Royce Low-Priced Stock Fund Performance Discussion

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

The market swung through several moods during the first six months of 2011, and Royce Low-Priced Stock Fund (RLP) participated in all of them to some extent. The Fund was up 3.3% for the year-to-date period ended June 30, 2011, while its small-cap benchmark index, the Russell 2000 Index, gained 6.2% for the same period. This was a somewhat disappointing result, though our feelings were mollified to a degree by the facts that six months is a short-term time period and that RLP's longer-term results remained very strong.

The Fund underperformed the Russell 2000 during the first quarter, up 7.0% versus 7.9%, though this return was more than acceptable on an absolute basis. The same was true for the month of April (+2.0% versus +2.6%), the last of three consecutive months of positive returns for small-cap stocks as a whole.

The stock market became unsettled following the interim small-cap high on April 29 and did not re-gain stability until the final two weeks of June, during which the Russell 2000 made back some of what it had lost between late April and June 13. For the second quarter, RLP was down 3.4% versus a decline of 1.6% for its benchmark.

The Fund's market cycle and other long-term results remained strong on both an absolute and relative basis. From the market bottom on March 9, 2009 through June 30, 2011, RLP considerably outpaced its benchmark, up 172.9% versus 148.6%. From the small-cap market trough on July 6, 2010 through the end of 2011's first half, the Fund gained 45.7% while the Russell 2000 was up 41.9%. (More on the Fund's results over recent market cycles.)

RLP was also ahead of the small-cap index for the one-, three-, five-, 10-, 15-year and since inception (12/15/93) periods ended June 30, 2011. The Fund's average annual total return since inception was 13.6%.

The Energy and Consumer Discretionary sectors were the top contributors to performance in the first half. While the first of these sectors saw strong net gains from several holdings, including service businesses Unit Corporation, Lamprell, Ensign Energy Services and Trican Well Service, results in the second were dominated by two positions. The Timberland Company is a footwear and apparel business whose fundamentals and widely recognized brand we have admired for many years—we first purchased shares in the portfolio in 2004 and have owned shares continuously since 2007. Its stock has been challenged by a number of issues over the last few years, including import tax issues in Europe, earnings disappointments, sluggish demand in the recession and rising leather costs. We were therefore pleased to see the announcement in mid-June that the firm would be acquired at a healthy premium by a large apparel business. We then began to reduce our position.

Watch and accessory maker Fossil continued to exceed both our own and others' expectations with consistently strong results. A stock that we have owned in RLP since 2002, it was one of the rare retail businesses that produced solid results through the worst days of the recession. We have long liked its balance sheet, its successful efforts to build its brand across the globe and its more recent strategy to direct more distribution to its own retail outlets. We took gains throughout the first half, though it was a top 30 holding at the end of June.

The stock price of Allied Nevada Gold reflected the volatility of both the stock market and precious metals prices, though it ended the first half as the Fund's second-largest contributor. First buying shares in RLP back in 2008 when it was a micro-cap company, we were drawn to its pristine balance sheet and skill at making the transition from exploration to production in several gold mines. After building our position between September 2010 and January 2011, we took some gains during March and April.

Three other metals and mining businesses were on the list of top detractors through the end of June. Two companies—Pan American Silver and Hochschild Mining—saw their stocks suffer in large part from two unfortunate developments: the sharp decline in silver prices during the second quarter and exposure to silver mines in Peru, which recently elected a president who campaigned on the idea of nationalizing or taxing the nation's mining industries, a position he has moderated since being elected, but not before the shares of both stocks fell. With each company's exposure at what we think are manageable levels, we held a large position in top-ten holding Pan American Silver at the end of the period and modestly boosted our stake in Hochschild Mining in June.

The tumultuous events of the Arab Spring had very little effect on the gold mining exploration and operation business of Centamin Egypt, but its name alone seemed enough to drive investors away. Seeing that operations at its primary mine in Egypt were continuing largely unaffected by political events, we substantially built our stake in the first half at what we deemed were highly attractive low prices.

The sum of all contributions to and detractions from performance for all securities would approximate the Fund's year-to-date performance for the period ended June 30, 2011.

See our June 30, 2011 Semiannual Review and Report to Shareholders for a complete list of holdings for Royce Low-Priced Stock Fund as of June 30, 2011.
View the complete list of holdings for Royce Low-Priced Stock Fund as of the most recent quarter end.