Royce Opportunity Fund Review and Outlook
article , video 02-03-2016

Royce Opportunity Fund Review and Outlook

Portfolio Manager Bill Hench looks at the factors that impacted Royce Opportunity Fund in 2015, and explains why he is optimistic about this broadly diverse, deep value portfolio for 2016.


Royce Opportunity Fund Review and Outlook

The things that affected our portfolio most in 2015 were energy prices, which proved to be disastrous for the industrial economy.

We, and most others, I think, underestimated just how much of the industrial economy in the U.S. had been tied up in the energy sector.

With energy investments being down, I think, almost 50 percent, it really had a crimp on our earnings, and a lot of the industrial companies not only in the U.S., but around the world.

Another thing that hurt us was that it was a very, very narrow market. Growth stocks in particular were in favor, but even within growth stocks, it was a small, select group of names that are names that we tend not to navigate to.

Optimistic About 2016

We're very optimistic about 2016. What is most important, when we look across the landscape, is valuation.

There has been a reluctance for people to look at these types of names, and with all the things that were a big concern in the market in 2015, these are not the names that people will run to an unstable environment, where you had massive moves in currency, massive moves in commodities, and questions about where interest rates were going.

We think with the great valuations you have now, also with employment being very, very good, with energy prices being a boon this time as opposed to what happened last year with energy prices, where they hurt us, you combine those things, and you have a pretty good recipe, I think, for a good recovery, not just for 2016, but for 2017 as well.

We're excited about our current portfolio

Our portfolio is and will always be very, very diverse. We don't rely on one or two names, or even five or ten names to get our performance. So when we look at our portfolio, why are we excited?

We're excited because the portfolio as a whole has a lot of value in it, and a lot of promise in it.

Our names tend to overshoot, both on the downside and the upside. So I could tell you that we like technology, I could tell you that we like some infrastructure plays, but we like the portfolio as a whole.

Our investors should know that we're in a typical cycle for this fund. We tend to do very, very well when we have growth, and when the economy is working to recover from things that have gone wrong.

So if you look at 2015, we had a lot of issues, with commodities, with interest rates, with FX. We think all those things are priced in.

We think this is typical for our portfolio, where after a bad year of performance, or a bad relative year or absolute year, we tend to make that up, because of the work, not that we're going to do in the future, but rather, what we did during that time of bad performance.

We think we've established a portfolio that has great attributes that, if we're right, should produce very good returns going forward into 2016 and 2017.

Average Annual Total Returns (%) as of 12/31/15

Micro-Cap Opportunity 0.51 -15.98 -15.98 4.91 5.27 N/A N/A N/A 10.21 08/31/10
Opportunity 1.60 -13.57 -13.57 7.27 5.66 6.08 9.19 N/A 11.43 11/19/96
Russell Microcap 3.74 -5.16 -5.16 12.70 9.23 5.13 7.99 N/A N/A N/A
Russell 2000 3.59 -4.41 -4.41 11.65 9.19 6.80 7.28 8.03 N/A N/A
Micro-Cap Opportunity Annual Operating Expenses: Gross 1.56% Net 1.28
Opportunity Annual Operating Expenses: 1.15%

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 at For Opportunity, operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees, other expenses, and acquired fund fees and expenses.

For Micro-Cap Opportunity, gross operating expenses reflect the Fund's total gross annual operating expenses and include management fees, dividends on securities sold short, and other 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. 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 to the extent necessary to maintain the Micro-Cap Opportunity's net annual operating expenses, other than dividends on securities sold short, and interest expense on borrowing, at or below 1.24% through April 30, 2016.

Opportunity 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.) Opportunity's broadly diversified portfolio does not ensure a profit or guarantee against loss. Micro-Cap Opportunity invests primarily in micro-cap companies, which may involve considerably more risk than investing in larger-cap stocks. The Fund generally invests a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund’s overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) Micro-Cap Opportunity 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.)

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of December 21, 2015 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.



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