Royce Global Dividend Value Fund Performance Discussion

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

We are pleased to report for the first time on Royce Global Dividend Value Fund (RGD). The Fund, which made its debut on December 31, 2010, seeks long-term growth of capital and current income by investing primarily in both U.S. and non-U.S. dividend-paying microcap, small-cap and/or mid-cap companies with market capitalizations up to $5 billion that Royce believes are trading significantly below its estimate of their current worth.

The Fund has a global scope, primarily looking for dividend-paying companies based in developed countries, including the U.S. At the end of the semiannual period, the largest country weightings in the portfolio were the United States at 11.4%, Japan at 9.1%, and Hong Kong at 7.4%.

The market struggled through the latter part of 2011's first half. In retrospect, the second half of the second quarter was a critical time when many of the market's greatest macro fears—supply-chain disruptions as a result of the Japanese tsunami, a standoff between the ECB and fiscal policymakers in both Europe's core and its periphery, and our own anxieties about America's fiscal viability—all came to the fore.

For the year-to-date period ended June 30, 2010, Royce Global Dividend Value Fund gained 2.3% versus 2.5% for its benchmark, the Russell Global Small Cap Index, for the same period. During the mostly bullish first quarter, RGD was up 2.6%, trailing its benchmark's rise of 3.2%. When stock prices began to correct in late April, the Fund effectively held its value, falling 4.5% versus a drop of 7.2% for the Russell Global Small Cap from the high on April 29, 2011 through the 2011 correction's low on June 13. For the second quarter, RGD fell 0.3%, losing a bit less than its benchmark, which declined 0.7%.

Year-to-date through the end of June, all but two of the Fund's eight equity sectors were positive. Information Technology and Health Care led, followed by solid net gains for Consumer Discretionary, which, along with Industrials, was the Fund's largest sector at the end of the period. The pharmaceuticals, electronic equipment, instruments & components, and energy equipment & services groups were the top-performing industries. Financials and Materials were the worst performing sectors for the semiannual period, though net losses in the latter were distinctly modest.

RGD ended the semiannual period holding 168 names. London-based Ashmore Group was the Fund's largest holding as of June 30, 2011 and one of the top performers for the period. The firm is a leading emerging markets asset manager focusing on five key investment themes, including dollar debt, local-currency debt, special situations, high yield and equities. The business was started in 1992 as part of ANZ Banking Group, became independent in 1999 and went public in 2006. The firm has benefited both from a compelling structural growth story and a cyclical tailwind as investors have flocked to emerging market debt funds.

IPG Photonics was the top performer in the first half. The Oxford, Massachusetts based company manufactures fiber lasers and amplifiers for use in materials processing, advanced technologies, telecommunications, and medical applications. The company offers optical fiber-based lasers, which combine the advantages of semiconductor diodes with the high amplification and precise beam qualities of specialty optical fibers. On the cusp of a new product cycle, with a 65% share of the fiber laser market, IPG Photonics dominates this space. Its vertically integrated model, IP portfolio, and extensive experience in fiber lasers gives it a formidable competitive edge in the fiber laser market. Its price going beyond our expectations and seeing attractive value elsewhere, we sold our shares.

Valmont Industries manufactures fabricated metal products, pole and tower structures, and mechanized irrigation systems in the U.S. and abroad. Based in Omaha, the company benefited from a solid fiscal first quarter. Better-than-expected earnings resulted from strength in its irrigation business and improved demand for its utility transmission operations.

E-House China Holdings was the greatest detractor to performance during the semiannual period. The Shanghai-based company is a leading real estate services operation in China. Like many small-cap and micro-cap U.S. listed companies that are based in China or derive a large portion of their business from China, E-House China Holdings was pressured due to the accounting irregularities at another U.S. listed Chinese firm during the period.

Another detractor was Raubex Group, a South African road construction and infrastructure development specialist. The company is also a major supplier of aggregates to the construction industry. Raubex is exposed to the buoyant but competitive road-building sector in South Africa and has an expanding footprint in the rest of Africa, a region that we believe has good medium- to long-term prospects. Its share price was hurt as the company faced delays in major road construction projects, dealt with lower-priced competition from imported Chinese crews and tried waiting out unrest in the ranks of South Africa's national highway administration.

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