article , video 01-30-2015

Looking at Returns in Today's Environment

Chuck Royce discusses the anomalous market conditions of the last four years, how the environment has affected the longer-term performance of some of our portfolios, and why we are benchmark agnostic.

TELL US
WHAT YOU
THINK

Francis Gannon: How would you sum up 2014 for Royce & Associates?

Chuck Royce: Almost nothing met our expectations. We had a very disappointing year in the way we would be conventionally measured on absolute and relative returns. We would expect in the long term to do better on both regards.

Francis: So as an active manager, what is an acceptable period of underperformance?

Chuck: Historically I would have said the most important thing is to measure the results over a given market cycle. Market cycles could be from a couple of years to seven years or so. The question is, how should the average investor look at things?

This particular period has been very rough in the last four years, which has distorted three-year, five-year, ten-year performance. So I think you have to look at it actually as a series of rolling returns. In other words, not be so distracted by the current conditions, the current underperformance—which had been dramatic—but look at the historic types of returns that this kind of orientation should deliver.

Francis: Do you think the investors' focus on tracking error of late is going to have unintended consequences from a market perspective?

Chuck: The only way you can beat the index is not to be like the index. So in the long run we're always looking for opportunities that are not part of the index, and that should have a payoff. It has not in the last four years.

Francis: But we've also faced some structural headwinds that as a firm we've never really experienced before, with quantitative easing, etc., correct?

Chuck: We've had a dramatic shift in the way the government has interacted with the economy. We have put into place something that actually has never been done before. It was successful in that it has generated economic or asset—certainly asset—growth and modest economic growth. It has distorted the way people price assets, and that distortion hasn't been good for our kind of investing.

Royce Featured Funds Average Annual Total Returns as of Quarter-End 12/31/14 (%)

  Average Annual Total Returns Annual Expenses
Fund QTR1 One-
Year
Three-
Year
Five-
Year
10-
Year
15-
Year
Since
Inception
Date Gross
Operating
Expenses
Net
Operating
Expenses
Pennsylvania Mutual 5.30 -0.70 15.45 12.80 7.97 10.74 16.282 N/A 0.93 0.93
Premier 1.01 -0.86 12.17 12.09 9.27 11.17 12.04 12/31/1991 1.09 1.09
Micro-Cap 5.49 -4.13 7.89 7.50 6.78 10.11 11.89 12/31/1991 1.56 1.56
Low-Priced Stock -1.71 -3.37 4.46 5.07 5.33 8.85 10.89 12/15/1993 1.51 1.49
Total Return 5.47 1.34 15.47 13.32 7.50 10.12 11.21 12/15/1993 1.18 1.18
Heritage 3.73 -1.14 12.50 10.48 7.96 9.50 13.15 12/27/1995 1.49 1.49
Opportunity 6.15 -0.48 20.52 15.31 8.14 11.60 13.00 11/19/1996 1.17 1.17
Special Equity 8.60 1.09 14.69 12.55 8.22 12.19 9.77 5/1/1998 1.13 1.13
Value 2.41 -0.02 11.85 10.12 8.15 N/A 10.84 6/14/2001 1.48 1.48
Value Plus 6.79 3.89 16.64 11.32 7.11 N/A 12.18 6/14/2001 1.49 1.49
100 3.43 -3.26 12.18 10.49 8.48 N/A 10.58 6/30/2003 1.51 1.51
Dividend Value 2.27 -2.14 14.38 13.19 8.47 N/A 9.17 5/3/2004 1.52 1.52
Global Value -5.90 -5.76 3.60 4.17 N/A N/A 3.95 12/29/2006 1.84 1.70
International Smaller-Cos -6.43 -7.29 7.66 5.10 N/A N/A 4.69 6/30/2008 2.08 1.70
Special Equity Multi-Cap 4.20 9.28 18.46 N/A N/A N/A 15.53 12/31/2010 1.46 1.24
Russell 2000 Index 9.73 4.89 19.21 15.55 7.77 7.38 N/A N/A N/A N/A
Russell Microcap Index 11.19 3.65 21.81 16.14 5.96 N/A 7.57 N/A N/A N/A
Russell 1000 Index 4.88 13.24 20.62 15.64 7.96 4.62 15.53 N/A N/A N/A
Russell Global Small Cap Index 1.10 -0.28 13.57 9.56 6.87 6.88 4.05 N/A N/A N/A
Russell Global ex-U.S. Small Cap Index -4.45 -3.63 10.31 6.40 6.65 6.74 3.18 N/A N/A N/A

1 Not Annualized
2 For Pennsylvania Mutual, the average annual total return shown is for the 40-year period ended as of the date shown above rather than since the Fund's inception.

Important Performance and Expense Information

All performance information in this piece 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 30 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 such fees were reflected, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained 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 prospectus dated 5/1/13. 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 International Smaller-Companies Fund. 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, or is higher than, the Fund’s Investment share Class. The Royce Funds invest primarily in securities of 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). This piece must be accompanied or preceded by a current prospectus for the Funds. 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. The Royce Funds, other than Royce Special Equity Multi-Cap Fund, 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. 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 Index is an unmanaged, capitalization-weighted index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index. The Russell Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. The Russell Global ex-U.S. Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. The Russell 1000 index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest 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.

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