Royce Pennsylvania Mutual Fund Manager Commentary
article 06-30-2021

Royce Pennsylvania Mutual Fund Manager Commentary

We were pleased with the Fund’s first-half results on an absolute scale as well as by its advantage over the Russell 2000 for the 20-, 25-, 30-, 35-, and 40-year periods ended 6/30/21.

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Fund Performance

Our flagship Royce Pennsylvania Mutual Fund was up 16.6% for the year-to-date period ended 6/30/21 versus a 17.5% gain for its small-cap benchmark, the Russell 2000 Index, for the same period. While not the relative result we were hoping for, we were pleased with first-half results on an absolute scale as well as by the Fund’s advantage over the Russell 2000 for the 20-, 25-, 30-, 35-, and 40-year periods ended 6/30/21, all under the management of Chuck Royce.

What Worked… And What Didn’t

For the year-to-date period ended 6/30/21, each of the 10 equity sectors in which the Fund held investments made positive contributions to performance, with the largest coming from Industrials, Information Technology, and Consumer Discretionary, while the smallest were in Communication Services, Consumer Staples, and Energy—the portfolio’s lowest sector weightings for the six-month period. At the industry level, the top contributors were semiconductors & semiconductor equipment (Information Technology), banks (Financials)—which were very strong in 1Q21—and electronic equipment, instruments & components (Information Technology). Only three industries finished the year-to-date period in the red: health care technology (Health Care), metals & mining (Materials), and consumer finance (Financials).

Kulicke & Soffa Industries, which designs and manufactures capital equipment, related spare parts, and packaging materials used in semiconductor device assembly, was our top contributor for the first half of 2021. The company reported strong results for its fiscal second quarter in May, citing increased global reliance on semiconductors and the growing capital intensity within the assembly process as the primary drivers behind its recent success. First Citizens BancShares is a financial holding company that we have long seen as a highly valuable bank franchise. It holds a dominant deposit market share in both North and South Carolina as well as a negligible cost of funds due to its strong client relationships. The company also has a history of successfully acquiring other banks. The major story for First Citizens over the past year has been its acquisition of CIT. We see significant value creation potential in the acquisition that lies in the significant expansion in HOA (homeowner’s association) deposits for First Citizens as well as its own far lower cost of capital, which should allow it to compete much more effectively in some of CIT’s core verticals. The market has begun to recognize these benefits, leading its shares to rise in 2021’s first half.


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The top detractor at the position level was GCM Grosvenor, an investment management company focused on private equity, infrastructure investments, real estate, credit finance, and absolute return. Its shares fell after the company reported fiscal first-quarter results in mid-May that showed better-than-expected revenues but earnings that seemed to fall short of other investors’ expectations. We added shares through most of the first half. SmileDirect Club designs and manufactures dental equipment, supplying invisible aligners and braces that straighten teeth. The company has had success expanding beyond the U.S. while profitably growing its domestic business. However, SmileDirect also suffered a cybersecurity-driven manufacturing interruption shortly after reporting results, which depressed its previously sunny near-term outlook. Liking its long-term prospects, we chose to build our position while others were selling.

Relative to the Russell 2000 for the year-to-date period, underperformance came entirely from stock selection as sector allocation decisions had a modestly positive effect. Hurting relative results most at the sector level was the combination of lower exposure and ineffective stock selection in both Energy and Communication Services. In Materials, the positive effect of our higher weighting fell short of the impact from stock selection miscues in the period. Conversely, a lower weighting in the lagging Health Care sector, along with a small assist from stock selection, was additive vis--vis the benchmark. Successful stock picks in Information Technology (which outweighed the negative impact of our larger exposure) and having no exposure to lagging Utilities also helped relative results.


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

Kulicke & Soffa Industries0.65
First Citizens BancShares Cl. A0.53
Upwork0.32
Scientific Games0.32
Shoe Carnival0.30

1 Includes dividends

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

GCM Grosvenor Cl. A-0.15
SmileDirectClub Cl. A-0.14
Alamos Gold Cl. A-0.10
Haemonetics Corporation-0.10
Upland Software-0.10

2 Net of dividends

Current Positioning and Outlook

We remain confident that cyclical small caps are poised for a strong run in the coming years, a confidence underscored by current expectations for strong nominal GDP growth in the U.S. this year and next coupled with an accommodative Fed and attractive relative valuations. Equally important, we remain excited about the opportunities in small caps, an asset class with a large number of diverse and interesting companies and evolving industries. We have recently been most focused on identifying those businesses that were able to use the difficulties wrought by the pandemic and ensuing recession to get stronger. We’ve been finding these kinds of businesses selling at what we think are attractive valuations largely in Industrials, Information Technology, and Financials. We believe that we are embarking on the leg of the market cycle when company results, rather than valuation expansion, typically begin to drive most of the stock price movement—an environment that we believe suits our skill sets well.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 30YR 45YR
Pennsylvania Mutual 2.7516.6053.88 12.89 15.75 10.55 8.86 9.87 11.10 13.32
Russell 2000 4.2917.5462.03 13.52 16.47 12.34 9.51 9.26 10.65 N/A

Annual Operating Expenses: 0.95

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, 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: Kulicke & Soffa Industries was 1.1%, First Citizens BancShares Cl. A was 1.3%, Upwork was 0.6%, Scientific Games was 0.5%, Shoe Carnival was 0.5%, GCM Grosvenor Cl. A was 0.6%, SmileDirectClub Cl. A was 0.5%, Alamos Gold Cl. A was 0.7%, Haemonetics Corporation was 0.3%, Upland Software was 1.0%


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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