Royce Select Fund II gained 6.5% for the year-to-date period ended June 30, 2014, outpacing both the long-only global small-cap index, the Russell Global Small Cap, and the long-only domestic small-cap index, the Russell 2000, which gained 5.7% and 3.2%, respectively, for the same period. This performance period left us pleased with the Fund’s performance on a relative and absolute basis.

The Fund takes a global approach and may invest in both U.S. and foreign companies, which served it well in the first half. Non-U.S. markets had a strong 2013, despite being unable to keep up with the feverish pace of domestic equities. In the first half of 2014, however, they continued to rally in spite of many Asian markets correcting. For the first quarter, the Fund returned 4.6%, outpacing the global small-cap’s 2.3% advance and the Russell 2000’s 1.1% gain by a healthy margin. Holdings in Canada, Brazil, Indonesia, and Israel made a positive impact on firstquarter results, while holdings in Hong Kong detracted most.

Second-quarter portfolio results were stronger for U.S., Canadian, and many Asian companies. Although holdings headquartered in Singapore, Malaysia, Taiwan, Israel, India, and Indonesia enjoyed positive secondquarter performance, positions in Japan made the most significant contribution to quarterly and first-half results. Japan was also the Fund’s second-largest country weighting at the end of June. (Holdings in Hong Kong, on the other hand, continued to struggle.) For the second quarter, Select II advanced 1.9% versus gains of 2.0% and 3.3% for the domestic small-cap index and the Russell Global Small Cap, respectively. The Fund outperformed the Russell 2000 for the one-year period and outpaced its global small-cap benchmark for the one-, three-year, and since inception (6/30/05) periods ended June 30, 2014.

Five of the Fund’s nine equity sectors finished the first half in the black. Industrials led by a wide margin, with Consumer Staples also posting strong net gains. They were followed by Information Technology, Materials and Energy. Holdings in the Consumer Discretionary and Financials sectors detracted from first-half results, though their net losses were modest. At the industry level, food & staples retailing helped to drive performance, as did semiconductors & semiconductor equipment, machinery, and professional services. The latter two groups are slotted in the top-performing Industrials sector. Real estate management & development, specialty retail, and media led those groups that hampered first-half returns.

The Fund’s top-performing stock was Thailand-based Premier Marketing PCL, which distributes snacks, beverages, confectionaries, and personal care products. Its share price began to gradually climb early in 2014, which led us to sell our stake in May. Brazilbased CETIP-Mercados Organizados offers an electronic platform for conducting online transactions, such as auctions and government bond trading, corporate bonds, and fixedincome 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. We began to reduce our position in April as its stock price was rising. Magellan Aerospace is an Ontario-based company that serves the civil aerospace and defense market. We like the business’s unlevered balance sheet and that management runs the business with a long-term focus similar to our own. The company’s share price was basically flat into the second quarter, dipping briefly in mid-March before the stock gradually climbed. This seemed to be the result of management executing effectively and the market beginning to take more notice of the business.

New York City-based Cache is a mall-centered and online women’s apparel store. Poor winter weather put a damper on sales for many retailers. Cache also had to contend with store closings and a decision not to move forward with casual and accessories offerings. We like the company’s long-term prospects and are confident in management’s ability to steer the business back in a positive direction by focusing on dresses and other historically profitable items. We added shares in March and April. We also built our position in SeaChange International, a Massachusetts-based software firm that provides multi-screen video services to television operators and telecommunications companies. Lower-thanexpected revenues and earnings hurt the stock.

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

Annual Operating Expenses: Gross 3.3% Net 1.62%

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

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