article , video 06-03-2016

Royce Special Equity Fund: Performance Turnaround and Investment Opportunities

Portfolio Manager Charlie Dreifus looks at Royce Special Equity Fund's first-quarter performance while discussing what contributed to its stronger performance.

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Special Equity Fund's First Quarter

My Special Equity Fund for the first quarter of 2016 performed well, which was essentially a reversal of what happened in 2015 where it didn't work well.

In fact, 2015 was the worst year in that I can recollect in my investing career in that I declined more than the index declined. In my closing remarks to last year I said something to the effect that I thought it was an outlier.

It was a very narrow market last year. If you didn't own the very few stocks that did well, you did poorly, and your mistakes therefore were magnified.

Portfolio makeup

Starting in mid-February, of course, the market turned and we had greater interest in cyclical stocks, fears of the recession of a recession declined and oil advanced.

So, while cyclical stocks did well, not all cyclical stocks did well. Looking in my holdings of cyclical stocks and adding to the ones that I feel have underperformed and therefore have been underappreciated while not necessarily taking more exposure to the sector because I am reducing some that either have advanced a great deal or in the case of, for example, some distributors where the business model has been more challenged and I think I'd rather own the manufacturer than the distributor.

I have also increasingly been adding to and finding new names in furniture retailing and furniture manufacturing. I come to that bottom-up – as bullish as I may be about a market segment, if I can't justify it on my valuation and other criteria, I won't own it. These appear on that basis and they happen to have a macro background.

The background for the furniture industry is that more people are working; they are working more hours and they are starting to get paid more. So the discretionary income of the individuals plus obviously inflation still, as of now, is tame – energy prices, while up, are still down year over year. So the consumer has money to spend and housing overall should continue to improve.

One segment of housing that has particular impact on furniture companies is household formations, and we have seen a dramatic spike up in household formations, after a long period of decline. That has to do – again it ties back into the economy – recent college grads who were unable to find work and moved in with friends and/or their parents finally got work and I am sure their friends and parents are delighted that they've moved out.

So they have moved on to an apartment or whatever and the people who were residing in the place they've moved into have now moved elsewhere. It's the turnover – turnover causes purchasing of furniture so I feel, as long as the consumer is in good health, I feel that the outlook for that part of the economy looks pretty good.

Important Disclosure Information

Average Annual Returns as of 3/31/16 (%)

  QTR YTD 1YR 3YR 5YR 10YR 20YR SINCE
INCEPT.
DATE
Special Equity 5.63 5.63 -9.60 3.67 5.76 6.57 N/A 8.59 05/01/98
Russell 2000 -1.52 -1.52 -9.76 6.84 7.20 5.26 7.68 6.15 N/A
Annual Operating Expenses: 1.15%

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 at www.roycefunds.com. 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 and other expenses.

All performance and risk information presented in this material reflects Investment Class results. Shares of RSE's Service and Consultant Classes bear an annual distribution expense that is not borne by the Investment Class.

Royce Special Equity Fund invests primarily in small-cap and micro-cap stocks which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) As of 3/31/16, the Fund held a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree.

The thoughts and opinions expressed in the video are solely those of the persons 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.)

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 performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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