Royce Opportunity Fund Manager Commentary
article 06-30-2020

Royce Opportunity Fund Manager Commentary

Our theme-based Deep Value strategy held up better than the Russell 2000 Value Index in 2020’s first half and maintained its advantage for the year-to-date, one-, three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 6/30/20.

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Fund Performance

An impressive second-quarter rebound of 30.4%—the fifth-best quarter in its history—helped Royce Opportunity Fund to solidify its longer-term relative advantages as it beat the Russell 2000 Value Index for the year-to-date, one-, three-, five-, 10-, 15-, 20-year, and since inception (11/19/96) periods ended 6/30/20. In 2020’s turbulent first half, the Fund was down 18.1% versus a 23.5% decline for the small-cap value index and a loss of 13.0% for the Russell 2000 Index for the same period.

What Worked… And What Didn't

For the year-to-date period ended 6/30/20, nine of the Fund’s 11 equity sectors finished in the red, with Industrials, Energy, and Financials making the biggest negative impacts. Information Technology and Consumer Staples were the only two sectors that contributed positively in the first half, and each did so modestly. At the industry level, the most significant negative impact came from two areas in Energy—oil, gas & consumable fuels and energy equipment & services—and two in Financials—banks and thrifts & mortgage finance.

Hertz Global Holdings was the biggest detractor at the position level in the first half. Our initial analysis showed strong turnaround potential that was significantly impeded by the outbreak of the coronavirus, which exposed the pitfalls of the car and truck rental specialist’s cash-poor balance sheet and its heavy reliance on business at airports. We began to exit our position before the firm filed for Chapter 11. Cross Country Healthcare provides healthcare workforce solutions and staffing services primarily in the form of traveling medical professionals. The moderation in the rates of COVID-19, travel restrictions, and a decline in elective procedures combined to depress its business in the first half, but we added to our stake as we think the company shows considerable growth potential. Walker & Dunlap is a real estate financing company whose shares suffered amid concerns about weak rent collections and high loan forbearance, though results have proven better than initially feared. We think this promising development, along with the company’s experienced management team and strong balance sheet, should help it to emerge in better shape than its peers.


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Biotechnology (Health Care) contributed most at the industry level, led by CareDx. The firm provides blood tests that detect heart and kidney transplant rejections and recently launched RemoTraC, which enables remote home-based monitoring of transplant patients. Three of the next four top-contributing industries in the first half come from tech: semiconductors & semiconductor equipment, electronic equipment instruments & components, and IT services. The portfolio’s top-contributing position for the first half was II-VI, which makes lasers and optical components chiefly for telecommunication and data center applications. Like fellow top contributor from the tech sector Limelight Networks, II-VI has been benefiting from accelerated demand for remote and mobile connectivity that was in the ascendant prior to the pandemic. We have also observed that people working from home are increasingly opting for higher-quality devices and services, which has helped the business and share prices of several of our technology holdings.

Relative to the Russell 2000 Value in 2020’s first half, sector allocation gave the Fund its advantage as stock selection was a negative factor. At the sector level, however, stock selection and our substantial overweight in Information Technology combined for a pronounced advantage over the benchmark. The portfolio’s much lower exposure to lagging Financials stocks also boosted relative performance. By contrast, relative results were hampered by our overweight and, to a lesser extent, ineffective stock picks in Energy, as well as by our lower exposure to Consumer Staples stocks.


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

II-VI0.74
CareDx0.55
Limelight Networks0.54
Atlas Air Worldwide Holdings0.52
MACOM Technology Solutions Holdings0.51

1 Includes dividends

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

Hertz Global Holdings-0.78
Cross Country Healthcare-0.60
Walker & Dunlop-0.56
Astronics Corporation-0.53
NMI Holdings Cl. A-0.49

2 Net of dividends

Current Positioning and Outlook

The extreme and volatile first half saw us selling certain holdings that either began to exceed 1% of total assets or that in our view had reached their full valuation. We then reallocated funds into more attractive and/or less expensive securities. In many cyclical areas, including consumer, aerospace, and automotive, the market is placing more emphasis on the murky near-term outlook than long-term earnings power. We have seen a similar dynamic in the defensive Health Care sector, where share price dislocations are resulting from procedures that were previously deemed medically necessary but have more recently, and increasingly, become “elective-like.” Taken together, these developments are opening up opportunities to buy stocks at what we think are attractive prices that we believe can rise on an eventual return to something resembling normal. Further, we have been adding to technology stocks that look well positioned for the ever-increasing digitalization of consumer and business behavior, especially those that touch work from home and e-commerce. In our view, two powerful drivers exist in our portfolio for future returns: the healthcare industry getting the upper hand on the coronavirus and the many company-specific growth drivers we’ve identified in our holdings. As challenging and difficult as the current cycle has been, it will eventually pass, and we are positioning the portfolio to maximize returns when the economy recovers.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Opportunity 30.37-18.05-9.13-1.782.708.976.588.4210.48 11/19/96

Annual Operating Expenses: 1.23

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. 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, 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: II-VI was 0.9%, CareDx was 0.8%, Limelight Networks was 1.0%, Atlas Air Worldwide Holdings was 0.7%, MACOM Technology Solutions Holdings was 0.9%, Hertz Global Holdings was 0.0%, Cross Country Healthcare was 0.6%, Walker & Dunlop was 0.9%, Astronics Corporation was 0.3%, NMI Holdings Cl. A 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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