Royce Small-Cap Trust Manager Commentary
article 06-30-2023

Royce Small-Cap Trust Manager Commentary

On an NAV basis, Royce Value Trust beat the Russell 2000 for the 1-, 3-, 5-, 10-, 20-, 25-, 30-, 35-year, and since inception (11/26/86) periods ended 6/30/23—and on a market price basis for each of these spans except the 1- and 20-year period.


Fund Performance

Royce Value Trust (RVT) advanced 11.7% on an NAV (net asset value) basis and 8.2% on a market price basis for the year-to-date period ended 6/30/23 versus respective gains of 8.1% and 6.0% for its primary small-cap benchmark, the unleveraged Russell 2000 Index, and the unleveraged S&P SmallCap 600 Index, for the same period. The Fund also maintained its longer-term relative advantages over the Russell 2000. On an NAV basis, RVT beat the Russell 2000 for the 1-, 3-, 5-, 10-, 20-, 25-, 30-, 35-year, and since inception (11/26/86) periods ended 6/30/23—and on a market price basis for each of these spans except the 1- and 20-year periods.

What Worked… And What Didn’t

Nine of RVT’s 11 equity sectors made positive contributions to 2023’s first-half performance, led by Industrials, Information Technology, and Consumer Discretionary. Consumer Staples and Utilities detracted while Communication Services made the smallest contribution. At the industry level, machinery (Industrials), semiconductors & semiconductor equipment (Information Technology), and construction & engineering (Industrials) contributed most while the biggest detractors were banks (Financials), food products (Consumer Staples), and pharmaceuticals (Health Care).

The top-contributing position in 2023’s first half was First Citizens BancShares. Its valuation looked attractive to us in late 2022, when we began adding shares that were trading at roughly 5x earnings per share. More recently, First Citizens was chosen by the FDIC to acquire Silicon Valley Bank, most likely owing to its long history of buying failed banks. Silicon Valley’s travails notwithstanding, the purchase was accretive to First Citizens’ tangible book value and earnings, helping to spur a sharp rise in its stock. CIRCOR International makes pumps, valves, and other flow-control products for the aerospace & defense, chemicals, and refineries industries. The company agreed to be acquired by KKR in June at a roughly 50% premium only to have a second suitor make an even better offer later that month. KKR then upped its price. The bidding war sent CIRCOR’s shares soaring. IES Holdings provides electrical contracting and maintenance services, and data communication services. Its stock rose with improved earnings as IES fixed certain operating issues.

The top detractor was Seneca Foods, which processes and sells packaged fruits and vegetables as well as snack chips. While the company continued to execute effectively, earnings and margins were crimped due to lower sales volumes that were not entirely offset by higher selling prices. San Francisco-based regional bank First Republic Bank was the third bank to declare insolvency in 2023 (following Silicon Valley and Signature Banks) and the second-largest failure since the fall of Washington Mutual in the 2008 Financial Crisis. It was hurt by having too many uninsured deposits and too many reserves in long-term debt instruments, which began losing value when interest rates began to rise. The result was a bailout by JPMorgan Chase in May. FARO Technologies is a global leader in 3D measuring equipment and software for industrial and construction applications. Early in 2023, FARO announced a costly convertible debt offering and additional restructuring actions to bolster liquidity and help with the cost of two acquisitions. In 2Q23 the stock plunged again when the CEO announced his plan to retire on July 1st. Unsure of its subsequent direction, we reduced our stake in June.

The Fund’s advantage over the Russell 2000 in 2023’s first half came from both stock selection and sector allocation. Stock picks boosted relative results most in Financials, Industrials (where our higher weighting also helped), and Real Estate. Conversely, stock selection detracted in Information Technology, Consumer Staples, and Health Care.

Top Contributors to Performance Year-to-Date Through 6/30/231 (%)

First Citizens BancShares Cl. A0.72
CIRCOR International0.49
IES Holdings0.39
Stevanato Group0.33
MKS Instruments0.32

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/232 (%)

Seneca Foods Cl. A-0.30
First Republic Bank-0.24
FARO Technologies-0.21
Lindsay Corporation-0.20

2 Net of dividends

Current Positioning And Outlook

We see an array of potential triggers that could jumpstart small-cap performance in the coming months. First, a soft landing looks more and more likely to us, and a recession—specifically the kind of deep and potentially lengthy contraction many have been anticipating since late 2021—looks less and less likely in our view. We have already seen promising developments that seem to suggest a nascently robust economy: durable goods orders rose for the fourth consecutive month in June—and hit a record high for nondefense capital goods (excluding aircraft or core capital goods, a proxy for business equipment investment)—while homebuilding rose by 21.7% in May, a record monthly surge that also defied expectations for a slowdown. Even more important, in our view, is the ongoing sense of cautious optimism we have been hearing from many management teams—which was reflected by generally solid earnings for many Fund holdings for the second quarter. Amid the difficulties of bear markets and periods of economic uncertainty, we think it’s crucial to remind investors of the opportunity to build their small-cap allocation at attractively low prices. History shows that investors who had the necessary patience and discipline to stay invested during periods of sluggish or negative performance have been rewarded. We continue to see the currently unsettled period as an opportune time to invest in select small caps for the long run.

Average Annual Total Returns Through 06/30/23 (%)

RVT 3.568.207.2812.366.158.927.618.328.4010.309.60
XRVTX (NAV) 4.9811.7316.3812.206.919.

Annual Operating Expenses: N/A

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, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund invests primarily in securities of small-cap and micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments.

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, 2023, 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, 2023 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 6/30/23, the percentage of Fund assets was as follows: First Citizens BancShares Cl. A was 0.7%, CIRCOR International was 0.0%, IES Holdings was 0.9%, Stevanato Group was 0.5%, MKS Instruments was 1.2%, Seneca Foods Cl. A was 0.3%, First Republic Bank was 0.0%, FARO Technologies was 0.2%, Lindsay Corporation was 0.5%, BankUnited was 0.3%.

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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