Fund Performance

Royce Small-Cap Fund beat its small-cap benchmark, the Russell 2000 Index, for the year-to-date period ended 6/30/25, down -0.8% versus -1.8%, while also beating the small-cap index for the 3-, 5-, 10-, 20-, 25-, 30-, 35-, 40-year and 45-year periods ended 6/30/25. For the 1-year period, certain attributes that go into our selection process, such as high returns on invested capital, underperformed and lagged the benchmark.

What Worked… and What Didn’t

Six of the Fund’s 10 equity sectors detracted from performance in the year-to-date period, with the biggest detractions coming from Consumer Discretionary, Information Technology, and Real Estate while the largest positive impacts came from Financials, Industrials, and Health Care. At the industry level, semiconductors & semiconductor equipment (Information Technology), chemicals (Materials), and specialty retail (Consumer Discretionary) detracted most, while capital markets (Financials), construction & engineering (Industrials), and insurance (Financials) were the biggest contributors for the year-to-date period.

The top detractor at the position level was Onto Innovation, which provides inspection, metrology, and lithography equipment that is critical for quality and process control in semiconductor chip manufacturing. Onto holds the #1 or #2 position in most of the niches it serves. Its broad portfolio of solutions and technologies is a key differentiator. The applications for Onto’s products increases with the growing complexity of the chip manufacturing process. Nonetheless, the stock fell on concerns that a tariff-induced global recession would impact end demand and cause semiconductor CapEx spending to decelerate. In 2Q25 the stock plunged 30% after Onto reduced fiscal 2025 guidance in part due to the loss of potential new business for a specific application ramping at a key customer. Thus far, our research leads us to believe this was an isolated incident and not a systemic issue within Onto. While the near-term will likely remain bumpy, even assuming Onto does not win back any of the lost opportunity, the company still appears to have multiple paths to achieve significantly higher earnings power as new advanced note integrated circuit designs and the increasing use of advanced packaging—which is just one aspect of the growing complexity in chip manufacturing, as well as the need for more testing as the chips are fabricated. Onto also has a proven track record of driving growth through expanding its addressable markets via new product development (its current pipeline could expand its sales opportunities by another $1 billion) and acquisitions (e.g., Onto recently announced the margin-accretive purchase of Semilab’s materials analysis business).

Enovis Corporation is 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. Enovis has a strong slate of new product introductions that will debut before the end of 2025, even as many investors continue to take a wait-and-see approach.

Ziff Davis is a digital media company that owns websites and related properties that target specific niche verticals. About 60% of its revenue comes from website advertising revenue while 40% is subscription based from its broadband connectivity data services, marketing technology, and cybersecurity offerings. The stock has been a consistent underperformer since the emergence of generative AI-based search and associated concerns about potential disruptions in the traditional digital advertising model. Additionally, Ziff Davis hasn’t completed a meaningful acquisition for about two years, despite M&A being a core source of historic value creation (20%+ internal rates of return). While management did announce the more material, strategic acquisition of CNET in 3Q24 and took more aggressive cost actions to preserve margins given lower-than-planned second half growth, our conviction in the long-term business model has waned given continual improvements in AI, combined with new AI search offerings from both incumbents such as Google, as well as new AI search entrants, such as ChatGPT Search in beta, and Perplexity. The threat of disruption from these new “answer engines” to the Google-dominated search advertising ecosystem appears to be growing, with content creators such as Ziff Davis, which receive a lot of traffic from Google, in the crosshairs for potential disintermediation. Each of these developments influenced our decision to exit the position.

Rogers Corporation develops and manufactures engineered materials and components for mission critical applications. It operates through the three segments: Advanced Electronics Solutions (AES), Elastomeric Material Solutions (EMS), and Other. The AES segment centers on circuit materials, ceramic substrate materials, busbars, and cooling solutions for applications in electric and hybrid electric vehicles, wireless infrastructure, automotive, thermal solutions, aerospace and defense, mass transit, clean energy, connected devices, and wired infrastructures. The EMS segment comprises elastomeric material solutions for critical cushioning, gasketing and sealing, impact protection, and vibration management applications. Rogers’s Other segment consists of elastomer components for applications in ground transportation, office equipment, and other markets. Its shares were volatile in 2025’s first half as an initial decline was followed by a recovery, and then a precipitous drop due when the CEO left, all against a backdrop of global macroeconomic uncertainty that appeared to keep investors away from its stock. We sold the last of our position in April.

Myriad factors hurt the shares of Computer Modelling Group (“CMG”) in 2025’s first half, A Canadian company that develops and licenses reservoir simulation software for energy companies that have to extract significantly increased amounts of oil and/or natural gas from their reservoirs. The company’s fiscal 3Q25 results fell short of investor expectations as the company faced low oil prices and endured customer churn in its core reservoir and production solutions business, with clients showing more caution and requesting lengthened deal cycles. CMG also anticipates a $6-7 million reduction in professional services revenue for fiscal 2026 that will likely affect its growth. As is often the case, we had a more confident view of its longer-term prospects at the end of June.

The Fund’s top contributor at the position level was TransMedics Group, a leader in the high-value transplant sector, with its organ care services (“OCS”) being the only FDA-cleared portable system that provides warm perfusion for heart, lung, and liver transplants. This technology preserves human organs designated for transplant in a near-physiologic condition, which expands the limitations of cold storage organ preservation. Management reported a 48% increase in total revenue for 1Q25 compared to 1Q24, driven by OCS liver and heart transplants. The company also increased its full-year 2025 revenue guidance by about 30%. The company’s logistics services, including the use of its own planes for organ transport, are also contributing to revenue growth and further streamlining the organ transplant process. In addition, Transmedics is expanding its manufacturing capacity with a new facility in Italy and advancing next-generation OCS clinical programs.

E-L Financial operates as an investment and insurance holding company in Canada in two segments, E-L Corporate and Empire Life. Management implemented a 100-for-1 stock split in May 2025, which made the stock more accessible to a wider range of investors while potentially increasing liquidity. Robust growth in revenue and profitability, combined with a low-debt balance sheet, seemed to draw more investors to its shares. Another Canadian holding, Alamos Gold operates as a gold producer in Canada, Mexico, and the U.S. The company’s positive earnings outlook, a renewed stock buyback program, and rising gold prices all helped its stock to climb in the first half of 2025. Also headquartered in Canada, Sprott is a global alternative asset manager specializing in precious metals and real assets. The company operates a diversified platform of exchange-listed products, private equity funds, and lending strategies focused on gold, uranium, and energy transition metals. Sprott’s shares advanced in the first half of 2025 as gold prices broke out to record highs amid elevated geopolitical risk, central bank buying, and a weaker U.S. dollar. The company’s suite of physical bullion trusts and energy transition ETFs saw substantial inflows, driving strong growth in assets under management and recurring fee revenue. The firm also benefited from robust performance in its private strategies, particularly in uranium and critical minerals lending. Management continues to scale its global distribution, with new mandates secured across Europe and Asia. With strong operating leverage, a clean balance sheet, and secular tailwinds behind the resource transition, Sprott remains well positioned to compound earnings across commodity cycles.

Air Lease is one of the world’s largest global lessors of commercial aircraft to commercial airlines. A rebound in airline passenger miles back from Covid-lows combined with ongoing production woes at both major aircraft suppliers has led to a multi-year imbalance of available supply of new planes versus demand. This is putting upward pressure on lease rates as well as leading to higher used aircraft resale values for planes that a come off lease. Both trends are starting to flow through in Air Lease’s recent earnings. Given the size of its order book and its focus on new, fuel efficient models, Air Lease has good visibility of future revenue streams, with over almost 60% of its deliveries through early in the next decade already under lease (including almost 100% of the next two year’s deliveries). Insurance recoveries on planes seized by Russia are also providing more financial flexibility, including the potential for Air Lease to begin buying back stock—despite strong performance, the shares remain below understated, tangible book value.

The portfolio’s advantage over the benchmark came from sector allocation decisions in the first half of 2025. At the sector level, stock selection in Financials, stock selection and, to a lesser extent, lower exposure to Health Care, and lower exposure to Energy did most to boost performance versus the benchmark. Conversely, stock selection and, to a lesser extent, a higher weighting in Information Technology, as well as stock selection in Consumer Discretionary and Materials, detracted most from relative year-to-date period results.

Current Positioning and Outlook

Against a backdrop of ample economic and geopolitical uncertainty, we know that as of the end of June, the Russell 2000 remained much less expensive than the Russell 1000. Based on our preferred index valuation metric, EV/EBIT or enterprise value over earnings before interest and taxes, small-caps stayed close to a 25-year low relative to large-cap stocks. Many small-cap stocks are just beginning to emerge from a two-year earnings recession, which should help boost performance for an asset class that’s lagged large-cap for several years and currently faces low expectations. And previous low expectations and relatively underwhelming returns have often been opportune times to increase allocations. Historically, sitting on the sidelines during corrections or the early stage of rallies has carried a high cost. We are therefore cautiously optimistic for the advantages of active, risk-conscious, small-cap investing for the long run.

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

Annual Operating Expenses: 0.93

¹ Not annualized.

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