Royce Premier Fund Manager Commentary
article 06-30-2023

Royce Premier Fund Manager Commentary

Royce Premier Fund outperformed its small-cap benchmark, the Russell 2000 Index, for the year-to-date, 1-, 3-, 5-, 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/23.


Fund Performance

Royce Premier Fund outperformed its small-cap benchmark, the Russell 2000 Index, for the 1-, 3-, 5-, 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/23. The Fund also decisively beat its benchmark for the year-to-date period ended 6/30/23, increasing 14.3% versus a gain of 8.1% for the Russell 2000.

What Worked… And What Didn’t

Eight of the Fund’s nine equity sectors made positive contributions to performance in 2023’s first half, led by Industrials, Information Technology, and Materials. Communication Services was the lone detractor while Health Care and Financials made the smallest contributions.

Stella-Jones was the portfolio’s top contributor at the position level in 2023’s first half. The company dominates the railway tie and wood utility pole markets and has a growing residential treated lumber business. Stella-Jones has benefited from strong lumber prices and healthy home repair/remodel activity, while demand for its rail ties remains largely recession-resistant as some percentage of the installed base is replaced annually as part of railroad track maintenance. Finally, it is seeing a dramatic upswing in utility pole demand, its largest segment, as broadband network expansion, renewable energy, and electric vehicle adoption are secular drivers of electricity usage and the need for utilities to harden their grids. Welding and cutting products manufacturer Lincoln Electric Holdings has enjoyed vibrant demand in its core business, including its fast-growing welding automation business, which is seeing demand from continued investment in robotics. Arcosa is a leading provider of construction aggregates in the southwestern U.S. Its Engineered Structures segment has been seeing robust demand for its utility support and telecom structures as customers invest in electricity grid hardening and ongoing 5G telecom network expansion. Arcosa’s wind tower business is seeing orders surge after new legislation passed that should keep a key production tax credit in place for 10 years, improving wind project economics amid strong demand for renewable energy sources.

The Fund’s top detractor in 2023’s first half was Lindsay Corporation, which provides center pivot irrigation systems for commercial agriculture. Lindsay’s stock retreated as corn and wheat prices came off highs and farm income is forecasted to decline from peak levels. The company also faces difficult year-over-year comparisons later this year because several severe storms in 2022 drove higher pivot-replacement demand. Internationally, Lindsay has faced irrigation order delays in the high growth Brazilian market due to a political transition that pushed out implementation of a government financing program for agricultural products growers. Forrester Research is a technology research firm whose clients use its proprietary reports, real-time survey data, and consulting services to analyze the technology trends impacting their businesses and determine the strategies and IT investments needed to stay competitive or harness those technologies to their advantage. Its shares began to slip in 2022’s second half after it failed to meet sales targets due to economic uncertainty, inflation, recession worries, and a slowdown in technology. Valmont Industries manufactures fabricated metal products, metal and concrete pole and tower structures, and mechanized irrigation systems. Following a strong performance in 2022, its stock fell through most of the first half, hurt by declines in farm income and rising capital environment costs.

The portfolio’s advantage over its benchmark was primarily attributable to sector allocation in 2023’s first half. Financials, Materials and Consumer Staples made the most significant positive impact versus the benchmark while Communication Services and Health Care were the only detractors from relative results.

Top Contributors to Performance Year-to-Date Through 6/30/231 (%)

Lincoln Electric Holdings1.05
Inter Parfums0.97
National Instruments0.87

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/232 (%)

Lindsay Corporation-0.69
Forrester Research-0.42
Valmont Industries-0.36
Ziff Davis-0.24

2 Net of dividends

Current Positioning and Outlook

The outlook remains cloudy with further rate increases designed to curb falling but persistent inflation, continued recession fears, and a banking crisis still memorable to most investors. Cloudy outlooks, however, tend to provide opportunities for the Fund’s all-weather approach given our investments in durable business models that, in our view, have strong histories of persistent high returns on invested capital, consistent free cash flow generation, and strong balance sheets. While the debate rages on about when the most predicted recession in our history will begin, evidence of decelerating inflation and Fed commentary on the prospect of a more measured pace of rate increases appeared to shift sentiment toward the view that any recession is likely to be mild. Accordingly in June, consistent with the market being a discounting mechanism, investors appeared to take steps to position for an eventual recovery. Given the Fund’s focus on bottom-up stock selection (as opposed to macro-led portfolio construction), our only forecast is that whatever economic environment prevails in the second half of 2023, we believe that the high-quality business models the Fund owns should continue to compound shareholder value. We also anticipate that, as this market cycle progresses, investors will increasingly focus on business fundamentals and valuations. We expect our companies to perform well during this period by leveraging their competitive advantages to pursue strategies such as gaining market share, expanding geographically, and/or consolidating via acquisitions during this uncertain time, as they have done in previous periods of uncertainty.

Average Annual Total Returns Through 06/30/23 (%)

Premier 4.4514.3119.6013.077.999.278.4110.6210.1110.9311.19

Annual Operating Expenses: 1.18

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, 2023, 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, 2023 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 6/30/23, the percentage of Fund assets was as follows: Stella-Jones was 3.4%, Lincoln Electric Holdings was 3.3%, Arcosa was 2.9%, Inter Parfums was 1.7%, National Instruments was 1.7%, Lindsay Corporation was 1.5%, Forrester Research was 1.6%, Valmont Industries was 2.3%, Ziff Davis was 1.7%, Morningstar was 1.9%.

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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