Royce 100 Fund Performance Discussion

This discussion comes from our June 30, 2011 Semiannual Review and Report to Shareholders.

Although relative results for Royce 100 Fund (ROH) were not as strong as we would prefer, we were otherwise quite pleased with its performance through the first six months of 2011. The Fund was up 5.3% for the year-to-date period ended June 30, 2011, trailing its small-cap benchmark, the Russell 2000 Index, which rose 6.2% for the same period.

ROH's performance in the first half reflected the divided nature of the market, with four months of mostly rising share prices followed by a highly volatile two months which included a sharp correction that was in turn nearly undone by a dynamic rally that closed out the period.

During the more bullish first quarter, the Fund gained 8.3%, narrowly outperforming the Russell 2000, which was up 7.9% for the same period. April was a strong month as well, with the small-cap market hitting its 2011 high on April 29, the final business day of the month. The Fund lagged its benchmark for the month, up 1.9% versus 2.6%. For the second quarter as a whole, ROH continued to trail, down 2.7% versus a loss of 1.6% for the Russell 2000, though the Fund lost a bit less than the small-cap index during the downturn from April 29 through the next low on June 13, falling 9.4% versus a loss of 10.1%.

In recent market cycles, the Fund's absolute results were solid, while its relative performance was stronger in more bearish phases, as we would typically expect. From the small-cap market peak on July 13, 2007 through June 30, 2011, ROH climbed 21.8% versus a 2.2% gain for the Russell 2000. In the more bullish period from the bottom on March 9, 2009 through the end of June 2011, the Fund was up 142.3% compared to a gain of 148.6% for the benchmark. Results were also close from the interim small-cap trough on July 6, 2010 through June 30, 2011, with ROH gaining 38.2% versus a 41.9% return for the small-cap index. (More on the Fund's results over recent market cycles.) The Fund outpaced the Russell 2000 for the three-year, five-year and since inception (6/30/03) periods ended June 30, 2011. ROH's average annual total return since inception was 12.3%.

Portfolio losses were relatively modest at the sector, industry and position levels. DreamWorks Animation produces animated films. We view it as a conservatively capitalized business with a great brand and solid business. Its stock was hampered in the first half by slowing DVD sales and sub-par box office receipts for "Kung Fu Panda 2." Still confident in its long-term prospects, we built our position between March and June.

Earlier in the year, we added to our stake in Knight Capital Group, a financial services business. The company has been expanding its range of services, but the moves have resulted in more debt on its balance sheet than we like to see. However, its stock traded at less than tangible book value through much of the second quarter, and we have long liked its core sales and trading business, so we have chosen to hang on for now.

Information Technology and Industrials were the portfolio's top contributors in the first half. Two of the Fund's five highest gainers came from the first of these sectors. Government technology consulting business SRA International became part of the active M&A (mergers & acquisitions) market when its acquisition at an attractive premium was announced in April, which led us to sell our shares. We had initially liked its core business and low-debt balance sheet.

FARO Technologies was something of an anomaly compared to most stocks. Its share price was both lower and more volatile in the first quarter than it was in the second. In any case, this maker of 3-D measurement systems for a variety of applications benefited from ongoing high demand internationally and revived demand here in the U.S. We made a modest increase to our position in March.

HEICO Corporation was the top contributor in the Industrials sector. The company manufactures electronic products primarily for the aerospace and defense industries. Growing global air traffic has helped to create robust demand for aftermarket airplane parts. Airlines have thus been increasing capacity, and their own improved financial condition made them more willing to spend on parts re-stocking as the recession lifted.

The Energy sector was also a notable positive contributor to first-half results. Oil and gas drill manufacturer Helmerich & Payne is a long-time Royce favorite that we first bought in ROH's portfolio in 2009. The company's stock was a bit volatile in 2011's second quarter, but made a strong finish in June. Demand for its newer, safer fleet of rigs appeared to attract investors to what we regard as a fundamentally sound and well-managed business.

Top holding—and one of 2010's top performers—Oil States International provides specialized products and services to the oil and gas industry. Like many energy services businesses, its performance was fueled by ongoing shale gas and oil activity that put its wares in high demand.

Current month-end performance may be obtained at our Prices and Performance page.