Royce Premier Fund Performance Discussion

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

While Royce Premier Fund (RPR) was subject to the same volatility that affected the equity markets in the first half of 2011, it managed its way through in more than respectable fashion. RPR gained 8.9% for the year-to-date period ended June 30, 2011, outpacing its small-cap benchmark, the Russell 2000 Index, which was up 6.2% for the same period. The Fund accomplished its strong result with a combination of solid turns in both the up and down phases of the year's first six months.

During the more bullish and less volatile first quarter, RPR gained 10.1% versus 7.9% for the small-cap index. The second quarter saw highly volatile commodity prices, catastrophes in Japan, natural disasters here in the U.S., discouraging economic data and the revived specter of a European debt crisis, all of which conspired to depress share prices through most of May and half of June.

Small-caps hit an interim high on April 29 and dropped more or less steadily until a rally in mid-June helped to win back some gains. The Fund performed just as we would hope during this challenging period, falling 3.4% from the interim smallcap high on April 29 through the end of June, versus a decline of 4.1% for the Russell 2000 Index. For the second quarter as a whole, RPR was down 1.1% compared to a loss of 1.6% for its small-cap benchmark.

Recent market cycle results were strong on an absolute basis. From the small-cap trough on March 9, 2009 through June 30, 2011, RPR rose 145.7% compared to a gain of 148.6% for its benchmark. The Fund climbed 44.1% from the interim small-cap low on July 6, 2010 through the end of June 2011 versus a 41.9% return for the small-cap index. (More on the Fund's results over recent market cycles.)

We were even more pleased with the Fund's longer-term calendar-year results. RPR outperformed the Russell 2000 for the one-, three-, five-, 10-, 15-year, and since inception (12/31/91) periods ended June 30, 2011. The Fund's average annual total return since inception was 12.9%.

Top-ten position Pan American Silver specializes in low-cost silver production and operates mines in Mexico, Bolivia, Argentina and Peru. Along with the slumping price of silver, the second of these nations proved to be a problem for the company in April when its president-elect was campaigning on the possibility of nationalizing or heavily taxing mining operations. Since being elected, he has taken a more moderate position. While the country is the world's largest silver producer, we thought that the company was well-equipped to manage the situation and found the market's overreaction puzzling, especially given the company's relatively light exposure to Peru. We still liked its long-term prospects at the end of June.

Thor Industries manufactures recreation vehicles, small and mid-size buses, and related accessories. A longtime holding and the Fund's eleventh largest position at the end of June, Thor suffered through tough times for big-ticket discretionary businesses. In addition, higher gas prices and stubborn unemployment were particularly bad for its business. However, the company continues to execute well and expand its market share. We bought a modest number of shares between February and April. We also added to our position in for-profit education business Strayer Education and held large stakes in old favorites Schnitzer Steel Industries and Sims Metal Management.

The Fund's top-performing sectors were Information Technology and Consumer Discretionary. The first half 's top performer was a long-term holding from the IT sector, Varian Semiconductor Equipment Associates, which first drew our interest for its strong balance sheet and impressive market leadership in the semiconductor capital equipment business. Like many small-cap businesses, it was subject to the 'urge to merge' when its acquisition at a substantial premium was announced in May. We began to sell our stake as its price rose.

Fossil, which we first purchased for RPR in 2003, continued to benefit from strong global demand for watches and other accessories. It was one of a small number of retailers to thrive through the recession. The company has also—wisely in our estimation—focused more and more on distributing its products through its own retail outlets. Its performance over the last few years has exceeded even our most optimistic expectations. Although we took gains through the first half, it was the Fund's twelfth largest position at the end of June.

In June, the acquisition of The Timberland Company by a large apparel company was announced. We had long loved the strong brand and balance sheet of the New Hampshire-based footwear and apparel business. The stock traded very cheaply over the last few years as a result of reduced consumer demand, some earnings disappointments, rising leather costs and import tax issues that hampered its business in Europe, so we were very pleased to see it acquired at a sizable premium, which prompted us to begin selling in earnest early in June.

Unit Corporation, which we have owned in the portfolio since 2002, is a hybrid company in the oil and natural gas industry, offering services to other exploration and production firms as well as conducting its own activities in those areas. Its share price was quite volatile in the first half, but ended June on a high note.

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 Premier Fund as of June 30, 2011.
View the complete list of holdings for Royce Premier Fund as of the most recent quarter end.

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