What Is Preferred Stock?

Preferred Stock

Preferred stock is an equity security that typically offers a fixed or floating dividend rate, but little, if any, potential for growth of capital. An investor generally buys shares of a preferred stock with the investment goal of a relatively stable income yield rather than for the potential capital growth goal of a common stock investor.

Investors wanting to buy or sell shares of publicly traded preferred stock after the initial offering must do so on a stock exchange. Share prices will vary as a function of interest rates, credit quality, supply and demand and other market factors. Companies typically issue preferred stock as a method of raising capital.

The Royce Closed-End Funds all have preferred stock issues outstanding. Each preferred stock issue pays its dividend on a quarterly basis.

Royce Focus Trust - 6.00% Cumulative Preferred Stock

1,000,000 shares or $25,000,000 were issued on 10/15/03 at $25.00 per share. Rated "aaa" by Moody's Investors Services. Optionally callable on October 17, 2008.

Royce Micro-Cap Trust - 6.00% Cumulative Preferred Stock

2.4 million shares or $60,000,000 were issued on 10/16/03 at $25.00 per share. Rated "aaa" by Moody's Investors Services. Optionally callable on October 16, 2008.

Royce Value Trust - 5.90% Cumulative Preferred Stock

8.8 million shares or $220,000,000 were issued on 10/9/03 at $25.00 per share. Rated "aaa" by Moody's Investors Services. Optionally callable on October 9, 2008.

Benefits to Common Stockholders

The Funds have used the net proceeds from each offering to purchase additional portfolio securities for each respective Fund in accordance with that Fund's investment objective and policies. From time to time since each issue, we have seen some excellent buying opportunities in the small- and/or micro-cap markets, and believe that the proceeds from each offering have allowed us to take advantage of them.

Benefits to Preferred Stockholders

The tax attributes of the dividends for each preferred stock are proportional to those of the net distributions of dividends and capital gains paid on the respective Fund's common stock. To the extent that dividends are reported as long-term capital gains for tax purposes, individual preferred stock holders will have a higher ordinary income tax-equivalent yield.

Important Information about Leverage

The issuance of Preferred Stock means that each closed-end portfolio is leveraged. Net leverage is the percentage, in excess of 100%, of the total value of a Fund's equity-type investments, divided by its net assets, applicable to Common Stock holders. We believe that the total return that we can achieve from investing in small- and/or micro-cap stocks with our disciplined value approach will exceed the cost of the leverage in each Fund.

Our goal has been to use the additional capital in a way that is consistent with our overall commitment to trying to provide solid long-term returns while limiting risk. However, to the extent that the average annual total NAV return in each Fund does not exceed the dividend rate of the preferred issues, the Preferred Stock leverage will have had a negative effect on the value of a Common Stockholder's investment. Royce has committed to voluntarily waive the portion of its investment advisory fee attributable to each Preferred Stock for any month when the Fund's average annual NAV total return since issuance of the corresponding Preferred Stock fails to exceed the dollar weighted average Preferred Stock dividend rate during that period.