article 05-15-2014

Royce Dividend Value Fund Celebrates 10 Years of History

Dividend Value, managed by Chuck Royce and Jay Kaplan, celebrated 10 years on May 3, 2014, marking a solid long-term track record of absolute results. We believe that dividend-paying small-caps and mid-caps offer investors many advantages, especially at this point in the economic and stock-market cycle.

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Royce Dividend Value Fund celebrated 10 years on May 3, 2014, marking a solid long-term track record of absolute results. Through its first 10 years of operation the Fund has provided investors with a 10.0% average annual total return for the since inception period ended May 3, 2014.

Like many of our portfolios, Dividend Value seeks to invest in what we deem to be well run, conservatively capitalized companies trading at discounts to our estimate of their intrinsic worth as businesses. But an additional key attribute is a company’s practice of paying dividends, which we have always viewed as an excellent measure of the business’s underlying quality as well as an intelligent form of corporate governance.

Understanding a company’s capital allocation decisions is a critical element in our investment process. Many high quality small companies earn more than they need in terms of reinvestment in the business. This excess profit, or free cash flow, is a vital qualitative element that we look for in companies regardless of location, and dividends tend by their nature to be the byproduct of healthy free cash flow generation.

Portfolio managers Chuck Royce and Jay Kaplan, along with assistant portfolio manager Jim Harvey, focus on dividend-paying small-cap and mid-cap companies with market capitalizations up to $15 billion. Of the 5,035 domestic companies (with market capitalizations up to $15 billion), 1,712 paid dividends as of the quarter ended March 31, 2014; of these dividend-paying companies, 893 had a dividend yield of at least 2%.1

Royce Dividend Value Fund [RYDVX]
Average Annual Total Returns as of Quarter-End 3/31/14 (%)

  1QTR* YTD* 1YR 3YR 5YR Since
Inception
Date
Dividend Value 0.17 0.17 19.57 11.25 23.55 10.16 5/3/2004
Russell 2000 1.12 1.12 24.90 13.18 24.31 9.08 N/A
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Royce Dividend Value Fund [RYDVX]
Average Annual Total Returns as of Quarter-End 4/30/14 (%)

  APR* YTD* 1YR 3YR 5YR Since
Inception
Date
Dividend Value -0.89 -0.73 18.06 10.21 19.94 9.97 5/3/2004
Russell 2000 -3.88 -2.80 20.50 10.74 19.84 8.57 N/A
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Annual Operating Expenses: 1.52%

*Not Annualized

Important Performance and Expense Information

All performance information 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, 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. Operating expenses reflect the Fund's total annual operating expenses for the Service Class as of the Fund's most current prospectus and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. 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. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

"I think the most valuable investment advice is to think of owning a stock as owning a business, so you should think about owning companies that you would like to own for the next five years, while trying to ignore the noise of Wall Street," said Jay in an article about Dividend Value Fund published by The Wall Street Transcript.

Dividends offer other potential portfolio merits, most crucially as a potentially mitigating factor against market volatility. To our way of thinking, a steady stream of income is always a good thing, but it can be particularly helpful for investors trying to navigate market extremes a little more comfortably.

Of the 516 small-cap objective funds identified by Morningstar as of March 31, 2014, only six funds have dividend, income, or total return in their respective names (two of which are Royce Funds).

We do not typically seek companies with the highest dividend yields. Instead, we think about dividends as part of the menu of items in a company’s capital allocation toolkit. There are several things a company can do with its free cash flow: It can reinvest in the company, make acquisitions, pay down debt, buy back stock, or pay dividends.

So when we look at dividends, we frame it in the context of what offers the best risk-adjusted use of capital for the company—could giving some of the money back be part of that? If the business lacks an effective way to use that money, it may be best to give it to shareholders.

Of the 516 small-cap objective funds identified by Morningstar as of March 31, 2014, only six funds have dividend, income, or total return in their respective names (two of which are Royce Funds). Yet dividends in the small-cap universe perform the same role that they do in the large-cap area—they can reduce a stock price’s downside volatility and allow an investor to start the year with a positive return as a result of the dividend.

We believe that owning dividend-paying small-cap and mid-cap companies should be of greater importance at this point in the economic and stock-market cycle, as they offer investors many advantages. In our view, a number remain undervalued. They also tend to be defensive by nature and may perform better as the economy expands.

WealthManagement.com recently wrote that Royce Dividend Value is a contrarian fund worth considering.

We think that the best days for Royce Dividend Value Fund still lie ahead.

Important Disclosure Information

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 micro-cap, small-cap, and/or 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 up to 25% of its net assets (measured at the time of investment) in securities of companies headquartered in foreign countries, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" 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 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

1 Source: Reuters as of 3/31/14

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