consumer Discretionary, while Utilities, Real Estate, and Consumer Staples had the smallest positive effect. At the industry level, the top contributors were semiconductors & semiconductor equipment (Information Technology), specialty retail (Consumer Discretionary), and health care providers & services (Health Care). The three biggest detracting industries, on the other hand, were biotechnology (Health Care), insurance (Financials), and interactive media & services (Communication Services).

RMT’s top contributor at the position level was AutoCanada, a North American automobile business that sells multiple brands and operates 50 franchised dealerships in Canada, as well as a group in Illinois. In early May, the company reported record-setting revenue and earnings along with a ninth consecutive quarter of outracing the Canadian new vehicle retail market, though AutoCanada’s used vehicle and F&I (Finance & Insurance) segments were the key drivers behind 1Q21’s improved earnings. Next came Chicken Soup for the Soul Entertainment, a media company that produces, develops, and distributes television series, video content, reality shows, and other programming via online and mobile channels. The company has already established a significant presence in the growing AVOD—Advertising-Based Video on Demand—market, in which consumers access free content that’s supported by revenues from various ads, such as sponsored content. Investors were attracted to its promising early growth as well as its position as the only free service with original long-form programming and first-run movies.

The top detractor at the position level was CIRCOR International, which manufactures and distributes valves and fluid control products and services designed to optimize the efficiency and ensure the safety of fluid-control systems across a range of applications in several different end markets. Its shares began to slump in March after the company reported lackluster results for fiscal 4Q20, driven by declines in the commercial industries it serves and some sizable defense program orders being pushed further into 2021. Confident in its longer-term prospects, especially in light of its critical role in enhancing efficiency in a very specific niche, we added a modest number of shares in the first half, making CIRCOR a top-10 position at the end of June. Biopharmaceutical software provider Simulations Plus came next as its shares felt the negative effects of delays and cancellations in its consulting business. While consulting and services represent less revenue than its higher margin software business, we would expect any fundamental shortfall in a higher-multiple stock to meet some selling pressure. So while its decline was a short-term disappointment, we added to our position as we expect its services business to ultimately rebound while remaining constructive on the ongoing strength of the company’s software sales.

Relative to the Russell 2000 for the year-to-date period, both savvy stock selection and sector allocation decisions were additive. Helping most at the sector level was a combination of superior stock picking and lower exposure to the index’s lagging Health Care sector. Stock selection also lifted relative results in Information Technology and Industrials. Conversely, stock picking miscues hurt in Financials and Materials, as did our lower weighting in the rebounding Consumer Discretionary sector.


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

AutoCanada1.74
Chicken Soup For The Soul Entertainment Cl. A1.01
Joint Corp. (The)0.94
Onto Innovation0.62
Transcat0.61

1 Includes dividends

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

CIRCOR International-0.23
Simulations Plus-0.20
Zealand Pharma-0.19
GCM Grosvenor Cl. A-0.18
Mesa Laboratories-0.15

2 Net of dividends

Current Positioning And Outlook

Many cyclical sectors began to lag the Russell 2000 in mid-May as the yield curve flattened with the decline in the 10-year Treasury yield. These short-term shifts have not altered our constructive stance on the Fund’s economically sensitive micro-cap holdings, however. We remain confident that these cyclical micro caps are poised for a strong run in the coming years, a confidence underscored by current expectations for strong nominal GDP growth in the U.S. this year and next coupled with an accommodative Fed and attractive relative valuations. Equally important, we remain excited about the opportunities in the micro-cap space, which remains a somewhat under-the-radar asset class with a large number of fundamentally strong companies in evolving industries.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
RMT 11.4726.1683.3916.5720.2413.678.9011.1711.28 12/14/93
XOTCX (NAV) 8.7121.1272.5417.5418.9913.319.8210.8611.87 12/14/93
Russell Microcap 4.1429.0275.7714.4718.1313.068.739.26N/A N/A

Annual Operating Expenses: N/A

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, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at www.royceinvest.com. The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund normally invests in micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss.

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: AutoCanada was 2.9%, Chicken Soup For The Soul Entertainment Cl. A was 1.5%, Joint Corp. (The) was 1.2%, Onto Innovation was 1.5%, Transcat was 1.5%, CIRCOR International was 1.2%, Simulations Plus was 0.8%, Zealand Pharma was 0.7%, GCM Grosvenor Cl. A was 0.6%, Mesa Laboratories was 2.3%


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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