Royce Opportunity Fund Performance Discussion

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

After successfully separating itself from the pack in 2010, Royce Opportunity Fund (ROF) had year-to-date results that were much closer to earth. The Fund gained 2.6% for the year-to-date period ended June 30, 2011, trailing its small-cap benchmark, the Russell 2000 Index, which was up 6.2% for the same period.

Somewhat uncharacteristically, the Fund was behind the index during each of 2011's very different first and second quarters. The first quarter was both more placid and more bullish, which can be seen in the Fund's 6.7% gain for the period and its benchmark's 7.9% result for the same span.

The second quarter was a far more volatile time, made uncertain by a plethora of negative news, including the catastrophes in Japan, more anxiety over the U.S. economy and revived concerns over European debt. The Fund was down 3.9% in the second quarter versus a 1.6% loss for the Russell 2000. However, ROF did better on a relative basis during the most severe part of the downturn than its quarterly results suggest. From the interim small-cap high on April 29 through the subsequent low on June 13, the Fund was down 10.7% versus a loss of 10.1% for the small-cap index. Most of ROF's second-quarter disadvantage came during the month of April, when it was up 1.1% while the Russell 2000 rose 2.6%.

ROF's recent market cycle performance was strong on both an absolute and relative basis. From the small-cap bottom on March 9, 2009 through June 30, 2011, the Fund rose 230.4% versus a gain of 148.6% for its benchmark. ROF also outpaced the Russell 2000 from the interim small-cap trough on July 6, 2010 through the end of June 2011, gaining 43.1% versus a 41.9% result for the benchmark. (More on the Fund's results over recent market cycles.)

These strong market cycle performances helped the Fund's longer-term average annual total returns. ROF outperformed the Russell 2000 for the one-, three-, five, 10-year and since inception (11/19/96) periods ended June 30, 2011. The Fund's average annual total return since inception was 13.3%.

Following two years of strong performance in 2009 and 2010, we have more recently sought to refresh the portfolio for potential gains in the future. These efforts created a drag on first-half performance. Many newer positions, all of which we see as attractively valuepriced stocks, saw their prices sink even lower during the correction and then lag during the late-June rebound. Those areas that felt the full effect included several turnaround candidates, many of our micro-cap holdings, and companies in the Consumer Discretionary, Information Technology and Financial sectors.

The Consumer Discretionary sector also provides a useful example of how stock-specific the market was during the year's first six months. It was the Fund's second worst-performing sector, behind only Financials in detracting most from performance through the end of June. It was also home to the Fund's two poorest-performing industries—the textiles, apparel & luxury goods group and media companies—as well as its two worst-performing companies, specialty retailer The Talbots, and apparel and accessories retailer, The Jones Group. At the same time, four of the portfolio's top-20 net gainers also came from the Consumer Discretionary sector, including its second-highest contributor, regional retail store operator Dillard's.

The Talbots has struggled with its attempts to capture younger customers and expand its core business of clothing for women 35 and older. Not only did younger shoppers fail to show up, but the company also managed to alienate some of its existing clientele. The resulting decline in sales and decision to close some existing stores sent its stock price reeling. We built our position significantly through the first half, confident that the company's recent decision to concentrate on its traditional customer base should help it to rebound. The Jones Group has faced cost pressures and increased competition as the market for luxury retail has continued to tighten. We like the company's multiple brands, its mostly solid earnings and its longterm chances of prospering when the economy gains more momentum. We increased our stake through the end of June.

ANADIGICS makes semiconductors primarily for broadband and wireless communications. It lost some business, which hurt its share price, a development that led us to build a stake in a company whose longterm prospects look promising to us. Network Equipment Technologies provides voice and data telecommunications equipment. The firm experienced delays and cutbacks on some existing government contracts, which hurt its business and stock price in the near term. Thinking of the long term, we began to buy additional shares in March.

The Fund's top performer was Haynes International, which makes high-performance nickel-and cobalt-based alloys in sheet, coil, and plate forms for a variety of industrial uses. It benefited from improvements in various industries, such as aerospace manufacturing. We continued to trim our stake in the first half. As the share price of Dillard's rose, we trimmed our position. The company continued to enjoy success with both strong fundamentals and better-than-expected earnings.

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 Opportunity Fund as of June 30, 2011.
View the complete list of holdings for Royce Opportunity Fund as of the current quarter end.

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