Fund Performance

Royce SMid-Cap Total Return Fund (formerly Royce Dividend Value Fund) was down -0.6% for the year-to-date period ended 6/30/25, trailing its SMID-cap benchmark, the Russell 2500 Index, which gained 0.4% for the same period. Longer-term results, however, were much better, as the Fund outperformed its benchmark for the 1-, 3-, 5-, 10 and 20-year periods ended 6/30/25. The Fund also beat the Russell 2500 Value Index for the 1-, 3-, 10-, 20-year, and since inception periods ended 6/30/25.

What Worked… and What Didn’t

Four of the portfolio’s nine equity sectors made a negative impact on year-to-date period performance, with Consumer Discretionary, Materials, and Energy making the largest negative impacts. Industrials, Financials, and Information Technology made the largest positive contributions. At the industry level, specialty retail (Consumer Discretionary), chemicals (Materials), and semiconductors & semiconductor equipment (Information Technology) detracted most for the year-to-date period, while capital markets (Financials), trading companies & distributors (Industrials), and IT services (Information Technology) were the largest contributors.

The Fund’s biggest detractor at the position level was Academy Sports & Outdoors (ASO), the nation’s second largest sporting goods retailer. As a value leader, it skews more closely to middle and lower income buyers. Unsurprisingly, then, its core business has been under pressure for the last few years, largely due to the pressure on its core customers. The decline in its shares was largely related to tariff announcements and their potential impact on Academy’s customers, and thus the company’s fundamentals. Academy sources some product from China, while most of its suppliers source from China, Vietnam, and other countries in Southeast Asia. However, as a value-oriented retailer, management believes its business is also benefiting from trade downs into its stores from higher end consumers. Academy also has a host of self-help levers it is pulling to improve same store sales, including the recent launch of the popular Jordan brand across many locations, with more to come.

Semiconductor assembly specialist Kulicke and Soffa endured a difficult first half that was largely driven by overall weakness within the broader semiconductor capital equipment industry rather than any idiosyncratic issues facing the company. There was significant bifurcation within the industry’s stock performance in 2025’s first half, with anything exposed to AI enjoying a strong year so far, while most of the remaining companies have seen a continuation of the extended cyclical bottom that has been present for several quarters now. Within the Russell 2000 Value, for example, the semiconductors & semiconductor equipment industry, the best performing stock was up 83.5% year-to-date through 6/30/25 due to its technology partnership with Nvidia, while the overall industry was down -14.5%. We have always felt that it is a fool’s errand to try calling the bottom of a cycle within the semiconductor industry given that the bounce off the bottom can be extremely rapid and strong. Thus, if you miss the first part of the move, then you have likely missed a significant part of the next cycle’s returns. So, while it has been frustrating that growth for semiconductor equipment within the past couple of years has been exclusively focused in the AI space, we still view the larger industry as having strong secular growth characteristics over the long term. We also view KLIC as a phenomenal place to wait out the cyclical bottom due to its net cash balance sheet, which provides downside protection, and very strong through-cycle returns on capital, which signals high quality.

Our third biggest detractor was Quaker Houghton, a global leader in industrial process fluids used in mission-critical manufacturing applications across steel, aluminum, automotive, and general industrial markets. Quaker operates a capital-light, high-recurring-revenue model embedded deeply into customer workflows through long-term relationships and tailored chemistries. Shares came under pressure in 2025 as the company faced cyclical volume headwinds and difficult year-over-year comparisons. Demand softened across both North American and European markets, particularly in steel and automotive. Additionally, investor sentiment turned cautious on global manufacturing activity amid macro uncertainty. Despite these near-term challenges, we believe Quaker remains well-positioned over the long run and its opportunity to consolidate a fragmented global market for industrial process fluids. Encouragingly, Quaker has re-centralized product management, merged commercial and strategy functions, and is prioritizing investments in customer-centric innovation through a more coordinated global R&D structure. We believe Quaker Houghton is making the right structural moves to unlock margin expansion and reaccelerate organic growth.

Charles River Laboratories International is a pharmaceutical services business that provides research models (such as animals for drug testing), drug discovery safety testing, and outsourced drug manufacturing to 2,000 biotech and pharmaceuticals companies in North America, Europe, and Asia. The company has been the global leader in research models to the drug development industry since 1947 and was hit hard when the U.S. Food and Drug Administration announced a phase-out of animal testing. Given the pressure on pharmaceutical R&D budgets generally and the potential thesis break from the FDA decision, we decided to sell our position.

The fifth biggest detractor was home and personal care products provider, Bath & Body Works, which has stores across the U.S. as well as a growing international presence. An unexpected CEO transition has likely weighed on the shares, while concerns around consumer spending—particularly the middle-income consumers that the company targets—have also weighed on the stock. We note that Bath & Body Works could be a tariff winner, as most of its products are sourced and made in the U.S. At the end of June, we were awaiting more color on the future strategy of the company from the new CEO, Daniel Heaf.

The position that made the biggest positive impact on first-half performance was futures commission merchant, Marex Group. Its business got a boost from heightened volatility in many of the world’s capital markets and economies as uncertainty creates a greater need for clients to keep hedging and trading volumes high. This uncertainty has mainly been driven by U.S. tariffs, which resulted in the VIX (volatility index) reaching 5-year highs earlier this year. Marex is also a big inorganic grower, and the more favorable M&A environment has created opportunities for the company to do highly accretive deals. In addition, the company has benefited from elevated interest rates, as Marex invests a large amount of client cash in U.S. Treasuries and other fixed income assets. Finally, an oversubscribed April follow-on offering heavily increased the free float of the shares while private equity investors continue to exit the name, which ultimately removes another overhang.

The Fund’s next top contributor was Kyndryl Holdings, which is the world’s largest IT infrastructure services provider, involved in keeping the mission-critical IT systems, data centers, and IT networks of large enterprises such as banks, airlines, and retailers, up and running in a secure manner on a 24x7 basis. Throughout most of its history, Kyndryl was operated as a loss-making cost center that existed to sell IBM hardware and/or software. Since being spun off from IBM in November 2021, however, Kyndryl has adroitly balanced its legacy IBM business while offering customers more advanced technology through partnerships with Google, Amazon Web Services, and Microsoft. Kyndryl had 1.3% constant currency revenue growth during the latest quarter, in line with management’s projections and offering evidence of the recession-resistant and non-discretionary nature of its services. Signings rose by a whopping 55%, led by a 37% increase in consulting signings. These contracts had 9% pretax margins versus the 5.5% achieved in 2024’s fourth quarter. Kyndryl is a financially strong business with recurring revenue, sticky customers, and ample operational momentum to deliver on its conservative full year 2026 guidance.

Next came Worthington Enterprises, which designs and manufactures market-leading brands focused on Building Products (cooking, heating, cooling, water solutions, architectural and acoustical grid ceilings, and metal framing) and Consumer Products (tools, outdoor living, and celebrations). Its strong performance was rooted in earnings growth and strong free cash flow in fiscal 2025 as Worthington delivered robust results in both Consumer and Building Products segments, driven by volume growth, disciplined cost management, and successful acquisitions. Management also increased the quarterly dividend by 12% while continuing to repurchase shares, reflecting their confidence in future growth and shareholder returns.

AerCap is the world’s largest global lessor of commercial aircraft, aircraft engines and helicopters to commercial airlines. In its recent earnings, the company reported robust demand for widebody aircraft and leasing services, driving higher lease rates and credit quality, and AerCap expects these favorable conditions to continue indefinitely. In addition, AerCap does not expect to be significantly affected by tariffs given its fixed price escalation caps with Boeing and Airbus. Instead, tariffs could serve as a potential tailwind if demand shifts towards older or less expensive aircraft. AerCap also reported strong demand for aircraft engines and boosted capital deployment for engines and helicopters. Lastly, AerCap benefited from a $1B recovery from insurers related to its $2.7B Russia-related charge, bringing total recoveries to $2.5B. The combination of strong underlying fundamentals and predictable long term cash flows enables AerCap to add shareholder value through intelligent capital allocation while its shares are undervalued and AerCap expects to repurchase $500m of its shares in 2025 and $800m in 2026.

Our fifth best contributor was global specialty P&C insurance company, Axis Capital Holdings, whose fundamentals have continued to improve owing to both company-specific factors—the new CEO has brought a new approach to underwriting—and industry dynamics, as most of the company’s lines of business continue to benefit from increasing pricing, known as a “hard market” in insurance parlance. This strong fundamental performance has led to positive earnings estimate revisions and multiple expansion.

The portfolio’s disadvantage versus the Russell 2500 was attributable to both stock selection and sector allocation in 2025’s first half. At the sector level, stock selection in Consumer Discretionary and Materials, along with a lack of exposure to Utilities, had the biggest negative impact versus the benchmark. Conversely, stock selection in Industrials, followed by substantially lower weightings in both Health Care and Real Estate contributed most to relative results in the year-to-date period.

Current Positioning and Outlook

The second quarter was marked by two distinct periods. There was the precipitous drop following the 4/2/25 tariff announcement, which was a continuation of the market swoon that began in earnest in February of this year. It was followed just six days later by an extended rally through the remainder of the quarter in which low-quality and high-beta led the market in the smid-cap universe. This type of rally is not the best environment for the Fund given our focus on high-quality, durable business models. And beyond the low-quality nature of the rally, there was also a significant dispersion of returns across the market. For example, while Information Technology and Industrials were the best performing sectors by a large margin within the Russell 2500 Value index, that outperformance was driven by a handful of very specific, higher-beta areas like Construction & Engineering for Industrials and Electronics Manufacturing Services within Information Technology. And despite the underperformance in the second quarter, we continue to believe that our focus on high-quality companies going through transitory or cyclical events will provide idiosyncratic exposures to long-term potential opportunities that can drive returns regardless of the macro environment. While the market showed favor to highly risk-on factors in 2Q25, we remain somewhat cautious in our outlook given concerns about a potential recession and trade policy uncertainties that are likely to drive choppiness into the business environment.

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

Annual Operating Expenses: Gross 1.56 Net 1.34

¹ Not annualized.

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