Royce Value Trust Manager Commentary
article 06-30-2020

Royce Value Trust Manager Commentary

The Fund outperformed its indexes on an NAV (net asset value) and market price basis, and outpaced the Russell 2000 on an NAV and market price basis for the one-, three-, five-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended 6/30/20.


Fund Performance

In as extreme and volatile a six-month period as we can recall, Royce Value Trust (“RVT”) held its value better than both of its unleveraged small-cap benchmarks. For the year-date-period ended 6/30/20, the Fund was down 8.9% on an NAV (net asset value) basis and 10.5% based on market price, compared to respective declines of 13.0% and 17.9% for the Russell 2000 and S&P SmallCap 600 Indexes for the same period. We were equally if not more pleased that on an NAV and market price basis, RVT outpaced the Russell 2000 for the one-, three-, five-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended 6/30/20.

What Worked… And What Didn’t

Five of the Fund’s 11 equity sectors made a negative impact on performance in 2020’s first half, with Industrials, Energy, and Financials detracting most. Of the six sectors that made positive contributions, the biggest came from Information Technology, followed by Health Care and Communication Services. At the industry level, energy equipment & services hurt results most, as tumbling oil and gas prices depressed the shares of many companies with exposure to that industry. Four of RVT’s five largest detractors at the position level were exposed to energy to varying degrees.

SEACOR Marine Holdings provides marine and support transportation services to offshore oil and natural gas and wind farm facilities worldwide. When reporting fiscal first-quarter results, the company said that it expects a deeper impact on revenues through the rest of the year as a result of COVID-19 and reduced activity from its oil and gas customers. TGS-NOPEC Geophysical is the world’s largest provider of seismic data to oil and gas developers. While categorized as an energy services stock, its business model is closer to that of a data services provider. We see it as a company built to weather downturns thanks to consistently positive free cash flow. And while spending on seismic is among the first expenses exploration & production (“E&P”) companies cut in downturns, reserves remain the lifeblood of these companies, which makes TGS’s seismic studies vital to reducing costs and improving the success rates of E&P activity. Kirby Corporation, a tank barge operator that transports bulk liquid products across the U.S., saw revenue for the marine transportation business decline substantially in the first quarter of 2020. Citing the COVID-driven global recession, its potential impact on future demand, and volatile industry conditions, Kirby also withdrew full-year earnings guidance in May.

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Bandwidth, RVT’s top-contributing position, offers voice-over Internet, integrated phone systems, smartphones, and business-grade Internet connectivity solutions through cloud-based communications. Its shares were lifted by robust revenue growth, especially through its expertise in CPaaS (Communications Platform as a Service), a cloud-based platform that enables developers to add real-time communications features to their own applications without needing to build back-end infrastructure and interfaces. Also contributing was Virgin Galactic Holdings, which develops commercial spacecrafts for eventual space tourist flights and suborbital launches for space science missions. Though still not profitable, the company signed a Space Act Agreement with NASA in early May to produce a supersonic aircraft for non-military applications, which we think bodes well for its future. Based in Toronto, Alamos Gold explores for, and produces, gold from mines in Canada, Mexico, and the U.S. Its stock benefited primarily from investor expectations that massive central bank interventions will maintain a supportive environment for gold prices.

Relative to the Russell 2000, RVT’s advantage was driven solely by stock selection—sector allocation was negative. Stock selection gave us a significant relative edge in Financials, as it did in Materials and Consumer Discretionary. By contrast, the Fund’s substantially lower exposure to index-leading Health Care stocks, particularly in biotechnology where our weighting was quite low, hurt relative results the most. Stock selection in Health Care also hindered performance, though to a lesser extent. On a smaller scale, our higher weighting in Energy detracted from first-half relative performance, as did both our lower exposure and stock selection in Consumer Staples.

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

Scientific Games0.49
MKS Instruments0.42
FLIR Systems0.40

1 Includes dividends

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

SmileDirectClub Cl. A-0.24
GCM Grosvenor Cl. A-0.17
Haemonetics Corporation-0.17
Upland Software-0.14
CIRCOR International-0.14

2 Net of dividends

Current Positioning And Outlook

We are seeking to take advantage of two current market dynamics that we believe support active management: high volatility and short-term thinking. While uncertainty about the near-term outlook is real, we expect both the economy and corporate profits to rebound beyond the next several quarters. Our portfolio positioning is still most heavily weighted in cyclical areas, specifically in Industrials and Information Technology. In the former sector, we have several machinery companies while in Information Technology, our largest weightings are in the semiconductors & semiconductor equipment group and the electronic equipment, instruments & components industry. We also maintained a sizable exposure to capital markets stocks in Financials and health care equipment & supplies. We are optimistic about the prospects for small-cap stocks over the intermediate term, particularly those companies with cyclical exposure and/or solid industry positions and better balance sheets. These are the stocks with which we have sought to populate the portfolio.

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

RVT 6.4621.1661.4215.3119.1211.858.429.6710.59 11/26/86
XRVTX (NAV) 4.7316.7756.2215.6117.3211.398.999.5711.16 11/26/86

Annual Operating Expenses: N/A

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, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund invests primarily in securities of small-cap and micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments.

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, 2020, 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, 2020 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 6/30/20, the percentage of Fund assets was as follows: Bandwidth Cl. A was 1.2%, Virgin Galactic Holdings was 0.2%, Alamos Gold Cl. A was 1.4%, Camping World Holdings Cl. A was 1.1%, Etsy was 1.0%, SEACOR Marine Holdings was 0.5%, TGS-NOPEC Geophysical was 0.5%, Kirby Corporation was 0.7%, Pason Systems was 0.4%, ProAssurance Corporation was 0.2%

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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