Royce Dividend Value Fund Performance Discussion

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

Micro-cap, small-cap and mid-cap dividend-paying stocks have lagged the market as a whole recently, which could be seen in the first-half performance of Royce Dividend Value Fund (RDV). For the year-to-date period ended June 30, 2011, the Fund gained 4.6% compared to a 6.2% return for its benchmark, the Russell 2000 Index, for the same period. We were not terribly disappointed with this result, in part because it was a solid absolute return and in part because the Fund performed largely in line with our expectations.

During the mostly bullish first quarter, RDV was up 6.2%, trailing its benchmark's rise of 7.9%. When stock prices began to plunge in late April, the Fund was able to better hold its value. It fell 7.3% versus a drop of 10.1% for the Russell 2000 from the interim small-cap high on April 29, 2011 through the ensuing small-cap low on June 13. For the second quarter, RDV was down 1.5%, narrowly outperforming its benchmark, which was down 1.6%.

We were very pleased to see the Fund outpace its benchmark in two of three recent market cycle periods. From the small-cap peak on July 13, 2007 through the end of June 2011, RDV rose 17.5% versus a 2.2% gain for the Russell 2000. In the more bullish phase from the bottom on March 9, 2009 through June 30, 2011, the Fund was up 150.8% while its benchmark rose 148.6%.

Finally, over the more bearish period from the interim small-cap high on July 6, 2010 through June 30, 2011, RDV climbed 35.8% compared to 41.9% for the small-cap index. (More on the Fund's recent market cycle results.)

These strong market cycle performances helped the Fund to secure strong absolute results and advantages over its benchmark for longer-term average annual total return periods. RDV beat the Russell 2000 for the three-year, five-year and since inception (5/3/04) periods ended June 30, 2011. The Fund's average annual total return since inception was 9.1%.

Year-to-date through the end of June, all but one of the Fund's 10 equity sectors were in positive territory. Industrials, Energy and Information Technology were the Fund's best-performing sectors. At the industry level, these sectors were led by the machinery group, energy equipment & services companies, and electronic equipment, instruments & components stocks.

The Financial sector was the Fund's largest sector weighting at the end of the semiannual period, with much of our exposure in capital markets companies, which includes asset management and insurance. These kinds of businesses have historically made up a sizable portion of the portfolio, mostly because they generally boast above-average dividend yields. Our focus over the past several quarters has remained on these industries, although we remain underweight banks as balance sheets are still not compelling.

Losses at the sector, industry and individual position levels were comparatively modest. PetMed Express, which markets non-prescription and prescription pet medications and other health products, was the greatest detractor to performance during the semiannual period. Based in Pompano Beach, Florida, the company experienced lower gross profit margins due in part to its new lower price strategy. We held our shares at the end of June, liking its long-term prospects and pristine balance sheet.

Manpower, the world's third-largest provider of temporary staffing services, was also a negative for the Fund. The company has been benefitting from a confluence of cyclical and secular factors that have been driving a rapid increase in temporary workers on a global basis, but it has also been under pressure due to global economic concerns and lingering high unemployment here in the U.S. We have long admired the company's business mix, strong management team, and focus on return on invested capital.

Helmerich & Payne was the greatest contributor to performance in the first half. A contract driller that provides offshore drilling services worldwide and land drilling in the U.S., its stock price moved around quite a bit during the year's opening half, as oil prices were very volatile. However, it finished June near its 2011 high, due in large part to demand for its innovative services and the company's large number of new, modernized rigs that offer both higher safety and increased efficiency. We were impressed that management chose to upgrade its rig supply when most competitors were content to refurbish theirs.

MAXIMUS provides outsourcing and consulting services for governments across the globe. Its recent success came from running welfare-to-work-type programs in Australia and the U.K. Although we took some gains in the first half, we think that the company remains well-positioned to potentially benefit from the Affordable Care Act putting more people on Medicaid. For several years, we have had high regard for the strong brand and balance sheet of the New Hampshire-based footwear and apparel business The Timberland Company. Its acquisition by a large apparel company was announced in June.

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