Royce Micro-Cap Trust Manager Commentary
article 06-30-2022

Royce Micro-Cap Trust Manager Commentary

The Fund outperformed the Russell 2000 on both an NAV and market price basis for the three-, five-, 10-, 20-, 25-year, and since inception (12/14/93) periods ended 6/30/22.


Fund Performance

Royce Micro-Cap Trust (RMT) was down 24.0% on both an NAV (net asset value) and market price basis for the year-to-date period ended 6/30/22, versus respective losses of 23.4% and 25.1% for its primary unleveraged benchmarks, the small-cap Russell 2000 Index and its secondary benchmark, the unleveraged Russell Microcap Indexes, for the same period. (By a wide margin, each index experienced its worst calendar first-half in their respective histories.) The portfolio outperformed the Russell 2000 on both an NAV and market price basis for the three-, five-, 10-, 20-, 25-year, and since inception (12/14/93) periods ended 6/30/22.

What Worked… And What Didn’t

Nine of the Fund’s 11 sectors had a negative impact on year-to-date performance. Information Technology, Health Care, and Industrials detracted most at the sector level while the only positive impacts came from Energy and Consumer Staples—as well as the Fund’s cash holdings. Semiconductors & semiconductor equipment (Information Technology), health care equipment & supplies (Health Care), and electronic equipment, instruments & components (Information Technology) detracted most for the year-to-date period at the industry level, while oil, gas & consumable fuels (Energy), road & rail (Industrials), and food products (Consumer Staples) were the largest contributors.

The Fund’s top detractor at the position level was Mesa Laboratories, which develops and manufactures electronic measurement instruments for industrial and hemodialysis customers, including pipeline flow meters and calibration instruments. The company’s relatively strong operating performance was undone by underperformance for much of the Health Care sector and more specifically by supply chain, procurement, and other impediments to its operations, particularly the two-month Shanghai-area shutdown. We held a position at the end of June, seeing its challenges as transitory. Although Aspen Aerogels has enjoyed success winning new customers in the electric vehicle original equipment manufacturer (OEM) space for its unique automotive battery insulation materials, its stock fell when the company announced an equity and debt offering to fund a doubling of capacity. The offering was subsequently pulled while the company explored alternative financing options. A top contributor from 2021, Transcat distributes test and measurement instruments and provides accredited calibration services for use across a diverse range of industries. Its shares fell steeply in February after analysts reduced estimates due to supply chain issues that affected its hardware business and Covid-related employee disruptions that impacted service segment margins. We think that both issues will prove to be temporary setbacks in what had been a secular growth story driven by market share gains in the laboratory instrument market, a highly regulated industry which, we believe, should drive repeatable, predictable revenue generation.

The Fund’s top contributor was Universal Logistics Holdings, which offers flatbed, heavy haul, oil field, van, temperature-controlled transportation, and logistics solutions for a North American customer base. In May, the company reported new all-time highs in operating revenues, operating income, and earnings per share for 1Q22. Driving its success were especially strong results in its Contract Logistics and Intermodal segments, which included new business wins in the former. Sabine Royalty Trust holds royalty and mineral interests in oil and gas properties located in the southern U.S. and saw rising energy prices help draw investors to its shares. Value Line, an independent investment research and financial publishing firm based in New York City, reported healthy fiscal third quarter results in March, thanks to improved revenues and profits in EAM Trust, the entity that manages and distributes the firm’s family of mutual funds, effective cost controls, and a gain from the forgiveness of a Paycheck Protection Program loan.

The portfolio’s advantage versus the Russell 2000 came from sector allocation as stock selection detracted in 2022’s first half. On a sector basis, RMT’s significantly lower weight in Utilities, stock picks in Health Care, and lower exposure to Financials had the biggest negative impact versus the small-cap index. Conversely, our higher weighting in Energy, stock selection in Information Technology, and the Fund’s cash holdings contributed to relative results.

Top Contributors to Performance Year-to-Date Through 6/30/221 (%)

Universal Logistics Holdings0.37
Sabine Royalty Trust0.23
Value Line0.22
StoneX Group0.20
Dorian LPG0.16

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/222 (%)

Mesa Laboratories-1.04
Aspen Aerogels-1.01

2 Net of dividends

Current Positioning And Outlook

We are currently in what we would call a “sum of all fears” environment. War, inflation, slower growth, and rising rates are all understandably frightening investors. Both consumer and investor sentiment are near historic lows. Perhaps counterintuitively, then, we have found that the most opportune times to invest are when fear is high and trailing returns are low. For our part, we have been looking for new investment opportunities among small-cap companies that have fallen into the micro-cap universe, particularly hard hit small-cap growth companies. The annualized three-year return for the Russell 2000 at the end of June was 4.2% compared to its three-year monthly rolling average since inception of 10.9%. Subsequent returns from these levels have been attractive. Coming off a record negative first half during what appears to be a late stage of the bear market, the current period looks,to us, like a solid entry point for prospective long-term small- and micro-cap returns.

Average Annual Total Returns Through 06/30/22 (%)

RMT -18.33-23.98-
XOTCX (NAV) -17.90-24.00-
Russell Microcap -18.96-25.11-30.735.054.559.045.167.45N/AN/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 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, 2022, 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, 2022 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 6/30/22, the percentage of Fund assets was as follows: Universal Logistics Holdings was 1.3%, Sabine Royalty Trust was 0.7%, Value Line was 0.7%, StoneX Group was 1.1%, Dorian LPG was 0.7%, Mesa Laboratories was 2.3%, Aspen Aerogels was 0.3%, Transcat was 1.9%, AutoCanada was 1.3%, nLIGHT was 0.9%.

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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