Royce Total Return Fund Manager Commentary
article 06-30-2021

Royce Total Return Fund Manager Commentary

Dividend payers as a group outperformed within the Russell 2000 for the year-to-date period ended 6/30/21, and we believe the portfolio is well positioned for a period of growth and rising prices in the U.S. economy.


Fund Performance

Royce Total Return Fund advanced 19.8% for the year-to-date period ended 6/30/21, underperforming its primary benchmark, the Russell 2000 Value Index, which gained 26.7%, but ahead of the Russell 2000 Index, which returned 17.5% for the same period.

What Worked… And What Didn’t

Each of the Fund’s 11 equity sectors finished the year-to-date period ended 6/30/21 in the black. Financials, the Fund’s largest weighting, made by far the largest positive impact, followed by Industrials and Information Technology, the portfolio’s second and fourth largest weightings, respectively. Utilities, Real Estate, and Health Care made the smallest positive impacts.

The Fund’s top contributing position in the first half was Signature Bank, a New York City metro focused commercial lender. Its shares suffered—and its valuation grew more attractive—in 2020 as investors fretted about New York City’s commercial real estate market and the potential losses in Signature’s loan portfolio. Regional bank stocks then began to recover when vaccines were approved in the fall of 2020, and Signature was no exception. Since that time, Signature has delivered on its growth model with robust loan and deposit growth, as well as a rising stock price. Our next top contributor was Triumph Bancorp, where the market’s recognition of the bank’s fintech expertise validated our original investment thesis. The company saw a quarterly record for invoices—which increased more than 400% from 2020—while invoices processed per carrier increased more than 190%. Triumph also boasts a strong market share in U.S. transportation (via Triumph Business Capital) and has successfully expanded that segment into payment processing for the trucking industry through its Triumph Pay (T-Pay) platform. These positive developments all helped its stock to climb in the first half.

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Shares of insurer James River Group Holdings were hit hard in May when the company announced a significant reserve charge related to its commercial auto business, specifically Uber, which led James River to stop writing new policies with the ride share company at the end of 2019. A larger-than-expected number of Uber-related legacy claims, however, led the company to meaningfully add to these reserves, which created a consequent negative impact on capital levels that in turn saw James River issue equity, the dilutive effect of which led its shares rapidly downward. Our subsequent due diligence, coupled with our long history with the company and the strong fundamentals of the E&S (“Excess & Surplus”) marketplace in which it has historically been successful, gave us the confidence to build our position. RenaissanceRe or “RenRe” has enjoyed many years of success in the reinsurance industry due to its use of internal models and databases to help price risk more accurately than its peers, which rely heavily on third-party models. Unfortunately, investors seemed uninterested or unaware of this distinction, as its shares fell along with most of the broader P&C (“property & casualty”) insurance industry in the first half. RenRe believes its current book of business will be profitable, and our research is in line with that estimate. In addition to its attractive valuation, we like the robust fundamentals we see throughout the P&C industry and believe RenRe is poised to ultimately benefit.

Relative to the Russell 2000 Value in 2021’s first half, ineffective stock selection and sector allocation decisions detracted from performance, with the former making the bigger negative impact. Stock selection and our lower exposure to Consumer Discretionary and Energy hurt relative performance, with stock selection having a larger effect in the former sector. Stock picking also hindered relative results in Materials. By contrast, our lower weighting in Utilities was additive, as were stock selection in Financials and, more modestly, our higher weighting in Information Technology.

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

Signature Bank1.20
Triumph Bancorp1.07
Kulicke & Soffa Industries0.96
Deluxe Corporation0.78
First Citizens BancShares Cl. A0.70

1 Includes dividends

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

James River Group Holdings-0.34
RenaissanceRe Holdings-0.11
Trean Insurance Group-0.10
Equity Commonwealth-0.08

2 Net of dividends

Current Positioning and Outlook

While the market’s recent preoccupation with certain meme stocks may have dampened the attraction of more prosaic stocks—those that pay dividends, generate cash, and have low debt—we have been happy to build positions in these consistent business models at what we believe are very attractive valuations. In addition to regional banks and P&C insurers, we remain constructive on areas such as high-quality cyclical industrials and certain pockets of the Consumer Discretionary sector. U.S. consumers are in excellent financial shape, with increased savings and lower debt service versus pre-pandemic levels and are thus able to spend. Within the apparel industry, supply chain disruptions—first challenged by COVID and more recently by revived demand—have resulted in very lean inventories, which typically give sellers more pricing power as strong demand frees retailers from the obligation to be promotional, thus improving gross margins for holdings such as Levi’s and Ralph Lauren. The competitive landscape within restaurants has been similarly disrupted. Asset light restaurant companies such as Denny’s should see structurally higher growth rates over the next few years. Finally, we continue to closely monitor inflation, which virtually all of our holdings are experiencing, and believe that the portfolio is well positioned for a period of rising prices in the U.S. economy.

Average Annual Total Returns Through (%)

Annual Operating Expenses: Label

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 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, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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: Signature Bank was 0.9%, Triumph Bancorp was 1.6%, Kulicke & Soffa Industries was 1.3%, Deluxe Corporation was 1.5%, First Citizens BancShares Cl. A was 1.2%, James River Group Holdings was 1.8%, RenaissanceRe Holdings was 1.0%, Trean Insurance Group was 1.6%, Equity Commonwealth was 1.0%, TGS was 0.4%, Uber was 0.0%, Levi’s was 1.7%, Ralph Lauren was 1.6%, Denny’s was 1.2%

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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