While we were pleased with the absolute results for Royce Partners Fund in the first half of 2014, we were nonetheless frustrated that the Fund was unable to keep pace with its benchmark. The Fund gained 2.8% for the year-to-date period ended June 30, 2014 versus the 5.9% advance for the Russell 2500 Index, the Fund’s benchmark, for the same period.

After the feverish pace of returns in 2013, especially in the second half, the bull market cooled to kick off the year. In the first quarter of 2014, Partners gained 0.3%, a modest gain that put the Fund far behind its benchmark’s 2.3% return. Volatility shook small-cap share prices throughout much of the second quarter of 2014, though a rebound late in May and throughout June was strong enough to steer results back into positive territory. In the second quarter, the Fund’s 2.5% advance was not enough to give it an advantage over its benchmark, which rose 3.6%.

Despite more muted performance in the first half of the year, equity returns were generally positive, with the economy showing signs of both growth and normalization. Equally important, we continue to see, albeit in fits and starts, the market gravitating from low quality to high-quality companies—those with strong balance sheets and high returns on invested capital. We believe this environment will reward active and disciplined managers with a long-term focus. The Fund’s average annual total return since inception (4/27/09) was 14.2%.

Seven of the Fund’s nine equity sectors were positive contributors to first-half performance. Financials led all sectors by a wide margin, followed by Materials and Health Care. Myriad Genetics, a molecular diagnostic company that specializes in genetic testing for cancer, made a strong comeback in the first half of the year. After the Supreme Court ruled that human genes cannot be patented in June 2013, its share price declined rapidly as investors grew concerned that Myriad would struggle to compete or be profitable in the wake of the Court’s decision. The company remains a leader in genetic testing with a variety of industry-standard tools for detecting hereditary cancer risk. The stock recovered in the first quarter of 2014, and though its price has been volatile more recently, we continue to believe in the company.

BBVA Banco Frances ADR is a financial services company that caters to corporations, medium and small companies, and individual customers in Argentina. It is the oldest private bank in Argentina and the nation’s third largest. It has posted both strong earnings and given an improved outlook so far in 2014, both of which seemed to attract more investors to its shares. After suffering a harsh 2013, the precious metals & mining industry rebounded strongly during the first half of 2014. We were pleased to see Pan American Silver, the portfolio’s eleventh-largest holding, benefit from this recovery. In January we sold our shares in GTT Communications as its price was beginning to rise on increased revenues. The company is a cloud-based technology business that designs and integrates data transfer and connectivity solutions. We also sold our position in Zebra Technologies in April. The company makes specialized printers, including direct thermal and thermal transfer label printers and radio frequency identification (RFID) printers and encoders. The firm announced strong fiscal fourth-quarter results early in 2014 that showed accelerating demand for its bar code printers and consumables after a period of channel destocking. Its shares jumped again in April on news of Zebra’s announcement of its intent to purchase Motorola Solutions’ enterprise business, which adds mobile computing and data-capture to the firm’s existing portfolio of technologies.

Towers Watson & Co., one of the Fund’s largest contributors to performance at the end of 2013, is a benefits consultant and a leading provider and manager of private health insurance exchanges. Its business slowed during the first half after a fantastic run-up in 2013. We like the company’s shareholder-friendly capital allocation and are holding our position after selling shares late last year. Hong Kong-based asset managers Value Partners Group’s stock was volatile throughout the first half of 2014. The fourthlargest holding in the portfolio, the company has largely suffered from China’s economic troubles and slow growth. We like the company’s value orientation and the fact that it has been making investments in China’s domestic market. We held our shares in the first half.

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

Annual Operating Expenses: Gross 3.97% Net 1.26%

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

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