Royce Premier Fund Manager Commentary
article 06-30-2022

Royce Premier Fund Manager Commentary

Our high quality-based Premier Fund beat the Russell 2000 Index, for the one-, three-, five, 15-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/22.


Fund Performance

Royce Premier Fund held onto its long-term relative advantages during a bearish first half, beating its small-cap benchmark, the Russell 2000 Index, for the one-, three-, five, 15-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/22. The Fund outperformed the small-cap index for the year-to-date period ended 6/30/22, down 19.2% versus a 23.4% decline for the Russell 2000.

What Worked… And What Didn’t

Given the “nowhere to run to, nowhere to hide” tenor of the first half, widespread sector weakness was not a surprise. Each of the portfolio’s nine sectors detracted from first-half performance, with Information Technology, Industrials, and Consumer Discretionary making the biggest negative effect while the smallest came from Communication Services, Real Estate, and Consumer Staples. At the industry level, electronic equipment, instruments & components (Information Technology), capital markets (Financials), and machinery (Industrials) detracted most for the year-to-date period while insurance (Financials), metals & mining (Materials), and marine (Industrials) were the largest contributors.

Premier’s top detracting position was MKS Instruments, which makes equipment that’s used to control and analyze gases in the semiconductor manufacturing process. Its shares fell more than 30% in the second quarter, reflecting in part the general sell-off in semiconductor capital equipment stocks, which is rooted in growing evidence that inflation has begun to blunt spending on discretionary items, including smartphones and other consumer electronics. MKS also faced ongoing delays in getting approval from China’s regulator for its proposed acquisition of Atotech, a global leader in electroplating chemicals used in the chip and printed circuit board manufacturing processes. Despite the recent pullback and rising near-term cyclical headwinds—which include a possible digestion phase for semiconductor capital equipment—we believe MKS’s leadership in critical semiconductor capital equipment components and its efforts to replicate its successful strategies in adjacent markets both position the company to benefit from long-term secular growth drivers, such as the proliferation of semiconductors, and increased miniaturization in microelectronics. FARO Technologies, which develops computer-aided coordinate measurement devices and software, saw its stock fall after an earnings miss as component shortages continued to limit certain product shipments. Shanghai’s Covid-driven lockdowns also hurt the company’s intra-China logistics while European 3D laser scanner sales stalled as customers anticipated the release of FARO’s next generation scanner. Confident in rebounds, we held shares in both companies at the end of June.

The Fund’s top contributing position 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, its stock rose 17% in 2Q22 despite very little public company-specific news. A potential 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 a minimal premium to the current price, the offer was 32% higher than Meridian’s stock price at the time of the initial offer, which was made privately a few months earlier. Property & casualty insurer Alleghany Corporation was also subject to the “urge to merge” when it agreed to be acquired by Berkshire Hathaway for a 25% premium in March.

Relative to the Russell 2000, the Fund’s advantage came exclusively from stock selection in the year-to-date period, with stock picking especially effective in Health Care, Industrials, and Consumer Discretionary, which made the most significant relative positive impacts. Conversely, Energy and Utilities detracted due to our lack of exposure, while Consumer Staples hurt relative results due to both stock selection and our underweight in the sector.

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

Meridian Bioscience0.53
Alleghany Corporation0.42
Haemonetics Corporation0.33
Ritchie Bros. Auctioneers0.14
Dorman Products0.11

1 Includes dividends

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

MKS Instruments-1.17
FARO Technologies-0.93
Mesa Laboratories-0.92
Computer Services-0.79

2 Net of dividends

Current Positioning and Outlook

It appears that near-term market sentiment will continue to be dominated by fear and uncertainty in the face of inflation, rising rates, and a slowing economy. We believe these conditions will continue to favor small-cap quality as investors seek shelter in companies with durable business models, strong balance sheets, and consistent free cash flow generation. The financial flexibility to self-fund growth irrespective of near-term cyclical trends positions quality companies to capitalize on secular opportunities that are growth tailwinds for many of our companies—for example, those involved in automation, digital transformation, infrastructure spending, and semiconductor capital intensity. While our holdings aren’t immune from recessions, their strong financial characteristics should give them the ability not only to survive difficult macro conditions, but also to emerge stronger when conditions improve. We believe they should be able to take market share from weaker, more highly leveraged competitors and/or acquire them at attractive multiples. Within small-cap, high quality stocks—as measured by high returns on invested capital (ROIC)—continue to trade at a discount to the Russell 2000. We believe this combination of durable business models and attractive valuations makes the portfolio a potentially attractive way to achieve attractive long-term returns on an absolute and relative basis.

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

Premier -12.81-19.20-14.824.947.489.047.309.949.8211.0710.93

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, 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 1.7%, Alleghany Corporation was 0.0%, Haemonetics Corporation was 2.1%, Ritchie Bros. Auctioneers was 1.7%, Dorman Products was 3.1%, MKS Instruments was 2.3%, FARO Technologies was 1.0%, Mesa Laboratories was 2.0%, Morningstar was 2.5%, Computer Services was 1.9%, Atotech 0.0%, SD Biosensor 0.0%, Berkshire Hathaway 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.)



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