Royce Mid-Cap Fund Performance Discussion

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

With a recurrence of some of the same macroeconomic challenges that hurt the markets in the first half of 2010 over the course of the first six months of 2011, we were pleased that Royce Mid-Cap Fund (RMM) was able to produce a solid absolute return in spite of lagging its benchmark. RMM rose 6.6% for the year-to-date period ended June 30, 2011 compared to its benchmark, the Russell Midcap Index, which rose 8.1% over the same period.

Rapidly deteriorating sovereign finances in Greece once again captured investors' attention in the first half, overwhelming what was generally a very good period for corporate earnings. The U.S. economy also hit a soft patch as supply chain disruptions following the Japanese tsunami rippled through many important industries such as autos and technology. Consumers also had to adjust to a spike in oil prices in large part the result of political and social unrest in North Africa and the Middle East.

RMM's selection universe incorporates companies ranging from $2.5 billion to $15 billion in market capitalization. While above the threshold for the bulk of our portfolios, investing in this segment allows our portfolio managers to extend the use of our institutional knowledge of companies as they grow out of our traditional capitalization range.

This space also includes many larger-cap companies that have produced disappointing financial results or fallen out of favor with investors and have seen a resulting drop in their market values, which frequently provides interesting opportunities for our disciplined, long-term and contrarian approach to security selection.

Solid corporate earnings reports in 2011's first quarter helped to bring about strong market performance. RMM largely kept pace, advancing 7.1% versus 7.6% for its benchmark. In the more challenging second quarter, marked by a meaningful correction in equities, RMM fell a modest 0.5% versus a slight gain of 0.4% for the mid-cap index.

Mid-cap stocks led the market in the semiannual period, appearing to benefit from investors' developing preference for higherquality companies that also boast above-average growth prospects. Now 18 months old, RMM is still working to catch up to its benchmark following a slow start in early 2010. The Fund's average annual total return for the since inception (12/31/09) ended June 30, 2011 was 17.0%.

We were pleased that each of the Fund's eight equity sectors generated positive performance in the first half, led by Health Care and Information Technology. Consumer Discretionary and Energy were the next strongest sectors, demonstrating that the performance characteristics of the market are becoming more stock-specific in nature. Both cyclical and defensive sectors had pockets of good performance, underlining the benefit of declining correlation in the marketplace.

Consumer Staples had the smallest aggregate contribution as commodity input costs continued to restrain margin improvement in this traditionally defensive sector. At the industry level, results were broadly positive as well, with semiconductors & semiconductor equipment stocks and the biotechnology group the top gainers. Software, along with oil, gas & consumables, were the biggest detractors, although net losses were modest.

Biogen Idec, a biotechnology company that develops products targeting multiple sclerosis and inflammatory diseases, was the leading individual gainer in the first half. The combination of the advancement of a novel oral multiple sclerosis drug and greater-than-expected stability in sales of the company's two major drugs led to a substantial increase in share price. We continue to view its valuation and cash flow profile as attractive, although we did pare our position somewhat in the second quarter.

The Fund also benefited from the continued pick-up in M&A (mergers and acquisitions) activity as Varian Semiconductor Equipment Associates agreed to be acquired in an all cash deal early in May. We sold our position following the announcement of the transaction.

On the other side of the ledger, Pan American Silver was a disappointment as the eventual winner of Peru's presidential race campaigned on a platform for nationalizing or heavily taxing the country's mines. Silver prices were also extremely volatile in the first half, with a rally of more than 50% through late April followed by a decline of nearly 30% over less than two weeks after increases in margin requirements dampened speculation. We continue to hold Pan American Silver, as we believe the market's reaction to these events dramatically undervalued the company.

Another disappointment was Alpha Natural Resources, which is engaged in the mining and processing of steam and metallurgical coal. With operations exclusively in the U.S., the firm sells coal to a range of industrial producers and electric utilities. As concerns about European contagion, the potential for a slowdown in China due to tighter monetary policy, and renewed fears of a double dip in the U.S., the shares of most coal producers declined sharply in the period. We used this weakness to add to our position as we have a less pessimistic outlook on the global economy.

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