Royce Opportunity Fund Manager Commentary
article 06-30-2021

Royce Opportunity Fund Manager Commentary

Our theme-based Opportunity Fund not only outperformed the Russell 2000 Value and the Russell 2000 Indexes, but it also outpaced both benchmarks for the one-, three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 6/30/21.


Fund Performance

For the year-to-date period ended 6/30/21, Royce Opportunity Fund was strong on an absolute and relative basis, advancing 30.9% and beating both the Russell 2000 Value (+26.7%) and Russell 2000 (+17.5%) Indexes for the same period. Opportunity also outperformed both indexes for the one-, three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 6/30/21.

What Worked… And What Didn’t

All 11 equity sectors made a positive contribution to performance for the year-to-date period ended 6/30/21, led by Industrials and Information Technology—the portfolio’s two biggest weightings. Consumer Discretionary and Health Care came next while the smallest contributions came from lower-weighted sectors: Utilities, Consumer Staples, Communication Services, and Real Estate.

At the industry level, we got outsized positive impacts from semiconductors & semiconductor equipment in Information Technology and health care providers & services from Health Care, followed by metals & mining (Materials). Only two industries detracted from year-to-date performance: biotechnology in Health Care and road & rail in Industrials. The entertainment industry, from Communication Services, finished flat for the six-month period ended 6/30/21.

Our top contributor at the position level was Avid Technology, which develops software and systems for digital editing, newsroom computer systems, and digital audio systems. Avid raised guidance in May due to robust end market demand during the first quarter and management’s expectation that this demand can last through the end of 2021. In the same announcement, the company also reported impressive growth in its key recurring subscription revenues. Next came Community Health Systems, which operates acute care hospitals and owns interests in medical practices, imaging centers, home health agencies, and ambulatory surgery centers. The company focuses its business primarily in Sunbelt states in locales with attractive demographics, high population growth, and economic opportunity. Community Health announced a favorable debt refinancing plan in May after reporting positive results in February for the fourth quarter and full-year periods.

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Lumber Liquidators Holdings, a specialty wood flooring maker, hurt performance most in the first half. After first rebounding nicely in the second half of 2020, the company then reported solid results in May, with increased revenues and same-store sales growth. However, supply disruptions due to the unavailability of containers and the Suez Canal shutdown had a negative effect on its shares, while the reimposition of tariffs hurt first-quarter profits. The supply constraint continues, and the company is finding new sources to offset tariffs. SmileDirectClub designs and manufactures invisible aligners and braces that straighten teeth. The company has had success expanding beyond the U.S. while profitably growing its domestic business. However, SmileDirectClub also suffered a cybersecurity-driven manufacturing interruption shortly after reporting results, which depressed its previously sunny near-term outlook. Uncertain of its long-term recovery, we reduced our stake.

Our year-to-date advantage came entirely from stock selection—sector allocation had a small negative effect. Stock picking drove results in the two sectors where the portfolio had the biggest edge over its small-cap value index: Information Technology and Health Care. Our higher weighting also helped us a bit in the latter sector. The combination of our lower weighting and effective stock selection was additive in Financials. The Fund’s cash position hurt us most versus the benchmark for the year-to-date period, followed by a combination of lower exposure and ineffective stock picking in both the Energy and Communication Services sectors.

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

Avid Technology0.79
Community Health Systems0.64
B. Riley Financial0.59

1 Includes dividends

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

Lumber Liquidators Holdings-0.15
SmileDirectClub Cl. A-0.09
Texas Capital Bancshares-0.08
Emergent BioSolutions-0.07

2 Net of dividends

Current Positioning and Outlook

The combination of steep increases in private sector business reopenings with aggressive fiscal and monetary stimulus has, in our view, created stresses around supply chains. We believe these stresses, encompassing both production and labor, have accelerated long absent inflationary pressures. We’re confident, however, that supply chains will ultimately react, and labor will level set after generous unemployment benefits normalize, both of which should make the inflationary spike temporary. In the short term, we’ve made tactical sales in industries such as restaurants that seem more susceptible to inflationary pressures without the offsetting ability to pass through pricing. Even among homebuilders, where the long-term demographic trends still look favorable, we’ve seen increased consumer resistance related to sharp price increases—even as interest rates sit near historical lows. We have thus continued to populate the portfolio with companies that we believe successfully navigated the pandemic-driven recession and have since positioned themselves for success in a more typical economic environment. We’ve also been finding interesting companies in technology, building our exposure to retailers, and seeing opportunities in aerospace—in this last instance as companies benefit from reopenings and the reintroduction of Boeing’s 737-Max. In general, we’ve been seeking companies that show the potential to surpass expectations while still trading at valuations we find attractive. We are optimistic about both the earnings potential for such companies and the broader economic outlook.

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

Small-Cap Opportunity 4.6430.87102.0517.7621.1113.1910.4211.2413.23 11/19/96

Annual Operating Expenses: 1.21

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 Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

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: Avid Technology was 0.8%, Community Health Systems was 0.8%, Lydall was 0.0%, B. Riley Financial was 0.6%, Magnite was 0.0%, Lumber Liquidators Holdings was 0.3%, SmileDirectClub Cl. A was 0.2%, Texas Capital Bancshares was 0.4%, Emergent BioSolutions was 0.4%, Meritor was 0.4%

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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