article 04-22-2015

Royce Pennsylvania Mutual: The Next Five Years for Our Flagship

In its 40+ years of history, Royce Pennsylvania Mutual Fund has sought to provide shareholders with strong absolute long-term performance with lower volatility and better down market protection than its peers and benchmark.


Royce Pennsylvania Mutual Fund is our flagship portfolio. Managed by Chuck Royce since 1972, it’s a broadly diversified, core fund that offers wide exposure to the small-cap asset class. The Fund seeks strong absolute long-term performance while also attempting to provide shareholders with lower volatility and better down market protection.

In this piece you’ll find some of the characteristics that have defined the recent, rather peculiar equity market from 2010 through the end of 2015’s first quarter as well as what we see going forward—we think the next five years will look quite different than the last five.

Here are some other key takeaways for Pennsylvania Mutual:

  • Outperformed the Russell 2000 in 95% of all rolling 10-year return periods since the inception of the small-cap index on 12/31/78.
  • Provided average annual total returns of 10% or higher in 84% of all rolling 10-year return periods since the Fund’s inception.
  • A broadly diversified portfolio that uses a bottom-up, fundamental approach to identify and invest in small- and micro-cap stocks with market caps up to $2.5 billion.
  • Focuses on quality businesses with lower debt, the ability to generate excess cash flow, and attractive prospects that are selling at prices Royce believes do not fully reflect these attributes.
  • Incorporates multiple themes including temporarily out-of-favor stocks, special situations, and niche market leaders.

2010 to 2015Perfect Storm for Relative Underperformance

What Happened Impact on Our Relative Performance
Declining cost of capital Highly levered companies we typically avoid outperformed
Lower volatility Reduced mispricing opportunities for active managers
Very high market returns The Fund's risk-conscious approach struggled to keep pace

Going ForwardWe Expect a Return to a More Favorable Market for Our Approach1

What's Happening Historical Impact on Our Relative Performance
Flat to rising cost of capital Stocks with less debt tend to outperform
Healthy U.S. economic growth Supportive of industrial and other cyclical stocks we favor
We expect historically average returns (+5 to +10% Favorable environment for our approach

1 There can be no assurance regarding future market or fund performance.

The Fund's Relative Performance Tends to Be Stronger When Absolute Market Returns Are Average or Lower
Monthly Rolling Five-Year ReturnsRussell 2000 Average Annual Total Returns from 12/31/78 through 3/31/15 (%)

Royce Pennsylvania Mutual Fund [PENNX]
Average Annual Total Returns as of Quarter-End 3/31/15 (%)

  QTR* 1 YR 3 YR 5 YR 10 YR 15 YR 20 YR 30 YR 40 YR
Pennsylvania Mutual 1.15 0.11 11.57 11.64 8.17 10.63 11.16 11.21 14.95
Russell 2000 4.32 8.21 16.27 14.57 8.82 7.19 9.62 9.95 N/A
Annual Operating Expenses: 0.93%

* 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 30 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 Investment Class as of the Fund's most current prospectus dated 5/1/14 and include management 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 it's investment in mutual funds, hedge funds, private equity funds, and other investment companies.

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 small-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 in foreign securities (measured at the time of investment), 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.



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