Royce Premier Fund Manager Commentary
article 06-30-2019

Royce Premier Fund Manager Commentary

We were pleased our High-Quality Strategy outperformed its index and maintained its long term advantages during the first half of 2019 despite challenges for cyclical sectors and most value stocks.


Fund Performance

Royce Premier Fund stayed ahead of its small-cap benchmark, the Russell 2000 Index, for the year-to-date, one-, three-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended June 30, 2019. The Fund increased 21.7% in the first half of 2019, outperforming the Russell 2000, which gained 17.0% for the same period. In spite of challenges for some cyclical sectors and most value stocks, our quality strategy has performed well over the last few years.

What Worked… And What Didn’t

We were pleased to see all nine of the portfolio’s equity sectors and, perhaps more impressively, each of its 29 industries contribute to positive first-half returns. The Fund’s largest sector weighting at the end of June—Industrials— also made the largest positive impact on first-half performance by a sizable margin. Information Technology and Financials also made notable positive contributions, while Real Estate and Consumer Staples had the smallest positive effect. Machinery (Industrials) and capital markets (Financials), the Fund’s two largest industry weights, contributed most with market-beating returns, while two groups from these same two sectors, industrial conglomerates and insurance, contributed least.

Fair Isaac was the portfolio’s top contributor at the position level. The company continues to reap the rewards of recent initiatives that have reaccelerated revenue growth in its core, high-margin credit score business, the ubiquitous, industry-standard FICO score. Fair Isaac is also broadening its addressable market, which is aimed at assessing the creditworthiness of borrowers with little or no credit history, while also growing its financial software business. Precision valve maker CIRCOR International benefited from some global recession fears receding with the result that, by mid-May, CIRCOR’s stock price had rallied 47% from the multi-year low with which it began 2019. Its shares then spiked again in May after a takeover offer from a larger engineered industrial products company. Before the end of June, this company raised its equity offer, and we continue to evaluate the situation.

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The Fund’s biggest detractor at the position level was agricultural equipment supplier, Lindsay Corporation, the only one of the portfolio’s 10 machinery holdings to finish the first half in the red. The company faced several challenges, including lower farming incomes that have crimped capital spending and led to ongoing weakness in its core market, excess rainfall and flooding in the Midwest, and tariff and trade war woes. In early July, however, Lindsay noted an uptick in domestic irrigation sales, while recent improvement in key crop prices such as corn have improved agricultural sentiment. In addition, the outlook for international irrigation demand remains favorable. We trimmed our stake slightly in the first half. We did the same with National Instruments, which supplies instrumentation hardware and software products for engineers and scientists. The company posted disappointing first-quarter sales, with broad weakness across much of its global business, including softening demand in Europe. The company is focusing its resources on higher-growth applications benefiting from key technology trends such as 5G and Advanced Driver Assist Systems, but it will take time for these initiatives to manifest in accelerated revenue growth and margin expansion—and we are prepared to be patient.

Industrials was the largest source of relative outperformance in the year-to-date period, with both our overweight and superior stock selection boosting performance. Financials also contributed as alternative asset manager Ares Management gained steadily throughout the first half. A market leader in managing private credit pools, Ares continues to benefit from strong fundraising, as investors favor investments delivering attractive yields in a period with generally low interest rates. The largest source of relative underperformance was the Fund’s cash holdings. The average level of cash in the first half was not high at 3%, but in a period with strong absolute returns, almost any amount is a meaningful drag on performance. The second-biggest relative detractor was Real Estate, where the Fund’s lack of exposure 
to the equity REIT industry hampered relative results, as this was an index-beating group within the overall small-cap market in the first half.

Top Contributors to Performance Year-to-Date Through 6/30/191 (%)

Fair Isaac1.55
CIRCOR International1.40
John Bean Technologies1.33
Ares Management Cl. A1.28

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/192 (%)

Lindsay Corporation-0.41
National Instruments-0.16
Wolverine World Wide-0.11
Dorman Products-0.10

2 Net of dividends

Current Positioning and Outlook

With much of the portfolio invested in cyclical sectors, it would not be immune to a further global economic slowdown or recession. However, in the event of a recession we would expect many of these holdings, specifically those in Industrials and Information Technology, to outperform cyclicals in general because of their status as market leaders in global niches as opposed to being one of many players in a highly fragmented commodity business. Many are also asset light companies, such as those in commercial and professional services, and so do not face the same degree of margin contraction if their sales decline. Additionally, several of our cyclical holdings generate a meaningful percentage of their revenues from after-market sales, which tend to be more recurring and thus better at surviving a slowdown or contraction. Finally, valuations for many of our holdings have already discounted some level of concern about the pace of global growth and thus still look reasonably valued.

Average Annual Total Returns Through 06/30/19 (%)

Premier 4.9721.696.2815.946.6812.479.5910.7011.60 12/31/91

Annual Operating Expenses: 1.17

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, 2019, 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, 2019 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 6/30/19, the percentage of Fund assets was as follows: Fair Isaac was 2.7%, CIRCOR International was 1.2%, John Bean Technologies was 2.9%, Ares Management Cl. A was 2.7%, Woodward was 2.7%, Lindsay Corporation was 1.9%, National Instruments was 2.2%, Wolverine World Wide was 0.9%, Dorman Products was 1.6%, nLIGHT was 0.6%

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 1000 Index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 Index. 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 Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. 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 ex USA Small Cap Index is an index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. 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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