Royce Pennsylvania Mutual Fund Manager Commentary
article 06-30-2020

Royce Pennsylvania Mutual Fund Manager Commentary

Our flagship portfolio held its long-term advantage, outpacing the Russell 2000 Index, for the three-, five-, 20-, 25-, 30-, 35-, 40-year, and since index inception (12/31/78) periods ended 6/30/20.

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Fund Performance

In one of the most turbulent first halves that we have seen in more than 45 years of small-cap investing, our flagship Royce Pennsylvania Mutual Fund retained its superior long-term relative performance record, beating its small-cap benchmark, the Russell 2000 Index, for the three-, five-, 20-, 25-, 30-, 35-, 40-year, and since index inception (12/31/78) periods ended 6/30/20. However, the Fund did lag slightly for the year-to-date period ended 6/30/20, down 13.6% versus a loss of 13.0% for the index.

What Worked… And What Didn't

The Fund focuses mostly on companies with better balance sheets and current profits. These attributes were critical in limiting losses in the first-quarter decline while they somewhat impeded results in the second-quarter upswing, when non-earners outpaced earners and more highly leveraged small-caps rose faster than their less-leveraged counterparts.

On a sector basis, Industrials, the Fund’s largest weighting, was the biggest detractor for the year-to-date period, with Financials coming next. Information Technology was the largest contributor, followed by Materials. Energy equipment & services (Energy) detracted most at the industry level in 2020’s first half, when most stocks with sizable exposure to energy suffered as the oil price plummeted (before partially recovering in the second quarter). Energy’s woes were a factor in each top-detracting position’s results. Canadian residential mortgage insurance provider Genworth MI Canada saw its shares fall due to concerns about increased mortgage delinquencies and growing losses on claims as investors worried about the economic effects of COVID-19 and increased unemployment in Canada’s western provinces—a key market for Genworth—due to lower oil prices. 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. Banks (Financials) were the second-largest industry detractor as the global recession, concerns about increased loan losses, and record-low rates conspired to drive investors away.


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On the positive side, software (Information Technology) and metals & mining (Materials) were the top industry contributors, boosted in the first case by the accelerating needs for cloud and telecommunications technology in a work-from-home world and in the second by precious metals resuming their historically familiar role as a safe-haven investment during economic slumps. Each of the Fund’s two top-contributing holdings also benefited from these respective trends. Based in Toronto, Alamos Gold explores for, and produces, gold from mines in Canada, Mexico, and the U.S. Bandwidth, which is slotted in the Communication Services sector, offers voice-over Internet, integrated phone systems, smartphones, and business-grade Internet connectivity solutions through cloud-based communications. Bandwidth’s shares were lifted by robust revenue growth, especially through its expertise in CPaaS (Communications Platform as a Service), a cloud-based platform that enables developers to add real-time communications features to their own applications without needing to build back-end infrastructure and interfaces.

On a relative basis, the Fund was negatively, though modestly, impacted by sector allocation—stock selection was additive in 2020’s first half. Health Care was the largest relative sector detractor as underweighting this strongly performing area, along with some stock selection miscues, hurt. Industrials was another source of underperformance as the Fund’s holdings lagged those in the index, most notably in marine, where our three holdings as a group trailed the overall index. In contrast, Financials was a source of outperformance largely due to stock selection, most notably in the capital markets industry. Materials, where metals & mining holdings were the standout performers, was an additional source of relative strength, again owing to stock selection.


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

Alamos Gold Cl. A0.73
Bandwidth Cl. A0.44
Etsy0.43
Virtu Financial Cl. A0.35
Franco-Nevada0.32

1 Includes dividends

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

Genworth MI Canada-0.71
SEACOR Marine Holdings-0.56
TGS-NOPEC Geophysical-0.45
SEACOR Holdings-0.44
G-III Apparel Group-0.43

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 and have increased our holdings in construction & engineering and building product stocks. In Information Technology, our largest weightings are primarily in the semiconductors & semiconductor equipment group and the electronic equipment, instruments & components industry. We increased our exposure to the latter area during the second quarter. We are optimistic about the prospects for small-cap stocks over the intermediate term, particularly those companies with cyclical exposure, 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 30YR 45YR
Pennsylvania Mutual 24.01-13.56-7.14 3.11 5.16 9.20 6.85 8.97 9.70 12.83
Russell 2000 25.42-12.98-6.63 2.01 4.29 10.50 7.01 6.69 8.93 N/A

Annual Operating Expenses: 0.94

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: Alamos Gold Cl. A was 1.4%, Bandwidth Cl. A was 0.6%, Etsy was 0.7%, Virtu Financial Cl. A was 0.5%, Franco-Nevada was 0.8%, Genworth MI Canada was 0.8%, SEACOR Marine Holdings was 0.0%, TGS-NOPEC Geophysical was 0.5%, SEACOR Holdings was 0.7%, G-III Apparel Group was 0.1%


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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