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Fund Focus Trends: Volatility Investment Approach

Royce Celebrates the Five-Year Anniversaries of Royce SMid-Cap Value and Enterprise Select Funds

By Steven McBoyle Last updated November 01, 2012

In today's economy, where emotions play an important role in making financial decisions, market cycles fluctuate, and sectors and industries rapidly fall in and out of favor, it can be hard to stay confident.

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The past five-years have been more than a little difficult, with the global economy almost constantly on the cusp of either inflation or deflation. One result has been a market rocked by a stressful series of significant gyrations since the previous market peaks in 2007.

No exception to these rules, smid-cap funds have gone through much in these challenging years. However, despite an often inhospitable investment environment, we are pleased to have recently celebrated the five-year anniversaries of Royce SMid-Cap Value and Enterprise Select Funds, both of which represent a continuation and evolution of Royce's value-oriented, disciplined approach.

Royce Smid-Cap Value Fund is co-managed by Steven McBoyle and Co-CIO Whitney George, while Royce’s Enterprise Select Fund is led by Steven McBoyle with Chuck Royce as Assistant Portfolio Manager. Steven McBoyle in his five-years at Royce has been among a small, select group of investment professionals charged with expanding our reach into the mid-cap area—where market caps range from $2.5 billion to $15 billion—while also watching and investing in the upper-end of the small-cap market.

The spirit of smid is to allow us to continue to own the names that we know dearly. We don't want to forfeit that knowledge base just because a company no longer qualifies as small cap.

Steven's disciplined value approach echoes the philosophy on which Royce has built its reputation. Equally important to this methodology are quantitative and qualitative metrics, the latter which examines and contributes to understanding a business's sustainable competitive edge.

Royce's long-term investment horizon also plays a major role in our quest for smid-cap stocks. "The spirit of smid is to allow us to continue to own the names that we know dearly. We don't want to forfeit that knowledge base just because a company no longer qualifies as small-cap," stated Steven.

In contrast to the volatile market cycles of the past five-years, in which a number of sectors and industries have shuffled in and out of vogue, each smid-cap portfolio has remained faithful to the smid-cap asset class and Royce's firmly held contrarian view and value approach.

The goal for each portfolio is to find the best of breed businesses that have all the attributes we think ultimately support sustainability in terms of the quality metrics that Royce looks for day-in, day-out. Our search for these kinds of businesses is not static. Often, we see what we believe are terrific businesses in industries that are showing weakness or are under pressure—the willingness to be patient is an important attribute in our approach.

Most recently, we have been concentrating on certain favored names and industries. One company in particular is a long-time Royce favorite—Westlake Chemical—which manufactures basic chemicals, vinyls, polymers, and fabricated building products. It also makes plastics and high-end plastic films to wrap food. Low natural gas prices gave it a significant cost advantage, as the company uses gas as a primary feedstock for plastic manufacture.

It is a founder-controlled business and possesses what we believe to be conservative and intelligent management. Although its share price began to rise in January 2012, which led us to take some gains in Royce SMid-Cap Value and Enterprise Select Funds, we think its ongoing prospects look solid. Natural gas prices remain low, which has allowed Westlake's margins to expand, particularly in the production of ethylene and polyethylene. Recent earnings have been strong, fueling the rise in its stock price.

Despite the market's volatility, Steven remains committed to a quality-focused, long-term approach within the SMid universe. Market forces aside, the past five years were of paramount importance in allowing us to identify those businesses that possess sustainable competitive advantages who can take advantage of these market dynamics.

Royce Enterprise Select [RMISX] and SMid-Cap Value Fund [RMVSX]
Average Annual Total Returns as of Quarter-End 9/30/12
 Annual Operating Expenses:
 3Q*YTD*1YR3YR5YRSince
Inception		Inception
Date		GrossNet
RMISX 5.07% 11.13% 27.52% 10.89% 3.87% 3.87% 9/28/2007 4.24% 1.25%
RMVSX 8.39% 11.29% 21.31% 8.97% 2.49% 2.49% 9/28/2007 1.95% 1.35%
Russell 2500 5.57% 14.33% 30.93% 14.06% 2.80% 2.80% N/A N/A N/A

* Not Annualized

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares of Royce SMid-Cap Value Fund redeemed within 180 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performances shown above; if they were, performance would be lower. Shares of Royce Enterprise Select Fund redeemed within 365 days of purchase may be subject to a 2% redemption fee, payable to the Fund, which is not reflected in the performances shown above; if they were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.roycefunds.com. Gross operating expenses reflect Royce SMid-Cap Value Fund's and Royce Enterprise Select Fund's gross total annual operating expenses for the Service Class and Investment Class, and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Funds' most current prospectus. Royce & Associates has contractually agreed, without right of termination, to waive fees and/or reimburse operating expenses to the extent necessary to maintain Royce SMid-Cap Fund's net annual operating expenses at or below 1.35% through April 30, 2013 and Royce Enterprise Select Fund's net annual operating expenses at or below1.24% through April 30, 2012.

Important Disclosure Information

The thoughts expressed in this piece are solely those of Steven McBoyle and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of small-cap and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Funds also may invest primarily in a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of these stocks would cause the Funds' overall value to decline to a greater degree (Please see "Primary Risks for Fund Investors" in the prospectus.) Royce SMid-Cap Select Fund may invest up to 35% of its net assets in foreign securities and Royce Enterprise Select Fund may invest up to 25% of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.) Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2500 Index is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 Index.

As of September 30, 2012, Westlake Chemical represented 3.1% of the net assets of Royce SMid-Cap Value Fund and 0.6% of the net assets of Royce Enterprise Select Fund.


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