Royce Pennsylvania Mutual Fund Manager Commentary
article 06-30-2022

Royce Pennsylvania Mutual Fund Manager Commentary

Even in a highly challenging market, our flagship portfolio maintained its long-term advantages over the Russell 2000 Index, outperforming the small-cap index for the one-, three-, five-, 20, 25-, 30-, 35-, and 40-year periods ended 6/30/22.


Fund Performance

Even in a highly challenging market, our flagship portfolio, Royce Pennsylvania Mutual Fund, maintained its long-term advantages over its small-cap benchmark, the Russell 2000 Index, outperforming the small-cap index for the one-, three-, five-, 20, 25-, 30-, 35-, and 40-year periods ended 6/30/22.The Fund also lost less than its benchmark for the year-to-date period ended 6/30/22, down 21.2% versus a decline of 23.4% for the Russell 2000. It was the worst first-half performance for the small-cap benchmark in its more than 40-year history.

What Worked… And What Didn’t

Nine of the 10 equity sectors in which the Fund held investments detracted from 2022’s first-half performance, with the biggest negative impacts coming from Industrials, Information Technology, and Financials. Energy made a small positive contribution while the smallest detractions came from Consumer Staples and Real Estate. At the industry level, two areas in Information Technology—semiconductors & semiconductor equipment and electronic equipment, instruments & components—detracted most, followed by banks from Financials. Each was among the Fund’s four largest industry weightings for the year-to-date period ended 6/30/22 (while the two industries from Information Technology were also significantly overweight versus the Russell 2000). These sizable exposures indicate our high long-term confidence in spite of recent stock price declines. The top-contributing industries were energy equipment & services (Energy), containers & packaging (Materials), and pharmaceuticals (Health Care).

The top detractor at the position level was Triumph Bancorp. The company’s payment platform has been changing how payments and invoices are handled in the trucking industry by better connecting carriers, shippers, factoring companies, and freight brokers in a way that allows much more efficient handling of invoices and other payments. A stellar 2021 share price run led to significant multiple expansion—and higher multiple stocks were hit hard in the first half of 2022 by rising rates. However, its fundamentals remain strong, and at the end of June we thought its shares were attractively valued. Mesa Laboratories develops and manufactures electronic measurement instruments for industrial and hemodialysis customers, including pipeline flow meters and calibration instruments. The company’s relatively strong operating performance was undone by underperformance for much of the Health Care sector and more specifically by supply chain, procurement, and other impediments to its operations, particularly the two-month Shanghai-area shutdown. We held a position at the end of June, seeing its challenges as transitory.

The Fund’s top contributor at the position level was Meridian Bioscience, a profitable health care company that manufactures consumable reagents used in in-vitro diagnostic (IVD) tests and develops IVD tests and instruments. The company has a particularly strong niche position in various gastrointestinal diseases. Following a 27% gain in 1Q22 on a reacceleration in its diagnostic test volume growth and new product-driven share gains in reagents, its stock rose 17% in 2Q22 despite very little public, company-specific news. The reason behind its rise was revealed on 7/7/22, when Meridian announced an agreement to be acquired by SD Biosensor, a South Korean healthcare company, and its private equity partner for $34 per share in cash. While this was a minimal premium to the current price, it was 32% higher than Meridian’s stock price at the time the initial offer was made privately a few months earlier. Blood and plasma supplies and services provider Haemonetics Corporation also contributed at the position level. The company reported encouraging fiscal 4Q22 results in mid-May, including improved revenues, earnings, and margins driven by growth in its hospital business, donor resilience in blood centers, and the rollout of Persona, a proprietary integrated plasma collection solution built upon the company’s NexSys platform that is designed to improve plasma yields.

The Fund’s relative advantage over its benchmark came entirely from stock selection in 2022’s first half, with eight equity sectors contributing to outperformance. At the sector level, stock picks and our lower exposure to Health Care both made positive impacts while stock selection drove the Fund’s relative advantage in Consumer Discretionary. The portfolio’s cash position also helped versus the benchmark. Conversely, the portfolio’s relative results were hurt by our lower exposure to Energy, lack of exposure to Utilities, and a combination of stock picks and our lower weighting in Consumer Staples.

Top Contributors to Performance Year-to-Date Through 6/30/221 (%)

Meridian Bioscience0.22
Haemonetics Corporation0.16
Intertape Polymer Group0.13
Antero Resources0.13
Pason Systems0.12

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/222 (%)

Triumph Bancorp-0.41
Mesa Laboratories-0.40
Element Solutions-0.37
Builders FirstSource-0.37
FARO Technologies-0.34

2 Net of dividends

Current Positioning and Outlook

We are currently in what we would call a “sum of all fears” environment. War, inflation, slower growth, and rising rates are all understandably frightening investors. Both consumer and investor sentiment are near historic lows. Perhaps counterintuitively, then, history shows that the most opportune times to invest are when fear is high and trailing returns are low. The annualized three-year return for the Russell 2000 at the end of June was 4.2% compared to its three-year monthly rolling average since inception of 10.9%. Subsequent returns from these levels historically have been attractive. Coming off a record negative first half during what appears to be a late stage of the bear market, the current period looks like a solid entry point for prospective long-term small-cap returns.

Average Annual Total Returns Through 06/30/22 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 25YR 35YR 45YR
Pennsylvania Mutual -13.34-21.24-17.565.616.819.226.238.599.289.8212.38
Russell 2000 -17.20-23.43-

Annual Operating Expenses: 0.92

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, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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, 2022, 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, 2022 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 6/30/22, the percentage of Fund assets was as follows: Meridian Bioscience was 0.6%, Haemonetics Corporation was 1.1%, Intertape Polymer Group was 0.0%, Antero Resources was 0.2%, Pason Systems was 0.7%, Triumph Bancorp was 0.8%, Mesa Laboratories was 0.7%, Element Solutions was 1.3%, Builders FirstSource was 0.9%, FARO Technologies was 0.5%, SD Biosensor 0.0%.

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.)



Sign Up