Royce Smaller-Companies Growth Fund Manager Commentary
article 06-30-2021

Royce Smaller-Companies Growth Fund Manager Commentary

The Fund’s advance almost doubled the Russell 2000 Index’s gain in 2020, and it also boasted impressive long-term results as it outpaced its primary benchmark for the 10-, 15-, 20-year, and since inception (6/14/01) periods ended 6/30/21.

TELL US
WHAT YOU
THINK

Fund Performance

For the year-to-date period ended 6/30/21, Royce Smaller-Companies Growth Fund advanced 18.9%, outperforming both the Russell 2000 (+17.5%) and Russell 2000 Growth (+9.0%) Indexes for the same period. The Fund’s recent impressive results helped it to beat both indexes for the one-, three-, and five-year periods while also outpacing the Russell 2000—its primary benchmark—for the 10-, 15-, 20-year, and since inception (6/14/01) periods ended 6/30/21.

What Worked… And What Didn’t

Eight of the Fund’s 10 equity sectors finished the year’s first half in the black. Health Care and Information Technology—the portfolio’s biggest weightings—made outsized positive contributions to performance, followed by Communication Services. Utilities and Materials, which were among the Fund’s three lowest portfolio weights, were the only sectors that detracted from performance while Real Estate, another low weighting, made the smallest contribution. The Fund’s top two contributing sectors furnished its three best contributors at the industry level: health care equipment, semiconductors & semiconductor equipment, and healthcare providers & services. The industries that made the largest (albeit modest) negative impact on performance came from three different sectors—electrical equipment (Industrials), diversified consumer services (Consumer Discretionary), and communications equipment (Information Technology).

The Fund’s best contributing position was The Joint Corporation, which operates and franchises chiropractic clinics. Its shares had already languished for a few years when we began building our position. We liked the recurring revenues of Joint’s franchise model as well as its more recent focus on ramping up its own stores that have thinner margins but higher revenues. The company navigated the pandemic successfully—being deemed an essential service helped—and chiropractic treatment has outgrown the stigma it had decades ago. In May, Joint reported increased revenue and a growing business while also raising guidance, leading its stock upward. Canadian sports media and online betting company Score Media and Gaming came next. The online sports betting industry is gaining traction on a global basis, and as the leading site in Canada for sports news and fantasy leagues, Score is also prepared to benefit from its home country’s efforts to legalize online sports gambling.


Want to know more about the Fund?

LATEST PORTFOLIO + PERFORMANCE INFO

 

Aspen Group, the portfolio’s top detractor in 2021’s first half, is a for profit college specializing in nursing and related programs. Enrollment rates were strong prior to COVID, later dipping through the worst days of the pandemic. This decline drove some large investors away from this micro-cap stock, but enrollments have since re-accelerated, boosting our confidence in an eventual recovery for the stock. We added shares in March and May. With Blue Prism Group, which makes Robotic Process Automation (“RPA”) software, we chose to exit the position. RPA is an emerging technology area, and the company was one of the few pure plays in what we expect to be a key growth area, although it proved to not be as well-managed as we’d like.

Relative to the Russell 2000 in 2021’s first half, outperformance came from stock selection as sector allocation detracted from results. Our biggest advantage on a sector level came from stock selection in Health Care, where our holdings significantly outpaced both the sector within the benchmark and the index as a whole. Next came the additive effects of our overweight in Communication Services and stock picks in Information Technology. Conversely, we were hurt versus the benchmark by a combination of ineffective stock selection and our lower weighting in Consumer Discretionary, our cash position, and the Fund’s lack of exposure to the resurgent Energy sector.


Top Contributors to Performance Year-to-Date Through 6/30/211 (%)

Joint Corp. (The)1.53
Score Media and Gaming Cl. A1.42
MagnaChip Semiconductor1.40
InMode1.23
STAAR Surgical1.19

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/212 (%)

Aspen Group-0.45
Blue Prism Group-0.42
Beam Global-0.42
Motorsport Games Cl. A-0.40
Rush Street Interactive Cl. A-0.38

2 Net of dividends

Current Positioning and Outlook

During the first half of 2021, we trimmed certain high multiple stocks earlier in the year while maintaining larger positions in those that we see as best positioned for long-term growth, including InMode, which makes state-of-the-art light, laser, and radio frequency devices for the aesthetic treatment of the face, body, and skin; Avid Bioservices, a contract development and manufacturing organization that provides process development and manufacturing practices for biotechnology companies engaged in gene editing; and Oxford Biomedica, a biopharmaceutical company involved in the research, development, and bioprocessing of lentiviral vector and cell therapy products for the treatment of various diseases. We made these changes based on the idea that earnings growth will continue to drive small cap performance. Eventually, the Fed will need to taper, whether due to continued inflationary and wage pressures or economic acceleration, but that scenario may take years to play out. The fact that COVID cases and attendant fears have lingered will also keep developed countries’ feet on the gas pedal. Leadership has rotated from small-cap growth to small-cap value, though the valuation gap remains wide, which suggests that value should continue to outperform in the near term. It’s also true that investors are perennially searching for “the next big thing,” and the U.S. continues to be a fertile source of innovation and leadership. Each of these factors underscores our confidence.

Average Annual Total Returns Through 06/30/21 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Smaller-Companies Growth 5.8018.9073.7821.3121.3413.089.7312.8513.12 06/14/01
Russell 2000 4.2917.5462.0313.5216.4712.349.519.269.43 N/A
Russell 2000 Growth 3.928.9851.3615.9418.7613.5210.898.999.18 N/A

Annual Operating Expenses: Gross 1.54 Net 1.49

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, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.royceinvest.com. Gross operating expenses reflect the Fund's gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.49% through April 30, 2022.

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, 2021, 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, 2021 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 6/30/21, the percentage of Fund assets was as follows: Joint Corp. (The) was 1.1%, Score Media and Gaming Cl. A was 0.2%, MagnaChip Semiconductor was 2.7%, InMode was 2.3%, STAAR Surgical was 2.3%, Aspen Group was 0.8%, Blue Prism Group was 0.0%, Beam Global was 0.0%, Motorsport Games Cl. A was 0.2%, Rush Street Interactive Cl. A was 0.5%, Avid Bioservices was 1.7%, Oxford Biomedica was 1.1%


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.)

Share:

Subscribe:

Sign Up

Follow: