article 06-30-2014

Royce Global Dividend Value Fund Manager Commentary

For the year-to-date period ended June 30, 2014, Royce Global Dividend Value Fund gained 5.4%, just behind its benchmark, the Russell Global Small Cap Index, which rose 5.7% for the same period. While strong on an absolute level, most non-U.S. markets lagged their domestic small-cap peers in 2013, though they mounted a furious comeback in the latter half of the year. Europe’s strength would continue into the first few months of 2014, while many Asian companies would struggle a bit. Within the Fund’s portfolio, exposure to holdings in Hong Kong and Japan in particular had a negative impact on performance in the first quarter. During this period, the Fund rose 1.4% compared to the global small-cap benchmark’s 2.3% advance.

Returns were stronger both abroad and stateside in the second quarter, with the former largely driven by a recovery for many Asian companies. While the struggles for holdings in China continued, the portfolio benefited from its substantial weighting in Japan. For the second quarter, the Fund was able to outpace the Russell Global Small Cap Index, advancing 3.9% versus 3.3%.

Eight of the Fund’s nine equity sectors were positive contributors to first-half performance, with Information Technology leading by a wide margin. Consumer Discretionary was the Fund’s lone detractor. At the industry level, software and capital markets led the pack, with pharmaceuticals and machinery providing respectable results as well. Results for capital markets companies were driven by strong performance for asset managers and other financial services companies, two areas that we think we know well and in which we have taken a great interest for many years. Net losses at the industry level were modest, with three groups from Consumer Discretionary detracting most—textiles, apparel & luxury goods; media; and multiline retail. At the country level, Hong Kong-based holdings detracted most from first-half performance while strong net gains came from positions headquartered in Canada, Malaysia, the U.K., South Africa, France, and Japan.

CB Industrial Product Holding is a Malaysian investment holding company that through its subsidiaries manufactures, markets, and trades palm oil mill equipment and related parts. The company is also involved in engineering support and contract work for palm oil mills. Its share price was pretty volatile during the first half, but was mostly on the ascent. Growth in its business, keyed by expansion into Central America and Africa, and earnings improvement seemed to attract investors. Its rising stock price helped to make it the Fund’s eighth-largest position at the end of June. Another top-10 holding, Singapore-based Silverlake Axis provides customized software solutions to the banking and insurance industries. Its stock was generally flat for most of the second half. Late in May the stock began to take off, the key driver being a more than 25% increase in year-over-year fiscal third-quarter revenues. This improvement was mostly the result of a higher contribution from software licensing, maintenance and enhancement services, as well as the sale of software and hardware products.

Brazil-based CETIP-Mercados Organizados offers an electronic platform for conducting online transactions, such as auctions and government bond trading, corporate bonds, and fixed-income securities. CETIP also provides central securities depository, outsourcing, market data, and risk management services. Its shares rose on what we suspect was a flight to company quality in Brazil’s first-half bear market. Graphite India is the largest Indian producer of graphite electrodes and also makes carbon and graphite specialty products. Its shares rose on improved operating profits and related margin expansion, which was no mean feat in the depressed market for its industry. The surge was also part of the general recovery for Indian stocks following the May election of Prime Minister Narenda Modi.

Brasil Brokers Participacoes is one of the two leading real estate brokerages in Brazil. Poor consumer sentiment in the country, not seen since 2008, hurt its business. We purchased more shares at the end of the second quarter. Hong Kong-based Pico Far East Holdings makes displays for companies when they present at conventions. The more challenging economic climate in China, which includes diminished consumer demand, put pressure on its stock. We like the long-term view that management maintains for its business and that major global brands such as Mercedes Benz, Citibank, and Singapore Airlines trust the company with their brand imaging. We increased our stake in the middle of the second quarter.


GOOD IDEAS THAT WORKED
Top Contributors to Performance
Year-to-Date through 6/30/14
1

CB Industrial Product Holding 0.34
Silverlake Axis 0.33
CETIP - Mercados Organizados 0.33
Graphite India 0.31
F-Secure 0.26
1 Includes dividends

GOOD IDEAS AT THE TIME
Top Detractors from Performance
Year-to-Date through 6/30/14
1

Brasil Brokers Participacoes -0.33
Pico Far East Holdings -0.22
KBR -0.19
New World Department Store China -0.18
Pacific Textiles Holdings -0.16
1 Net of dividends

Average Annual Total Returns as of Quarter-End 6/30/14 (%)

  QTR YTD 1YR 3YR SINCE
INCEPTION
INCEPTION
DATE
 
Global Dividend Value 3.89 5.38 19.66 7.34 6.96 12/31/2010
Russell Global SC 3.31 5.72 23.60 9.22 8.62 N/A
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Annual Operating Expenses: Gross 2.99% Net 1.7%

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

Important Disclosure Information

All performance information in this Report 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 redeemed within 180 days of purchase may be subject to a 2% redemption fee payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. Gross operating expenses reflect total gross annual operating expenses and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive its fees and/or reimburse operating expenses to the extent necessary to maintain the Fund’s net annual operating expenses, (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business), at or below 1.69% through April 30, 2015 and at or below 1.99% through April 30, 2024. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Regarding the two “Good Ideas” tables shown above, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Fund’s year-to-date performance for 2014.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2014, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of June 30, 2014 and are subject to change at any time without notice. There can be no assurance that securities mentioned above will be included in any Royce-managed portfolio in the future.

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. The Fund invests primarily in small-cap and mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. The Fund may invest a significant portion of its assets in foreign companies which may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of the securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of the securities of U.S. companies. (Please see "Primary Risks for Fund Investors" 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 Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. Index returns include net reinvested dividends and/or interest income. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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