Fund Performance

Royce Small-Cap Opportunity Fund was down -2.6% for the year-to-date period ended 6/30/25, losing less than its benchmark, Russell 2000 Value Index, which fell -3.2% for the same period. The Fund also beat the benchmark for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 6/30/25 while trailing for the 1-year period.

What Worked… and What Didn’t

Six of the portfolio’s 10 equity sectors made a negative impact on year-to-date period performance, with the largest detractions coming from Consumer Discretionary, Energy, and Health Care while the largest positive impacts came from Industrials, Materials, and Financials. At the industry level, semiconductors & semiconductor equipment (Information Technology), energy equipment & services (Energy), and specialty retail (Consumer Discretionary) detracted most for the year-to-date period, while aerospace & defense (Industrials), electronic equipment, instruments & components (Information Technology), and construction & engineering (Industrials) were the largest contributors.

The Fund’s top detractor at the position level was Lakeland Industries, which manufactures safety garments and accessories across a broad range of industries. Through a series of strategic acquisitions, Lakeland is in the midst of repositioning the itself to become a “head to toe” provider of firefighting gear. During the second quarter the company experienced some normal operations integration issues from recent acquisitions but also saw one large order get delayed while also coping with tariff related cost increases. While we expect tariff costs to be an ongoing headwind, we view the other issues as transitory in nature and thus added to our position in 2Q25.

Ichor Holdings provides fluid delivery subsystems to semiconductor equipment manufacturers. The stock was negatively affected by the unexpectedly severe and capricious tariff announcements given its position in a cyclical industry that is at the forefront of some of the more contentious trade issues. We ultimately believe these tariff issues will be resolved in a manageable manner and see Ichor as well positioned to benefit from the ongoing need for semiconductors.

Select Water Solutions Cl. A was historically a water services provider to the North American oil patch that delivered and evacuated the water used for the fracking of shale assets. This was a commodity-based business with significant volatility. Over the past few years, however, Select Water Solutions has been morphing into a water infrastructure company, where it focuses on building water pipelines and enabling customers to use the water infrastructure on a long-term contract basis, generating much higher margins and return than the water services business model. Its stock underperformed in the first half along with the rest of the U.S. oil field services industry, driven by the volatility in oil prices and flat drilling activity in U.S. shale regions. There was no significant company specific reason for the underperformance. We bought shares at the early stages of its transformation in 2023. Since then, Select Water Solution’s business model change has been working, as evidenced by several infrastructure contract wins, a newly instituted dividend, a sizeable share buyback program, and accretive acquisitions. We remain confident in both its growth prospects and the caliber of its management team, so we used the share price weakness price to build our position.

Grid Dynamics Holdings, which helps global retailers, consumer technology platforms, and financial institutions build cloud native apps and run AI and analytics pipelines, also detracted meaningfully. Its share price declined significantly in the first half of 2025 in part because enterprise clients are delaying discretionary projects and curbing non-essential spending, leaving the IT services cohort among 2025’s worst performers year-to-date. Grid’s stalling near-term growth was first seen in 1Q25’s sequentially flat revenue. Management reiterated fiscal 2025 guidance but also acknowledged that the year’s first half would be “soft,” with acceleration pushed to fiscal 2025’s second half. The lack of immediate growth torque contrasts sharply with other AI hardware beneficiaries that have grabbed the market’s attention. The company’s Retail segment remained its largest vertical at 31% of first-quarter revenue, while its Tech Media Telecom segment added another 24%. These are the very segments that companies slashing or delaying customer-experience features typically rebuild first during macro slowdowns, which amplifies the volatility in Grid’s backlog, as well as the long-term opportunity.

Rounding out the top five detractors was oncology testing specialist NeoGenomics, whose stock underperformed in 2025’s first half after an earnings miss in 1Q25 that was driven by lower pharmaceutical and biotech R&D spending due to National Institutes of Health funding cuts and tariff uncertainty. These macro pressures make the return to profitability that’s a key part of NeoGenomics’s turnaround plans more challenging. Wall Street also remains skeptical of the company’s “show me” story. Revenues are continuing to grow, however, and management has a plan to drive margin expansion and profitable growth. Our view remains that the company’s unique assets in the oncology testing space, particularly their ability to serve rural hospitals and oncology practices, is significantly undervalued at recent share prices.

The Fund’s top contributor at the position level was nLIGHT, which builds highpower semiconductor and fiberlaser systems for industrial metal processing and, increasingly, directedenergy weapons. First-quarter revenue grew 16% year-over-year while Aerospace & Defense sales jumped more than 150%, reflecting rampups on the U.S. Army’s HELSI/DE MSHORAD programs and a growing pipeline of highenergy laser components. Management guided to sequential Aerospace & Defense growth and better mixdriven gross margins, and analysts highlighted the move as the “first clear proofpoint” that nLIGHT’s multiyear defense designwins are translating into volume shipments. With few pureplay directedenergy suppliers listed, investors are paying up for nLIGHT’s unique exposure to Pentagon laser budgets and AIdriven industrial automation, driving multiple expansion on top of improving fundamentals.

The Fund’s top contributor was aerospace & defense supplier Astronics Corporation, whose shares outperformed strongly year to date driven by strong industry fundamentals and improvement in the company’s performance. Record new bookings, a backlog driven by tailwinds in demand for new aircraft in the commercial aerospace market, and increased defense spending globally have all set the stage for better-than-expected earnings growth at Astronics. The company’s turnaround efforts drove a significant increase in margins while earnings (and Wall Street’s) estimates have risen accordingly. Astronics remains undervalued relative to peers, and we believe the shares still offer favorable return potential despite recent strong share price performance. There have also been favorable developments in several outstanding legal challenges the company has faced, the final resolution of which would remove a significant overhang on the stock.

Kratos Defense & Security Solutions also benefited from the strong spending in global defense markets, as surging demand for drones and UAVs—unmanned aerial vehicles—has played into the company’s strong product offerings in this area as well as its microwave electronics products. Shifting defense spending priorities away from legacy systems toward these newer unmanned systems and hypersonics is a significant shift in the funding being directed in this area and “buy American” provisions are aiding in their adoption. While there are several new entrants and startup companies attempting to capitalize on this secular shift, Kratos has the proven and tested product and technology available today at costs well below what many defense prime contractors can match—which is an important reason why we continue to like the long-term outlook for the company.

Another top contributor in 2025’s first half, LifeMD runs a direct to consumer virtual care platform whose fastest growing line is prescription GLP 1 weight loss programs. (GLP-1, or glucagon-like peptide-1, is a naturally occurring hormone that plays a crucial role in regulating blood sugar levels, appetite, and digestion.) First-quarter revenue leapt 49% year-over-year, with telehealth revenue up more than 70%, while the company swung to positive adjusted EBITDA (earnings before interest, taxes, depreciation & amortization), convincing the market that scale economics are finally coming through. The company also made deals in April and May with Novo Nordisk (Wegovy) and Eli Lilly (Zepbound), giving LifeMD preferred access to brand name GLP 1 supply and marketing support, catalyzing a step change in new patient adds and boosting earnings guidance for fiscal 2025. With investor appetites for obesity drug beneficiaries remaining high, LifeMD screens as a small-cap, high growth way to play this theme without blockbuster drug pricing risk.

The Fund’s fifth-best contributor was OptimizeRx, which operates a cloud platform that delivers real-time messaging, copay support, and adherence programs from pharmaceutical sponsors directly into EHR, or electronic health records, workflows. Revenue grew 11% year-over-year to $21.9 million in 1Q25, and the company posted positive adjusted EBITDA for the first time, aided by cost discipline and a shift toward higher margin subscription contracts. Management’s move from one-off media buys to recurring SaaS (software as a service)-type “Patient Journey” service bundles is lifting visibility (80% contracted revenue), lowering churn, and reducing working capital drag—moves that investors rewarded. OptimizeRX sits in the money flow as pharmaceutical marketing dollars migrate from TV ads to digital point of care channels. In addition, recent competitive wins versus GoodRx underscore the strength of OptimizeRx’s integrated EHR network.

The Fund’s advantage over its benchmark came mostly from stock selection in the year-to-date period. At the sector level, stock selection in Industrials helped most by a wide margin, followed by stock selection in Health Care and the combination of stock selection and a lower weighting in Communication Services. Conversely, the biggest detractions from relative year-to-date results came from stock selection in Consumer Discretionary, a significantly lower weighting in Financials, and stock selection in Information Technology.

Current Positioning and Outlook

The second quarter was an eventful one for the overall market and for small-cap stocks in particular. After the first quarter’s sharp selloff, the Fund rallied sharply from the 4/8/25 low through the end of June, rising 30.4% as tariff uncertainty faded, and the market digested Trump’s desire to get trade deals done at significantly lower rates than those first announced on “Liberation Day.” While geopolitical events and the U.S. military attack on Iran’s nuclear facilities following the Israelis’ successful air campaign dominated the headlines, the energy markets were particularly sanguine regarding the risk of oil supply disruptions; as of the end of June, oil traded below $70 a barrel. This has helped to keep core inflation contained and heading in the right direction (as did May’s data being revised lower) while the futures market has priced in three rate cuts by year end. All while the economy and job market continue to exhibit healthy levels of activity. Bearish sentiment began to fade as the optimism surrounding Trump’s “America First” agenda helped fuel domestic manufacturing and re-shoring growth began to reassert itself, leading the markets responded accordingly. We saw two healthy signs of increasing market breadth: the mega-cap Magnificent 7 stocks were no longer driving the advance and there was welcome strength in industrial stocks—which bolstered our confidence in portfolio positioning. We remain constructive on the long-term prospects for our portfolio holdings, particularly technology and industrial companies, and we used the market selloff to add selectively to both existing and new positions. We have been adding to our domestic energy exposure, concentrating on natural gas and power generation as opposed to oil. We have also been increasing our Health Care exposure given the attractive opportunities after several years of underperformance. There have been some sure signs of slowing growth in areas such as Consumer Discretionary and leisure and business travel, as well as large corporate deal activity, as both businesses and consumers await greater clarity. We still believe that a more business friendly regulatory approach by the Trump administration will lead to increased corporate deal activity, a view that has been echoed by our specialty investment banking holdings. We would expect this to benefit the portfolio, which has often held M&A takeover targets as well as allowing small-cap companies to grow via acquisitions and mergers. Our portfolio also benefits from increased spending by both the government and private sector, driven by the ongoing need to maintain and grow U.S. infrastructure, particular power generation and transmission, as well as to boost our chip-making capabilities and re-shore manufacturing across many sectors of the industrial economy.

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

Annual Operating Expenses: 1.22

¹ Not annualized.

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