Royce Premier Fund Manager Commentary
article 06-30-2021

Royce Premier Fund Manager Commentary

Royce Premier Fund has produced its greatest excess relative return in five-year periods with single digit returns, which is our expected range for the small cap index over the intermediate term.


Fund Performance

Royce Premier Fund posted an attractive absolute, though disappointing relative, performance in 2021’s first half, increasing 10.4% versus a gain of 17.5% for its small-cap benchmark, the Russell 2000 Index, for the same period. The Fund did, however, retain its leadership over its benchmark for longer-term periods, beating the Russell 2000 for the 15-, 20-, 25-year, and since inception (12/31/91) periods ended 6/30/21.

What Worked… And What Didn’t

Seven of the Fund’s eight equity sectors finished the first half in the black, led by its two largest, Industrials and Information Technology. Health Care was the sole detractor, while Real Estate, our second-lowest weighting, made the smallest contribution. The Fund held sizable weights in its two top contributing industries: machinery (Industrials) and electronic equipment, instruments & components (Information Technology). Health care equipment & supplies (Health Care) was the largest industry detractor, followed by commercial services & supplies (Industrials).

Coherent, which makes laser-based photonic products, was the largest contributing position as the stock benefited from a takeover battle that resulted in its shares appreciating more than 70% for the year-to-date period. Manhattan Associates was the second top contributing position in 2021’s first half. The company develops and provides technology-based supply chain software solutions that help companies manage the effectiveness and efficiency of supply chains. Manhattan reported 1Q21 results in late April that included record first-quarter revenue, robust demand for its cloud-based solutions, and increased guidance for the remainder of 2021. The company also believes it can benefit from several secular tailwinds, such as the digitalization of businesses, the shift to more flexible multi-function facilities for brick-and-mortar stores, innovative inventory management solutions, and shorter fulfillment timelines. All of these trends are helping to spur demand for its products. It exemplifies a key theme in Premier’s portfolio: a business that proved its durability during the recession and has so far emerged with greater earnings and cash flow power as the economy recovers.

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Haemonetics Corporation designs and manufactures automated systems for the collection, processing, and surgical salvage of donor and patient blood while also offering related information services and data management software. It was the largest detractor for the year-to-date period as its shares suffered a significant decline in April with the departure of a large customer in plasma distribution. Confident in the company’s expertise in its niche, we held shares at the end of June. The next 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 a meaningful amount of shares in January before slightly trimming our position in May as part of a portfolio-wide effort to raise cash.

The Fund’s relative disadvantage for the year-to-date period was due largely to ineffective stock selection, though sector allocation also detracted slightly from relative performance. Consumer Discretionary was the largest relative detractor on a sector basis due to weak stock selection as well as our underweight in this outperforming sector for the benchmark. Having no exposure to two strong industry performers—specialty retail and (to a lesser extent) hotels, restaurants & leisure—accounted for most of the performance shortfall. Financials was the second largest sector detractor due exclusively to lagging stock selection, largely in capital markets. Perhaps surprisingly, Health Care was the biggest relative contributor in the first half of 2021, thanks to our underweight in this underperforming sector. The Fund’s lack of exposure to the lagging biotechnology industry was particularly additive to relative performance. Utilities was the second largest relative contributor for a similar reason—the Fund had no holdings in this underperforming sector.

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

Manhattan Associates0.78
Valmont Industries0.75
Lindsay Corporation0.68

1 Includes dividends

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

Haemonetics Corporation-0.90
GCM Grosvenor Cl. A-0.32
Ritchie Bros. Auctioneers-0.26
Ashmore Group-0.14
ESCO Technologies-0.12

2 Net of dividends

Current Positioning and Outlook

The first half was a challenging relative performance period as low profitability and high leverage small caps did best, the opposite of the attributes that we seek. Corporate high yield spreads also contracted, which, while historically supportive for the Fund’s absolute returns, has also whipped up headwinds for its relative results. However, from the starting point of low high yield spreads, the Fund’s relative results have been very attractive throughout its nearly three decades of history. The Fund has also produced its greatest excess relative return in five-year periods with single digit returns, which is our expected range for the small cap index over the intermediate term. From a portfolio positioning standpoint, we raised cash throughout the second quarter. Sales have largely been focused on reducing weightings in some of our highest valuation holdings, which may be more vulnerable to price declines, and in companies where we still have long-term conviction—but where the near-term price appreciation seems a bit excessive. We are actively researching potential holdings and are prepared if market volatility gives us the opportunity to build existing holdings at more attractive prices.

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

Premier -0.0710.3841.9112.9716.1510.069.7010.8411.92 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, 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: Coherent was 0.0%, Manhattan Associates was 1.3%, Bio-Techne was 1.5%, Valmont Industries was 2.5%, Lindsay Corporation was 2.5%, Haemonetics Corporation was 1.5%, GCM Grosvenor Cl. A was 1.2%, Ritchie Bros. Auctioneers was 1.1%, Ashmore Group was 1.8%, ESCO Technologies was 1.2%

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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