Fund Performance

In an otherwise down period for most small-caps, Royce Smaller-Companies Growth Fund advanced 7.2% for the year-to-date period ended 6/30/25, beating both the Russell 2000 Growth Index, which was down -0.5%, and the Russell 2000 Index, which declined -1.8%, for the same period. The Fund also outperformed both indexes for the 1-, 3-, 5-, 10-year, and since inception (6/14/01) periods ended 6/30/25.

What Worked… and What Didn’t

Six of the portfolio’s nine equity sectors made a positive impact on year-to-date performance, led by Health Care, Industrials, and Consumer Discretionary. The detractors were Consumer Staples, Information Technology, and Financials. At the industry level, pharmaceuticals (Health Care), health care providers & services (Health Care), and construction & engineering (Industrials) contributed most in the first half of 2025, while semiconductors & semiconductor equipment (Information Technology), food products (Consumer Staples), and trading companies & distributors (Industrials) were the biggest detractors.

The Fund’s top contributor at the position level was Hims & Hers Health, which operates a telehealth consultation platform that gives consumers to access to healthcare professionals for mental health, sexual health, dermatology, and primary care. Its shares outperformed as the company continued to report favorable earnings results, driven in part by strength in its weight loss segment despite concerns that the FDA would crack down on companies, including Hims & Hers, that manufactured generic versions of the GLP-1s via “compounding” operations now that the product shortage has passed. The stock also rallied on the news that Hims & Hers Health had signed a distribution partnership agreement with leading branded manufacturer Novo Nordisk. Shortly thereafter, however, Novo announced it had terminated the deal, in part because Hims & Hers Health was continuing to compound formulations of the Novo product. We trimmed our position because it seems likely that the stock will underperform for a period, at least until we know more about the level of the company’s weight loss revenues over the next 12 months, which is why we have trimmed the position.

Corcept Therapeutics is a commercial-stage pharmaceutical company that specializes in the discovery, development, and commercialization of medications that treat severe metabolic, oncologic, and psychiatric disorders, with a focus on the development of drugs for disorders are associated with a steroid hormone called cortisol. Its share price spiked in April 2025 after it presented excellent phase III data on its late stage pipeline product for the treatment of platinum-resistant ovarian cancer—which is the first of several studies targeting solid tumors in Corcept’s pipeline. In the meantime, the bridge has been crossed for its lead product Korlym, which went generic last year, to its new and improved compound Relacorilant, which is expected to receive FDA approval near the end of 2025. We reduced our weighting on the spike but may look to increase the position once we have evidence that the transition to Relacorilant for Cushing’s Syndrome begins to gain traction.

Coming in third was Limbach Holdings, which has continued to be a stellar contributor, as management shifted the business from being heavily commercial HVAC equipment and hardware focused to more of a recurring revenue HVAC services business, which brings with it the higher margins, recurring revenue streams and growth re-acceleration that investors love seeing. Limbach also has a long runway of growth ahead, as it increases its presence in current markets while also acquiring other service-oriented providers.

AeroVironment designs, develops, produces, and supports the operation of unmanned aircraft systems and electric transportation solutions. The stock recovered after a sell-off on softer quarterly earnings earlier in 2025, followed by exceptional fiscal fourth quarter results (reported in April) and a spotlight on unmanned aerial vehicles becoming a larger part of the Department of Defense budget, as the U.S. looks to modernize its equipment and resources.

Rounding out the top five contributors was ARS Pharmaceuticals, which is a biopharmaceutical company that focuses on the development of a novel, potentially first-in-class product candidate—NEFFY, an inhaled version of epinephrine for the emergency treatment of Type I allergic reactions (including anaphylaxis) which to date have only been available via injection (with an autoinjector). The shares have performed well in the run-up to NEFFY’s launch, placing it squarely in our “better mousetrap” theme. Everything appears to be on track for the launch with regard to manufacturing, TV marketing, allergist sampling, and sales efforts, including an additional distribution partnership to target general practitioners. The “back to school” third quarter (which ends September) will likely offer a clear indicator of NEFFY’s early adoption and growth trajectory.

The Fund’s top detractor was Semtech Corporation, an analog and mixed signal semiconductor company that was a solid performer for the portfolio in 2024 due to a successful turnaround effort after a disastrous and largely debt financed acquisition of Sierra Wireless, which closed early in 2023. With margins improving from cost cutting, business segment recovery, and the potential for the sale of the remaining Sierra assets, the company also began to forecast meaningful revenues from products used in AI data center buildouts, which led to a run-up in the shares into January 2025. Unfortunately, management began to guide those expectations down shortly afterward. There were also delays in the timing of these products, causing a significant drop in the shares during the first half of 2025. We decided to sell the position, given the loss of confidence in management and the low visibility into the business.

A long-time holding, Freshpet is the leader in the fresh (not frozen) and natural ingredient pet food category. After resetting expectations/estimates in 2022, management upgrades, and operational improvements, the shares outperformed in 2024. In early 2025, however, signs of a category growth slowdown from pet owner trade-downs from premium brands like Freshpet and consequent expectations of slower growth, resulted in a massive correction in the share price in the first half of 2025. Management’s revenue growth targets became increasingly difficult to meet, again causing pressure on consensus estimates on top of new entrants into the fresh pet food category. We continued to hold a position and are looking for a bottoming of growth rate expectations before choosing to add to our stake.

CareDx is a leader in DNA and gene expression testing, with products that help detect organ transplant rejection. It is another entrant in our “better mousetrap” category in that its tests look for rejection markers in the bloodstream versus doctors having to take periodic biopsies of the transplanted organs, which is a much more invasive method. The shares have underperformed for years under previous management teams, due to various missteps including poor relations with the Centers for Medicare & Medicaid Services, which dictate protocol and reimbursement for tests, and had issued unfavorable guidelines for those of CareDx. We bought the stock shortly after the arrival of new management, with whom we were familiar from a previously owned company. While the turnaround has taken longer than expected, we believe the company is on track to better communicate the utility of its products and ultimately extend patient lives, despite the complexity and slow timelines in the lab developed test industry.

Abacus Global Management is a converted SPAC and one of two leaders in the life insurance “settlement” industry. While it scored very highly in most of our financial metric categories (e.g., growth rate, margins, valuation, and a long runway for growth), management has been the target of a “short report” regarding some of its investment claims The managers have also raised equity at inopportune times and set very high expectations. We reduced our position due to both the risk of ongoing underperformance now that the company has a smaller market capitalization and the time it may take to get out from under its cloud of doubt.

One of our favorite “better mousetrap” holdings, ACV Auctions is a wholesale used-car auction company that primarily targets auto dealerships with an all-digital online method for dealer-to-dealer transactions. The company earns approximately $500 per vehicle on every unit transacted, which allows the dealership to convert used car trade-ins and excess inventory into cash. Its shares underperformed in the first half due to weak volumes (and fewer trade-ins) in the auto industry along with volatile used car prices. Volumes have been slow to return to pre-COVID levels, which would be a significant driver of ACV’s revenue growth. Despite the industry cloud, however, ACV has delivered on its business plant, with significant growth above its industry, suggesting that the company has been taking share from traditional in person auction companies. We are sticking with our position given the multiple areas of potential growth.  

The portfolio’s advantage over the Russell 2000 Growth was attributable to stock selection in the first half of 2025. At the sector level, stock selection in Health Care, Consumer Discretionary, and Industrials sectors did the most to boost relative results. Conversely, stock selection in Consumer Staples and Financials detracted, as did the Fund’s lack of exposure to Real Estate, which finished 2025’s first half with a small gain.

Current Positioning and Outlook

At the end of 1Q25, we noted that we were in the middle of one of those periodic pullbacks for small-cap stocks, which was exacerbated by a -12.3% drop in the Russell 2000 Growth index between 3/31 and the small-cap low on 4/8/25 (and -22.0% from the beginning of the year through 4/8/25). What followed was a dramatic rebound for the small-cap growth index, which advanced 27.7% from the April low through the end of June (the Fund gained 31.5% over the same span). Following ‘Liberation Day’ on 4/2/25, the markets seemed to lose confidence in the idea that Trump’s tariff threats were simply a short-term negotiating tactic but would instead have a measurable negative impact on the economy, reigniting inflation, which in turn would lead to higher interest rates. Increased military strikes between Israel and Iran (and the U.S. and Iran) gave investors another headline to worry about. Fast forward two months, during which the mood for equities substantially improved, and returns nearly went back to where they were at the beginning of the year. Driving the rebound seemed to sentiment that the U.S. economy has held up better than expected, that tariff threats have brought trading partners to the negotiating table where deals have been struck (and where most have promised to increase their defense spending to boot), any inflation jump would be short lived, and conflict in the Middle East would be at least manageable. A lot has taken place in the past six months for the markets to be only down slightly! Our positioning within the Fund has not changed materially, despite trimming a few positions whose risk profiles increased. We have benefited from both our nuclear power renaissance and defense spending themes, as both federal and state initiatives have driven the former, while increased spending prospects from our international allies have helped the latter.

The market rally appeared to catch some by surprise, such that a pause in small cap performance is likely, at least until we gain incremental data points from second quarter earnings reports, and more importantly, second half outlooks. Over the medium term, however, we are optimistic about the level of innovation spending in the US and elsewhere, which is creating new industries and corporate leaders. It is increasingly looking like the advent of Machine Learning and Artificial Intelligence in recent years will be looked back on as major technology breakthroughs on par with the introduction of the railroad, electricity, telecommunication, gene sequencing and the internet.

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

Annual Operating Expenses: Gross 1.55 Net 1.49

¹ Not annualized.

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