article , video 10-30-2013

Understanding the Benefits of Rolling Returns

Gunjan Banati, Fund Research and Analytics, discusses the benefits of rolling returns data and explains why calendar-year returns may not paint the most realistic performance portrait.

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"Rolling returns are an excellent performance measurement tool to look at mutual fund performance. It allows you to look at returns over multiple periods of time and gauge the experience of many investors that come in at different points in the time of a fund.

"The main advantage of looking at return data on a rolling basis is it’s a series of data, so you have many more data items to look at. It’s a much more robust calculation.

"One of the limitations when you’re looking at calendar-year returns is that they truly are arbitrary periods. No investor is actually going to put money on January 1 and then take it out on December 31. So, you’re looking at a time frame that’s not necessarily a meaningful representation of an investor’s experience. When you look at rolling returns you actually see what most investors experienced over a three-year or a five-year time frame.

"When you look at a trailing series of data, that’s also going to be anchored to a month end or a quarter end. So, for example, if you’ve had a really good 12-month performance period, that affects your one-year trailing return. It also is a third of your three-year return, it’s a fifth of your five-year return. When you look at a rolling series of data, it smoothes that effect out of one anomalous period. So, it’s much more effective to look at rolling data when you want to understand the consistency of a fund’s performance.

"One of the great things about looking at rolling data when you look at it over longer periods of time, such as a three-year time frame, or a five-year time frame, or even a ten-year time period, you get to encompass multiple market cycles into that evaluation.  And when you look at those over time, you can actually see the consistency of a manager’s performance over multiple cycles.

"For rolling returns to be an effective measure you want to have some history. So, if you’re looking at a three-year rolling return period, you want to be able to go back 10 or 15 years for you to have enough data for that to be a meaningful dataset.

"When you look at using a rolling methodology you can evaluate consistency of fund performance using multiple metrics. A great example would be to look at risk over that by using rolling standard deviation or risk-adjusted returns by looking at the sharp ratio.

"One of the reasons why rolling returns is so effective for financial advisors when they’re evaluating funds is you actually can see what the multiple experiences of your clients have been in a particular fund or if they were to invest in a particular manager style. You’d be looking at the consistency of return performance for all your investors."

Royce Featured Funds vs. The Benchmark1

Monthly Rolling Average Annual Return Periods and Relative Results Since Fund Inception or Most Recent 15 Years through September 30, 2013

  Average Annual 10-Year Rolling Return Average Annual 5-Year Rolling Return Average Annual 3-Year Rolling Return
Fund % of Periods Where
Beat the Index
Fund
Average2
Index
Average2
% of Periods Where
Beat the Index
Fund
Average2
Index
Average2
% of Periods Where
Beat the Index
Fund
Average2
Index
Average2
Pennsylvania Mutual
61/61
100% 9.3% 6.1%
110/121
91% 9.5% 6.1%
124/145
86% 10.5% 6.9%
Low-Priced Stock
51/61
84 9.6 6.1
104/121
86 9.8 6.1
112/145
77 10.9 6.9
Heritage
61/61
100 9.6 6.1
121/121
100 9.7 6.1
112/145
77 10.8 6.9
Value Plus
28/28
100 11.6 8.2
54/88
61 8.8 5.6
66/112
59 12.0 8.4
Premier
61/61
100 11.2 6.1
115/121
95 11.3 6.1
128/145
88 11.8 6.9
Special Equity
54/61
89 10.2 6.1
102/121
84 10.3 6.1
85/145
59 11.5 6.9
Value
28/28
100 11.9 8.2
76/88
86 9.9 5.6
89/112
79 12.5 8.4
100
4/4
100 11.0 9.4
61/64
95 6.5 2.7
69/88
78 9.3 6.4
Total Return
46/61
75 8.1 6.1
100/121
83 8.3 6.1
97/145
67 9.4 6.9
Dividend Value
53/53
100 5.8 2.8
68/77
88 7.7 5.2
Micro-Cap
40/40
100 10.6 6.7
92/100
92 9.4 4.8
86/124
69 11.2 7.7
Opportunity
61/61
100 9.7 6.1
102/121
84 10.1 6.1
118/145
81 11.5 6.9
Global Value
16/22
73 3.5 1.3
33/46
72 9.6 6.3
International Smaller-Cos
3/4
75 6.6 5.1
13/28
46 11.4 11.2
1The Russell 2000 is the benchmark for most funds. Royce Micro-Cap Fund is compared to the Russell Microcap Index and is from the Russell Microcap Index's inception. Royce Global Value Fund is compared to the Russell Global Small Cap Index. Royce International Smaller-Companies Fund is compared to the Russell Global ex-U.S. Small Cap.
2Average return shown is the average of all month-end trailing three-year, five-year, and 10-year total returns.

Royce Featured Funds Average Annual Total Returns as of Quarter-End 9/30/13

  Average Annual Total Returns Annual Expenses
Fund Third
Quarter*
YTD* One-
Year
Three-
Year
Five-
Year
10-
Year
15-
Year
40-Year/Since
Inception (Date)
Gross
Operating
Expenses
Net
Operating
Expenses
Pennsylvania Mutual 10.68% 23.48% 29.23% 15.95% 11.08% 10.49% 11.42% 13.28% 0.90% 0.90%
Low-Priced Stock 9.95 8.60 9.63 5.06 7.72 8.11 11.64 11.59
(12/15/93)
1.58 1.50
Heritage 8.41 18.62 26.17 12.69 12.31 10.77 13.59 13.38
(12/27/95)
1.51 1.51
Value Plus 9.14 22.63 23.71 13.43 8.87 10.45 n.a. 12.44
(6/14/01)
1.46 1.46
Premier 9.77 18.42 24.64 14.80 11.47 12.22 12.53 12.43
(12/31/91)
1.06 1.06
Special Equity 8.25 21.68 25.35 17.02 12.91 10.21 11.34 10.09
(5/1/98)
1.13 1.13
Value 8.62 17.81 21.52 11.82 9.50 11.55 n.a. 11.28
(6/14/01)
1.45 1.45
100 10.57 22.25 28.62 13.86 11.40 11.43 n.a. 11.56
(6/30/03)
1.48 1.48
Total Return 8.24 22.14 26.58 15.42 10.47 9.40 10.16 11.41
(12/15/93)
1.14 1.14
Dividend Value 8.58 20.40 26.66 15.08 12.41 n.a. n.a. 9.74
(5/3/04)
1.52 1.52
Micro-Cap 10.05 13.40 14.01 8.04 9.59 9.53 11.87 12.48
(12/31/91)
1.49 1.49
Opportunity 9.39 29.62 37.11 18.15 13.83 10.83 14.48 13.38
(11/19/96)
1.14 1.14
Global Value 7.12 2.00 4.55 2.61 8.11 n.a. n.a. 4.99
(12/29/96)
1.81 1.70
International Smaller-Cos 7.86 7.09 11.97 5.28 9.80 n.a. n.a. 6.33
(6/30/08)
2.15 1.71
Russell 2000 10.21 27.69 30.06 18.29 11.15 9.64 8.91 n.a. n.a. n.a.
Russell Microcap 11.62 32.07 32.12 19.66 11.12 7.55 n.a. n.a. n.a. n.a.
Russell Global Small Cap Index 10.47 17.89 22.19 10.38 10.50 10.09 9.24 n.a. n.a. n.a.
Russell Global ex-U.S. Small Cap 10.70 12.65 18.01 6.54 10.41 10.84 9.79 n.a. n.a. n.a.
*Not Annualized

Important Performance and Expense Information

All performance information above 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 1% redemption fee payable to the Fund (2% for Royce Global Value and International Smaller-Companies Funds). Redemption fees are not reflected in the performance 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 here. All performance and expense information reflects results of the Fund’s oldest share Class (Investment Class or Service Class, as the case may be). Gross operating expenses reflect each Fund’s gross total annual operating expenses, including management fees, any 12b-1 distribution and service fees, other expenses, and any applicable 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 fees and/or reimburse operating expenses through April 30, 2014 to the extent necessary to maintain net annual operating expenses, other than acquired fund fees and expenses, to no more than 1.49% for the Service Class of Royce Low-Priced Stock Fund and to no more than 1.69% for the Service Class of Royce Global Value and International Smaller-Companies Funds. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2023 to the extent necessary to maintain net annual operating expenses, other than acquired fund fees and expenses, to no more than 1.99% for the Service Class of Royce International Smaller-Companies Fund. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by any applicable Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Shares of a Fund’s Service, Consultant, R, and K Classes bear an annual distribution expense that is not borne by the Fund’s Investment Class. The Royce Funds invest primarily in securities of micro-cap, small-cap, and/or mid-cap companies, which may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective prospectus). Please read the prospectus carefully before investing or sending money.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking, 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. Micro-cap, small-cap, and mid-cap stocks may involve considerably more risk than investing in larger-cap stocks. (Please see “Primary Risks for Fund Investors” in the prospectus.) The Sharpe Ratio is calculated for a specified period by dividing a fund's annualized excess returns by its annualized standard deviation. The higher the Sharpe Ratio, the better the fund's historical risk-adjusted performance. Standard deviation is a statistical measure within which a fund's total returns have varied over time. The greater the standard deviation, the greater a fund's volatility.

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