Fund Performance

Royce Small-Cap Special Equity Fund lagged the Russell 2000 Value Index for the year-to-date period ended 6/30/25, down -6.1% versus -3.2%. The qualities that the Fund emphasizes, such as conservatively capitalized balance sheets, sustainable returns on invested capital, and strong and steady free cash flow from operations, were out of favor in the second-quarter rally that instead rewarded companies with high growth and lower-quality metrics. While disappointing, this was not surprising as previous small-cap rebounds also saw higher-quality attributes lag in the initial phase of the recovery.

What Worked… and What Didn’t

Eight of the portfolio’s nine equity sectors had a negative impact on year-to-date performance. The sectors making the largest detractions came from Materials, Consumer Discretionary and Industrials while the only positive impact came from Financials. At the industry level, paper & forest products (Materials), construction materials (Materials), and food products (Consumer Staples) detracted most for the year-to-date period, while household products (Consumer Staples), building products (Industrials), and hotels, restaurants & leisure (Consumer Discretionary) were the largest contributors.

The portfolio’s top detractor at the position level for the year-to-date period was Sylvamo Corporation, a low-cost producer of uncoated paper with global reach. First-quarter results weighed on the stock, as forward guidance was weaker than anticipated and included the heaviest maintenance outage of the year. Europe also remains a weak market, in part due to higher wood costs and a soft demand and pricing environment.

United States Lime & Minerals finished second among the portfolio’s detractors despite reporting a 27% jump in first quarter revenue and greater than 50% gross margins. After a multiyear rally, the share price consolidated during the period, which was likely a bout of profit taking amid questions about how long elevated lime pricing can persist, leaving strong fundamentals overshadowed by a valuation overhang.

John B. Sanfilippo & Son, the nut and snack producer, suffered early in the year as the December quarter results highlighted competitive pricing and input cost inflation pressuring margins. Late in 2024 the company also announced an outsized CapEx program that will weigh on cash flows. The March quarter results then saw volumes down -8%, in part due to the wind down of a snack bar recall at a major customer and price sensitive consumers increasingly turning away from the high-priced nut category.

Department store operator Macy’s was another significant detractor whose stock has been pressured throughout the year as sales have declined amid store closures and consumer pressure. While luxury brands Bloomingdale’s and Bluemercury have been bright spots, they have not been able to offset weakness at the Macy’s nameplate. The stock has also been volatile around tariff headlines.

Movado Group, which designs and distributes watches under its own as well as licensed brands, rounded out the bottom five. Like Macy’s, Movado has been whipsawed by tariff headlines and a challenging retail environment. Recent results have also been weighed down by an outsized brand-building investment.

The top contributor in 2025’s first half was Insteel Industries, which is a leading manufacturer of prestressed concrete (PC) strand and welded wire reinforcement used in concrete construction. The stock reacted positively to results in April that saw shipments rebound as customer activity increased. At the same time, selling prices increased relative to input costs, lifting gross margins to the mid-teens versus the low teens a year earlier. Management also highlighted the benefit of its updated focus on trade protections. The combination of higher volumes, better spreads, and tariff protection produced strong earnings growth that we think looks likely to persist.

Oil-Dri Corporation of America, which produces sorbents and mineral based products for pet care, agriculture, fluids purification, and industrial markets, was the second largest contributor. Reported in April, sales hit record third quarter levels as demand remained robust, particularly for bleaching clay used in renewable diesel feedstock purification. Gross margin also expanded on favorable mix and price increases, while the Ultra Pet acquisition, which was made in 2024, added incremental growth. Management’s confidence was underscored by a double-digit dividend increase.

The iconic hotdog brand Nathan’s Famous ranked third, positing fiscal-year results (ended 3/31/25) showing mid-single-digit revenue growth as the license business continues to shine. Speculation in special situation circles that the company could explore a sale, potentially to a strategic packaged foods buyer, also buoyed the shares, adding a takeover premium to solid fundamentals.

Preformed Line Products, which supplies hardware for power utility and communications networks, was the fourth largest contributor. First-quarter sales grew by mid-single digits, the second quarter of positive growth following a prolonged period of destocking at customers. The company also saw strength in the domestic communications and international energy markets, while cost discipline and mix lifted net income roughly 20% year-on-year.

Rounding out the top five contributors was Federated Hermes Class B, the asset management firm best known for money market funds. Assets under management climbed to an all-time high of nearly $840 billion, fueled by continued inflows into cash products as investors sought safety amid market volatility.

The portfolio’s disadvantage versus its benchmark was attributable to stock selection in the year-to-date period. At the sector level, stock selection in Materials, a much lower weighting in Financials, stock selection in Information Technology had the most significant negative impact versus the Russell 2000 Value. Conversely, having no exposure to slumping Health Care stocks, little exposure to Energy, and a heavier weighting in Consumer Staples contributed most to relative year-to-date period results. The portfolio’s cash position also helped relative results in the year-to-date period.

Current Positioning and Outlook

Based on our methodology that examines the spread between private equity cap rate valuation compared and the junk bond yield, we have not seen any companies that meet our stringent criteria for inclusion in the portfolio. We have found some intriguing businesses to research, so that when the spread improves to a more opportunistic level, we can and will purchase. We also want to reiterate our longstanding precept that rate of return is a function of entry level. To put it simply, price matters. We therefore have not yet seen new purchase opportunities in terms of favorable risk-reward. Finally, we believe that downside risks are lurking throughout the market—which we think could make our risk-conscious approach more attractive in the days to come.

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

Annual Operating Expenses: 1.22

¹ Not annualized.

Important Performance, Expense and Disclosure Information