Royce Special Equity Fund Manager Commentary
article 06-30-2021

Royce Special Equity Fund Manager Commentary

We believe our intensive stock selection approach may benefit from an environment where investors are more focused on individual companies.

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Fund Performance

For the year-to-date period ended 6/30/21, Royce Special Equity Fund advanced 14.2%, trailing its primary benchmark, the Russell 2000 Value Index, which gained 26.7%, and the Russell 2000 Index, which rose 17.5%, for the same period.

What Worked… And What Didn’t

For the year-to-date period ended 6/30/21, all nine of the equity sectors in which the Fund held investments contributed to performance, led by Industrials, Information Technology, and Consumer Discretionary. Real Estate, Health Care, and Financials—three of the portfolio’s five lowest weightings at the end of the first half—made the smallest contributions to performance.

At the industry level, Information Technology’s semiconductors & semiconductor equipment industry contributed most by a wide margin for the year-to-date period ended 6/30/21. The industry was driven by the strength of Kulicke & Soffa Industries as well as a strong six months for Axcelis Technologies. Kulicke & Soffa designs, manufactures, and markets capital equipment and packaging materials (as well as service, maintenance, repair, and upgrade equipment that are used in semiconductor device assembly). Axcelis Technologies designs, manufactures, and services ion implantation, dry strip, thermal processing, and curing equipment, all of which are necessary in the fabrication of semiconductor chips. Auto components (Consumer Discretionary) came next among industry contributors, driven by positive results for Cooper Tire & Rubber, which was acquired by Goodyear at a hefty premium in June.


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Other notable positive contributors at the position level included Meredith Corporation, a media and marketing company involved in magazine and book publishing, television broadcasting, integrated marketing, digital advertising, and interactive media. National Presto Industries also contributed meaningfully to first-half results. The company has two main businesses: Housewares & Small Appliances and Defense Products.

Only three industries detracted from year-to-date performance. The top two detracting industries were also home to the holdings that had the biggest negative effect at the position level. First came Information Technology’s IT services group, where Computer Services, whose expertise includes bank payment processing, cloud-based banking security, and regulatory compliance services to financial institutions and other corporate customers, had the biggest negative impact. Food & staples retailing (Consumer Staples) came next, due entirely to a poor showing from the second-largest detracting position in 2021’s first half—Ingles Markets, which operates a supermarket chain in the southeastern U.S. The smallest negative impact at the industry level came from Consumer Discretionary’s hotels, restaurants & leisure industry. Of the two other holdings that hurt performance in 2021’s first six months, International Money Express, which provides funds and data transfer services from the U.S. to Latin America and the Caribbean, came third. We exited the position in May. Rounding out the gang of four detractors was Bowl America, which offers bowling, food and beverages, and game rooms for a U.S. customer base.

Year-to-date through 6/30/21, relative underperformance mostly resulted from stock selection, though sector allocation also detracted. Stock picks in Consumer Discretionary—along with the Fund’s cash position—hindered results most. The Fund was also hurt by its lack of exposure to the resurgent Energy sector. Helping relative performance were the portfolio’s much lower weighting in Financials and its lack of exposure to Utilities, while its lower allocation to Health Care provided a more modest relative benefit. Each of these three sectors lagged the small-cap value index in 2021’s first half.


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

Kulicke & Soffa Industries2.53
Cooper Tire & Rubber1.57
Meredith Corporation0.82
National Presto Industries0.80
Axcelis Technologies0.73

1 Includes dividends

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

Computer Services-0.15
Ingles Markets Cl. A-0.10
International Money Express-0.06
Bowl America Cl. A-0.01
Sterling Construction0.03

2 Net of dividends

Current Positioning and Outlook

Historically, the market has been most challenged when profit margins are rolling over in a declining pattern. While not yet evident, it is something worth watching closely. Increased input costs need to be recaptured in prices for margins to hold. Related to this is the question of whether the productivity gains we have seen over the last several months can continue. Perhaps more than ever before, the durability of productivity improvements is critical. Time will tell, of course. As for our own preference for value and cyclical names, there is, in our view, a possible nascent positive development (though we are not there yet) in that the popularity of picking equities via macro themes, such as lockdowns and reopenings, appears to be coming to an end. If so, stock selection should matter more. Differentiation at the company level seems likely to become even more important, especially as earnings comparisons for the second, third, and fourth quarters this year will prove far easier than next. We believe the vast majority of those gains are already reflected in full-year earnings figures. We expect that an environment in which investors are more focused on individual companies could potentially benefit our intensive approach to stock selection.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Special Equity 0.8214.1636.277.6910.398.588.289.699.00 05/01/98
Russell 2000 Value 4.5626.6973.2810.2713.6210.857.909.178.59 N/A
Russell 2000 4.2917.5462.0313.5216.4712.349.519.268.40 N/A

Annual Operating Expenses: 1.23

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. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

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: Kulicke & Soffa Industries was 4.8%, Cooper Tire & Rubber was 0.0%, Meredith Corporation was 2.5%, National Presto Industries was 3.8%, Axcelis Technologies was 2.2%, Computer Services was 4.0%, Ingles Markets Cl. A was 3.8%, International Money Express was 0.0%, Bowl America Cl. A was 0.3%, U S Dollar was 0.0%, Goodyear was 0.0%


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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