Royce Premier Fund Manager Commentary
article 06-30-2020

Royce Premier Fund Manager Commentary

Our Premier Quality Strategy held its long-term relative performance over the Russell 2000 Index for the one-, three-, five-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended 6/30/20.

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Fund Performance

We were pleased that during one of the more extreme and tumultuous six-month periods we have ever experienced, Royce Premier Fund maintained leadership over its small-cap benchmark, the Russell 2000 Index, outpacing the index for the one-, three-, five-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended 6/30/20. For the year-to-date period ended 6/30/20, the Fund slightly lagged its benchmark, down 13.3% versus a decline of 13.0% for the Russell 2000 as the second quarter’s rebound was not quite enough to make up for the first quarter’s decline.

What Worked… And What Didn't

Industrials was by far the biggest detractor in 2020’s first half, followed by Financials and Energy. In the case of the second sector, however, the portfolio’s holdings held up noticeably better than those in the index. Information Technology was the largest positive contributor, followed by modest positive impacts from Consumer Discretionary and Health Care. These three were the only equity sectors out of the nine in which the Fund held investments that posted positive performance for the year-to-date period ended 6/30/20.

The position that detracted most from performance was Genworth MI Canada, the second-largest player in an oligopoly of private residential mortgage insurance providers in Canada. Its shares sold off on concerns that the country’s rising unemployment rate and cooling housing market would lead to mortgage delinquencies, keying a rise in Genworth’s insurance loss ratio. Our own analysis shows that Genworth is overcapitalized, has a secure and generous dividend yield, and was trading at approximately 80% of tangible book value at the end of June, making the stock an attractive value in our view. CIRCOR International manufactures flow control products for a broad range of industrial and aerospace applications. The combination of exposure to highly cyclical industries and above-average (though declining) leverage drove investors away in the first quarter before the stock rebounded with improving—that is, less bad—economic data. After reducing our position meaningfully in 2019, we exited fully in 2020’s second quarter. While we believe there remains much to like about CIRCOR’s business, there were other companies in which we had greater conviction.


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Manhattan Associates was the top-contributing position in the first half; the firm also boasts the number one share in warehouse management systems software. Accelerating demand for its core product, driven by the launch of its long-awaited cloud version and the disruptions related to the COVID-19 pandemic, has been catalyzed by increases in corporate spending on software that enhances flexibility in, and visibility into, companies’ supply chains. The pandemic has also stoked demand for the company’s Active Omni suite of solutions, which enable retailers to leverage their physical store base for e-commerce options. Bio-Techne, a leading developer and manufacturer of high-quality purified proteins and reagent solutions, has also been experiencing accelerating demand, in its case for reagents, assays, and diagnostic tools that are being used in the development of tests for both the coronavirus and antibodies, in addition to patient monitoring. Its reagents and analytical solutions are critical “picks and shovels” in life sciences research and development, making it far more than what some might call a “COVID play.” Since the arrival of its current CEO in 2013, the company has tripled its revenues via aggressive product development, geographic expansion, and acquisitions.

On a relative basis, the Fund’s narrow underperformance was entirely due to sector allocation as stock selection was positive in 2020’s first half. Our underweight in Health Care, which included no exposure to the market-leading biotechnology industry, hurt relative performance most. Our overweight in the cyclically sensitive and lagging machinery and marine groups resulted in Industrials also detracting from results versus the small-cap index. On the positive side, stock selection in Financials helped, as did our lack of exposure to the sector’s weak bank industry. Both savvy stock selection and overweighting the Information Technology sector also aided relative performance.


Top Contributors to Performance Year-to-Date Through 6/30/201 (%)

Manhattan Associates0.65
Bio-Techne0.62
Ares Management Cl. A0.59
Cognex Corporation0.43
Pool Corporation0.40

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/202 (%)

Genworth MI Canada-1.34
CIRCOR International-1.14
Pason Systems-1.10
Alleghany Corporation-1.10
Kirby Corporation-1.08

2 Net of dividends

Current Positioning And Outlook

In these turbulent times, we are looking closely at how management teams are adjusting to adversity. We want to see that they can execute effectively through uncertain periods because our experience shows that the ability to cope well with difficulties and enjoy success when more stable conditions return are closely correlated. We have also been making changes to better position the portfolio, which included exiting three holdings in the second quarter in which we no longer had sufficient confidence in their business models and/or management. We added a new holding, one that has, in our view, a distinctive position among infrastructure construction services and a second that provides core banking and other services to small regional and community banks. We are very mindful of the extraordinary amount of worldwide monetary and fiscal stimulus, with signals that more is on the way. These efforts seem likely to be successful in spurring an economic recovery. With the expectation that cyclicals will outpace defensives in a re-energized global economy (as they have historically), we continue to lean the portfolio towards high-quality cyclical stocks.

Average Annual Total Returns Through 06/30/20 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Premier 20.11-13.28-4.415.877.0610.038.669.9911.00 12/31/91

Annual Operating Expenses: 1.19

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 www.royceinvest.com. 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, 2020, 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, 2020 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 6/30/20, the percentage of Fund assets was as follows: Manhattan Associates was 2.9%, Bio-Techne was 2.2%, Ares Management Cl. A was 2.9%, Cognex Corporation was 2.2%, Pool Corporation was 1.8%, Genworth MI Canada was 1.5%, CIRCOR International was 0.0%, Pason Systems was 1.1%, Alleghany Corporation was 1.6%, Kirby Corporation was 1.7%


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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