Royce Micro-Cap Trust Manager Commentary
article 06-30-2020

Royce Micro-Cap Trust Manager Commentary

The Fund outpaced its benchmarks, the Russell Microcap and Russell 2000 Indexes, on both an NAV (net asset value) and market price basis in the first half of 2020.

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Fund Performance

Royce Micro-Cap Trust (“RMT”) fell 6.2% on an NAV (net asset value) basis and declined 11.0% based on market price compared to respective losses of 13.0% and 11.2% for RMT’s unleveraged benchmarks, the Russell Microcap and Russell 2000 Indexes, for the same period. The Fund also outpaced the Russell Microcap on an NAV and market price basis for the one-, three-, five-, 10-, 20-year, and since inception (12/14/93) periods ended 6/30/20.

What Worked… And What Didn’t

Only four of the 11 equity sectors in which the Fund held investments finished 2020’s first half in the black. Energy detracted most from performance by a large margin, followed by Industrials and Consumer Discretionary. Health Care made the most sizable positive impact, and Materials and Information Technology were also additive to results. Two of the Fund’s worst performing industries came from Energy: energy equipment & services and oil, gas & consumable fuels. Machinery (Industrials) also hampered performance. Conversely, two of the best performing industries came from Health Care: biotechnology and health care technology. Sandwiched in the middle to round out the top three was aerospace & defense (Industrials).

The worst performing position in 2020’s first half was Houston-based Bristow Group, which provides helicopter transportation services primarily to the offshore oil and gas industry. Demand for its helicopters has slackened as lower oil and gas prices have curtailed drilling and exploration. Lindblad Expeditions Holdings, which provides expedition cruising and adventure travel services, also detracted as its industry continued to be hit especially hard by substantial restrictions on travel created by the coronavirus, which included the firm’s decision in March to cease all operations until it would again be safe for its guests and crews. SEACOR Marine Holdings provides marine and support transportation services to offshore oil and natural gas and wind farm facilities worldwide. When reporting fiscal first-quarter results in May, the company said that it expects a deeper impact on revenues through the rest of the year as a result of COVID-19 and reduced activity from its oil and gas customers due to lower commodity prices.


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LATEST PORTFOLIO + PERFORMANCE INFO

 

Virgin Galactic Holdings was the top performing position for the year-to-date period ended 6/30/20. The company develops commercial spacecrafts and aims to provide suborbital spaceflights to space tourists and suborbital launches for space science missions. Though still not profitable, Virgin Galactic signed a Space Act Agreement with NASA in early May to produce a supersonic aircraft for non-military applications, which we think bodes well for the company. Arcturus Therapeutics Holdings is a biotech company focused on the discovery, development, and commercialization of therapeutics for rare diseases with a focus on RNA. The stock surged when the company announced it was working on a vaccine for the coronavirus. Simulations Plus develops absorption, metabolism, distribution, excretion, and toxicity modeling and simulation software for multiple industries, including pharmaceuticals, biotechnology, cosmetics, and food ingredients. The company reported that 1Q20 organic revenues grew by 22%, its third consecutive quarter of growth of more than 20%, which led to increased investor optimism about its ongoing prospects.

Relative to the Russell 2000 Index, performance was driven by stock selection, though sector allocation was also additive. Financials was the top performing sector by a large margin, with results driven by savvy stock selection and, to a lesser degree, our lower weighting. Stock picks and lower exposure to Real Estate were also additive to performance, while stock selection drove positive performance in Materials. Conversely, our overexposure to Energy hampered relative results. Our lower weighting and ineffective stock picks also hurt performance in Health Care and Consumer Discretionary.


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

Virgin Galactic Holdings1.48
Arcturus Therapeutics Holdings1.23
Simulations Plus0.95
Sandstorm Gold0.82
Sprott0.80

1 Includes dividends

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

Bristow Group-0.77
Lindblad Expeditions Holdings-0.77
SEACOR Marine Holdings-0.74
Computer Modelling Group-0.58
Heritage-Crystal Clean-0.50

2 Net of dividends

Current Positioning And Outlook

We are seeking to take advantage of two dynamics in the current market that we believe play to the strengths of active management: high volatility and short-term thinking. While uncertainty about the near-term outlook is real, we expect both the economy and corporate profits to rebound beyond the next several quarters. Our portfolio positioning is still most heavily weighted in cyclical areas, specifically in Industrials and Information Technology. In the former sector, we have several machinery companies while in Information Technology, our largest weightings are in the semiconductors & semiconductor equipment group and the electronic equipment, instruments & components industry. We also maintained a sizable exposure to capital markets stocks, which are part of Financials, and health care equipment & supplies. We are optimistic about the prospects for micro-cap stocks over the intermediate term, particularly those companies with cyclical exposure and/or solid industry positions and better balance sheets. These are the stocks with which we have sought to populate the portfolio.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
RMT 32.23-11.04-3.872.494.9010.575.839.039.20 12/14/93
XOTCX (NAV) 32.24-6.210.804.085.2710.537.258.9110.06 12/14/93
Russell 2000 25.42-12.98-6.632.014.2910.507.016.698.28 N/A
Russell Microcap 30.54-11.21-4.770.852.869.935.656.53N/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, 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: Virgin Galactic Holdings was 0.5%, Arcturus Therapeutics Holdings was 1.0%, Simulations Plus was 1.6%, Sandstorm Gold was 2.1%, Sprott was 1.7%, Bristow Group was 0.5%, Lindblad Expeditions Holdings was 0.7%, SEACOR Marine Holdings was 0.2%, Computer Modelling Group was 0.6%, Heritage-Crystal Clean was 0.6%


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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