article , video 04-27-2016

Understanding The Royce Funds' 1Q16 Performance

Senior Investment Strategist Steve Lipper's thoughts on The Royce Funds' first quarter performance, and a closer look at the lineup of funds including value, core, and growth funds.

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Understanding The Royce Funds' 1Q16 Performance

Royce had a very good performance across the lineup in the first quarter. 10 of the 11 domestic small-cap funds benchmarked to the 2000 beat the benchmark – I mean that's really pretty good. But I can understand people looking at it and saying 'Wow, your best fund was up over nine, and the fund that lagged the most was down over four - that seems a pretty big disparity; help us to understand it?'

I think we would say that the array of funds, where they land in the lineup, was sort of consistent with our expectations given the factors that were going on in the various markets. But perhaps the magnitude was a little greater than you might expect. We think it is important though to emphasize that we didn't do anything in changing processes – the same things we were doing in the 4th quarter and the 3rd quarter in 2014 were things that we were doing in the first quarter, but the market altered so it rewarded things a little bit differently.

Royce's Value Funds

As we look at the value funds, there are some nuances here. So if we look at the Opportunity Fund, which had the lowest performance, it still beat the Russell 2000 and it's important to recognize that the Opportunity Fund is about half in micro-cap and micro-cap lagged small-cap. The Micro-Cap Index was down about 5.4%, so when you’re aware of that, it puts it into context as to why you might expect our value opportunity to lag. The next three, the Dividend Value; the Total Return and the Special Equity, they're all our lower volatility offerings.

We would generally expect them to be in the middle of the range of our value offerings during a quarter like this. That leaves Small-Cap Value. Small-Cap Value, if you look over its history, it has about 100% (a little over 100%) in terms of its upside capture and a little less than 100 in the downside. So in a market where Small-Cap Value-type of stocks are rewarded, Small-Cap Value Fund leading our value array makes complete sense to us.

Royce's Core Funds

Within the core funds as well, if we go to that next level there's some nuance there, so let's start with the Low-Priced Stock Fund. That's another one that has about half in micro-cap and, again, micro-cap declined – the benchmark declined about 5%, so we would expect Low-Priced itself to probably have a little bit more of a headwind in that kind of environment. Then the middle grouping, the Heritage Fund and the Premier Fund as well as the Small-Cap Leaders Fund – those are our high quality (we call them our Premier Suite). They execute a pretty similar strategy at different capitalization ranges, so in an environment where value is really rewarded, they are real true core funds and being in the middle of a core array makes sense to us.

The one nuance, the one surprise I would say is actually Small-Cap Leaders – that's a fund that has actually a fair amount of micro-cap. And its strong performance in the quarter is really a testament to the manager, really well done there. Then, the Pennsylvania Mutual Fund being the best performing of our core funds, again in a quarter where value beat growth. Pennsylvania Mutual is the most value oriented of our core funds, so that it lands there in the array makes perfect sense to us.

Royce's Growth Fund

The one fund of our Domestic Small-Cap funds that actually underperformed the benchmark was the Smaller-Companies Growth Fund. What we've seen historically, the performance pattern here is it often lands between the 2000 in the Core and the Growth Index. So, if you go back to last year (last calendar year) that's exactly what happened. It outperformed the 2000 and it underperformed the Growth Index and this year, when it was reversed, when growth did worse than value, it outperformed the Growth Index and underperformed the 2000. Because it is a valuation sensitive – we call it growth at a reasonable price – growth orientation portfolio, it also makes sense to us where it landed.

Looking Forward

So, going forward, how would you apply that and what expectations would you have? Well, in addition to being aware of value, core, and growth, it's helpful to go down to the next level in understanding – it's helpful to understand what the volatility profile is within that style classification that each of our funds have. That can sort of set expectations on what type of quarter it is, if it's strongly up or strongly down, or in the middle and the other is to be aware of the capitalization breakdown of the funds, like Opportunity, Low-Priced and Small-Cap Leaders, that have a healthy amount of micro-cap. How Micro-Cap did versus Small-Cap will give you an indication of how these might do in our overall array.

Important Disclosure Information

Average Annual Total Returns as of 3/31/16 (%)
  Average Annual Total Returns(%) Annual
Operating Expenses(%)
Fund QTR 1YR 5YR 10YR SINCE
INCEPT.
DATE GROSS NET
Dividend Value 5.13 -1.72 6.17 6.71 8.28 05/03/04 1.29 1.29
Heritage 4.90 -2.96 3.58 5.30 12.29 12/27/95 1.17 1.17
Low-Priced Stock -0.64 -11.26 -3.90 1.89 9.78 12/15/93 1.17 1.17
Opportunity 2.08 -12.74 4.73 4.67 11.39 11/19/96 1.15 1.15
Pennsylvania Mutual 6.22 -6.99 4.92 4.87 12.993 N/A 0.92 0.92
Premier 4.41 -8.34 3.64 5.79 11.11 12/31/91 1.10 1.10
Small-Cap Leaders 5.25 -8.12 2.59 4.94 8.96 06/30/03 1.22 1.22
Small-Cap Value 9.38 -6.10 2.93 5.06 9.81 06/14/01 1.18 1.18
Smaller-Companies Growth -4.31 -10.16 4.83 3.86 10.79 06/14/01 1.34 1.25
Total Return 5.17 -4.09 6.80 5.44 10.43 12/15/93 1.19 1.19
Russell 2000 -1.52 -9.76 7.20 5.26 N/A 12/29/78 - -

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 www.roycefunds.com. 

All performance and expense information reflect results of the Fund’s Investment Class shares. Gross operating expenses reflect each Fund’s gross total annual operating expenses and include 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 exclusive of any applicable acquired fund fees and expenses. All expense information is reported as of the Fund’s current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2016 to the extent necessary to maintain net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) to no more than 1.24% for the Investment Class of Royce Smaller-Companies Growth 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.

The thoughts and opinions expressed in the video are solely those of the person speaking as of April 12, 2016 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. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)

Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" 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 Index is an 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 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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