Fund Performance

Royce Premier Fund was ahead of the Russell 2000 for the year-to-date period ended 6/30/25, down -0.6% versus a decline of -1.8% for the same period. The Fund also beat its benchmark for the 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/25, while lagging for the 1-, 3-, and 5-year periods. As was typical during past small-cap recoveries, the initial rebound in the Russell 2000 from its trough on 4/8/25 was led by low quality factors such as low or no returns on invested capital, or ROIC, and higher debt levels. We saw similar dynamics periodically over the last few years. However, if past is prologue, higher quality factors such as high ROIC—returns on invested capital—should reassert leadership as that cohort has consistently been the best performer within small-cap over the long run.

What Worked… and What Didn’t

Five of the portfolio’s eight equity sectors made a negative impact on year-to-date period performance, with the largest detractions coming from Health Care, Real Estate, and Information Technology. The largest positive contributions came from Industrials, Financials, and Consumer Staples. At the industry level, chemicals (Materials), real estate management & development (Real Estate), and health care equipment & supplies (Health Care) detracted most for the year-to-date period, while machinery (Industrials), capital markets (Financials), and paper & forest products (Materials) were the biggest contributors.

The top detractor at the position level was medical technology company, Enovis Corporation, a medical technology company that derives 50% of its sales from orthopedic and support products, with the remaining 50% coming from its faster growing orthopedics surgical implant segment, which has solid market positions in knee, shoulder, hip, foot, and ankle products. Management reported solid 1Q25 results, including low double-digit organic growth in its Reconstruction segment. However, while management reiterated 6.0-6.5% total company organic growth guidance for the year, it reduced EBIT (earnings before interest and taxes) guidance by about 5% for the year due to tariff impacts (mainly in its Prevention & Rehab business). The company has a strong slate of new product introductions that will debut as the year progresses, but investors continue to take a wait-and-see approach.

Bio-Techne is a life sciences company that develops and produces high-quality proteins, antibodies, and other essential reagents, as well as analytical tests and instruments used by biopharma companies and academia for research and drug discovery, disease diagnostics, and bioprocessing. The company’s R&D Systems brand is the gold standard in reagents. The importance of high-quality and input consistency when replicating or advancing laboratory experiments allows Bio-Techne to set premium prices. The company also has a razor/razor blade model: instrument sales lead to multi-year streams of usage-driven consumables revenue and create an annuity-like stream. With 80% of Bio-Techne’s sales coming from consumables, this further drives more predictable revenue and cash flows. However, the company was not immune to the near-term headwinds from spending reductions in U.S. academia (10% of sales) or from tariffs since roughly 40% of its sales (including 9% to China) come from outside the U.S. Yet 90% of its products are made in the U.S. With Bio-Techne’s stock down roughly -30% year-to-date through the end of June, it appears that not much weight is being given to potential mitigation actions from, for example, price pass-throughs and/or potential retaliatory tariff exemptions given the criticality of its products. The same can be said of the contrasting secular tailwinds that include the aging population in the U.S. and other developed countries, advances in disease treatment modalities (e.g., cell and gene therapy), increased automation in lab testing, and precision diagnostics. We think that near-term uncertainty is masking the attractive long-term earnings and cash flow power of a company that should return to delivering above-average organic growth at high profit margins over the long run.

Innospec is a global specialty chemicals company serving a broad range of end markets, including fuel additives, oilfield services, and personal care. Innospec operates with an attractive asset-light model and generates strong free cash flow supported by recurring, formulary-driven sales and long-term customer relationships. Its stock underperformed in the first half of 2025 primarily due to softer-than-expected results in its Performance Chemicals and Oilfield Services segments, which faced cyclical volume headwinds amid lingering global destocking and weaker activity in international energy markets. Fuel Specialties, Innospec’s largest and most profitable business, remained relatively stable but was not enough to offset weakness elsewhere. Concerns around the slowing pace of global economic activity and reduced diesel demand in key geographies have added incremental pressure to investor sentiment. Despite these near-term challenges, we believe Innospec remains a high-quality operator with strong long-term fundamentals, particularly as it continues to pivot toward higher-growth, higher-margin specialty formulations in personal care and performance chemicals. The company maintains a net cash balance sheet, continues to generate robust free cash flow, and has a long history of disciplined capital allocation, including share repurchases and tuck-in acquisitions. We remain confident in management’s ability to navigate cyclical pressures and believe Innospec is well positioned to benefit from an eventual recovery in end-market demand and continued portfolio upgrade efforts.

Kennedy-Wilson Holdings is a real estate investment manager whose stock began to fall precipitously in early March, despite the company continuing to execute on its transition to a more asset light model and divesting non-core assets. Persistently high mortgage interest rates and macroeconomic uncertainty have pressured commercial real estate valuations, and with it the firm’s stock price. We sold the last of our position in Premier in late June.

Long-time holding Quaker Houghton is a global leader in industrial process fluids used in mission-critical manufacturing applications across steel, aluminum, automotive, and general industrial markets. Quaker operates a capital-light, high-recurring-revenue model embedded deeply into customer workflows through long-term relationships and tailored chemistries. Shares came under pressure in 2025 as the company faced cyclical volume headwinds and difficult year-over-year comparisons. Demand softened across both North American and European markets, particularly in steel and automotive. Additionally, investor sentiment turned cautious on global manufacturing activity amid macro uncertainty. Despite these near-term challenges, we believe Quaker remains well-positioned over the long run and its opportunity to consolidate a fragmented global market for industrial process fluids. Encouragingly, Quaker has re-centralized product management, merged commercial and strategy functions, and is prioritizing investments in customer-centric innovation through a more coordinated global R&D structure. We believe Quaker Houghton is making the right structural moves to unlock margin expansion and reaccelerate organic growth.

Our top contributor at the position level in the year-to-date period was ESCO Technologies, which provides engineered products and solutions, including special purpose communications systems for electric, gas, and water utilities. ESCO also offers software to support advanced metering applications and provides engineered filtration products to the aviation, space, and process markets from around the world. Its shares rose mostly on the company’s improved sales and earnings, with a record backlog, especially in its Aerospace & Defense segment.

TMX Group owns the Toronto Stock Exchange and the Montreal Exchange for equities, along with other listing, clearing, and trading capabilities for derivatives, fixed income securities, and energy. Over the past several years, new management, through its Global Insights segment, has begun to better leverage and monetize the company’s proprietary data that it has as a monopoly provider in Canada. The company has also acquired firms with indexing data and data analytics that it sells to relevant users on a recurring basis. With almost 50% of TMX’s revenue generated from these services, it has a higher margin, steadier income stream to counter some of the cyclicality associated with its more trading volume-dependent Capital Formation (exchange listings fees) and Trading & Clearing businesses. Organic growth from these actions has accelerated, including a 19% gain in 2Q25, which along with healthier capital markets after the 90-day Trump Tariff pause, are key drivers of the stock’s strong performance.

Another top contributor in the year-to-date period was RBC Bearings, which manufactures highly engineered precision bearings and components used in the aerospace, defense, and industrial markets. A mission-critical, high-spec manufacturing business, RBC serves niche end markets with significant barriers to entry. The company benefits from long-term platform content, FAA certifications, and sole-source positions on a range of aircraft platforms, translating to high margins and recurring aftermarket revenue. RBC continued to post strong results in the first half of 2025, with solid organic growth driven by both its industrial and aerospace segments. The latter remains on a multi-year recovery trajectory, supported by robust demand for narrow-body aircraft and ramping military programs. RBC has also benefited from favorable pricing trends and strong cost controls, which have led to expanding gross margins and operating leverage. In addition, management has effectively executed on recent acquisitions, including Dodge Mechanical, which has helped RBC scale its industrial platform while maintaining strong free cash flow generation and deleveraging. Importantly, RBC’s consistent execution and conservative capital allocation have resonated with investors during a period of heightened macroeconomic uncertainty.

Woodward is a leading designer and manufacturer of control systems and components for aerospace and industrial engines. The company operates in highly engineered niches where reliability, efficiency, and emissions compliance are mission critical to customers—particularly in defense aviation, commercial aerospace, and energy applications like turbines and reciprocating engines. The commercial aviation business continues to recover, driven by strong aftermarket demand and rising production rates of narrow-body aircraft, while in defense growth is being driven by strong demand for the company’s smart defense systems, which support precision-guided weapons used across multiple military platforms. Woodward’s industrial segment is also experiencing a strong cycle, supported by elevated global electricity demand, continued adoption of natural gas turbines, and stricter global emissions standards that require more precise engine controls and fuel systems. Equally important, Woodward is benefiting from years of self-help and operational streamlining, with rising volumes now flowing through a leaner cost base and driving strong operating leverage. The company has also been active in returning capital to shareholders via buybacks and dividends. Its high engineering content, durable OEM (original equipment manufacturer) relationships, and leading positions in long-cycle platforms all support a growing base of recurring revenue.

Headquartered in Canada, Stella-Jones provides treated wood infrastructure products, with 70% of its sales in the U.S. (from U.S.-based facilities). It holds leading market shares in wood utility poles (47% of sales) and railway ties (25% of sales), both of which are oligopoly industry structures. In addition to predictable sales from multi-year contracts with major customers to support the annual replacement of poles and rail ties, infrastructure spending should lift long-term growth as utilities invest to harden and expand their electricity grids in the face of rising demand. Stella-Jones recently expanded its addressable market by $5 billion with the purchase of a leading producer of steel high-voltage electric transmission lattice towers and poles. After taking advantage of the stock’s underperformance in 2024 to build our position, we were pleased to see the company’s strong financial performance (reported in early May) and strategic acquisitions spur a rise in the stock in early June.

The portfolio’s advantage over its benchmark was attributable to sector allocation decisions in the year-to-date period. At the sector level, both stock selection and our larger weighting in Industrials, stock selection in Financials, and a lack of exposure to underperforming Energy stocks made the most significant positive impact versus the benchmark. Conversely, stock selection in Health Care, Real Estate, and Information Technology detracted most from relative year-to-date period results.

Current Positioning and Outlook

The second-quarter delivered a welcome shift for U.S. small-caps equities: the Russell 2000 rebounded 8.5% after the sharp sell-off earlier in the year, even as the index remained -1.8% year-to-date. As was typical during past small-cap recoveries, the initial rebound in the Russell 2000 from its trough on 4/8/25 has been led by low quality factors such as low or no ROIC and higher debt levels. However, if past is prologue, higher quality factors such as high returns on invested capital should reassert leadership as that cohort has consistently been the best performer within small-cap over the long run. Our Small-Cap Premier Quality Strategy is well aligned with such factors given its disciplined, time-tested focus on owning quality companies with high returns on invested capital, cash generative business models, and low financial leverage. Portfolio companies are not immune to macroeconomic changes, of course, but the strength and sustainability of their underlying competitive advantages ultimately determine their ability to grow shareholder value at attractive rates over the long run. While geopolitical and policy uncertainties persist, the combination of historically low relative valuations, early-cycle earnings acceleration, and probable policy tailwinds in the form of lower rates and potential tax break underpins our conviction that the Fund offers an attractive asymmetry: limited downside due to balance-sheet strength and significant upside if the anticipated small-cap catch-up unfolds. We believe patient ownership of durable franchises remains the best path to compounding shareholder value over the coming cycle.

Average Annual Total Returns Through 06/30/25 (%)

Annual Operating Expenses: 1.19

¹ Not annualized.

Important Performance, Expense and Disclosure Information