article 12-31-2013

Royce Global Dividend Value Fund Manager Commentary

2013 was a remarkable year for equities as a whole, but based on the calendar-year performance of Royce Global Dividend Value Fund, many small-cap stock investors seemed more interested in other options than those provided by many dividend-paying companies. Indeed, considering the market’s stellar performance, we were disappointed in the Fund’s relative and absolute results. The Fund, which invests primarily in dividend-paying small-cap companies both in and outside the U.S., was up 15.8% for the year, trailing its global small-cap benchmark, the Russell Global Small Cap Index, which gained 24.8% for the same period.

Many stocks around the world participated in the bullish first quarter, although non-U.S. equities generally saw lower returns. In the first three months of 2013, Global Dividend Value underperformed its benchmark by a considerable margin, gaining 4.1% versus its benchmark’s 8.6% gain. Stock prices were driven lower globally in the more volatile second quarter, with those outside the U.S. suffering more as a group. Investors were increasingly anxious over credit issues and slower growth in China, social unrest and stock market declines in emerging market countries such as Brazil and Turkey, uncertainty over the fiscal health of some of Europe’s developed countries, and rising interest rates and talk from the Federal Reserve about tapering here in the U.S. the Fund finished the second quarter in the red, losing 2.0% versus the Russell Global Small Cap Index’s 1.7% decline.

In contrast to their domestic counterparts, which for the most part finished the second quarter in the black, non-U.S. companies did not begin to recover until early in the third quarter, with most global markets settling down in July. While generally not as robust as the first quarter in the U.S., the third was strong nonetheless, particularly in Europe. Unfortunately, the Fund again fell short of its benchmark in this period, gaining 9.1% in the third quarter versus 10.5% for the global small-cap index. The fast pace slackened in the fourth quarter—December was particularly rocky—though small-cap results in many places remained in the black. The Fund advanced 4.1% in the fourth quarter versus 5.8% for the Russell Global Small Cap Index. After outperforming the global small-cap index in the second half of 2012 (+15.8% versus +11.0%), the Fund’s underperformance in 2013 eroded its longer-term relative advantage for the three-year/since inception (12/31/10) periods ended December 31, 2013.

It seems doubtful to us that the market can sustain its recently feverish pace, so we see the potential attraction in the kinds of conservatively capitalized, dividend-paying small-cap companies that we seek for the Fund’s portfolio. Investors in the U.S. began to pay more attention to business fundamentals in the last six months of 2013. This flirtation was both too brief and too localized to benefit the Fund’s relative calendar-year results. However, we see the possibility of greater commitment in a more challenging market, especially one with rising interest rates, which is likely to provide renewed interest in businesses with strong balance sheets. We are very comfortable with the way the portfolio is positioned as we look forward.

Eight of the Fund’s nine equity sectors contributed positively to performance in 2013. Information Technology, Industrials, and Consumer Discretionary led by a wide margin, with Materials the only sector to finish the period in the red. Heavy losses came from holdings in the metals & mining industry—eight out of the Fund’s 10 leading detractors came from this category. Sharp declines in silver and gold prices continued to drive stock prices and revenue downward throughout the year. Believing that it is well positioned for an eventual turnaround in the industry, we initiated a position in Gold Fields in March and added shares in June. We did the same with Imdex, an Australian firm that provides drilling fluids and downhole survey instruments to the mining, oil and gas, water well, HDD, and civil engineering industries worldwide. In May, however, we chose to sell our position in Hochschild Mining. We increased our stake in Sprott, a Canadian investment management company with a history dating back to 1981. Its share price declined primarily due to its high exposure to the precious metals & mining industry.

Daphne International Holdings is a maker and retailer of Chinese footwear and sells Aerosole shoes in China. China’s economic slowdown has greatly influenced Daphne’s share price as a cutback in consumer spending has contributed to declining sales and revenues. After trimming our stake a bit in February, we began adding to our share in May as valuations dropped down to our liking. The company’s strong management and market position gave us confidence in its long-term potential.

Photo-Me International is a U.K.-based consumer goods company that operates, sells, and services photo equipment such as photo booths and digital photo kiosks. After building a position earlier in the year, we sold our stake in October. New York City-based Apollo Global Management is a global asset manager that invests in private equity, credit-oriented capital markets, and real estate. At the end July, we sold our shares after news that Apollo would be acquiring Pitney Bowes Management Services for approximately $400 million in cash drove its stock price up.

Top Contributors to 2013 Performance

Photo-Me International 0.57%
Apollog Global Management LLC Cl. A 0.54
Jupiter Fund Management 0.50
Boiron 0.48
Pacific Textiles Holdings 0.47
1 Includes dividends

Top Detractors from 2013 Performance1

Daphne International Holdings -0.64%
Gold Fields ADR -0.55
Hochschild Mining -0.45
Imdex -0.44
Sprott -0.39
1 Net of dividends

Average Annual Total Returns as of Quarter-End 12/31/13 (%)

  QTR YTD 1YR 3YR Since
Global Dividend Value 4.07 15.78 15.78 6.28 6.28 12/31/2010
Russell Global SC 5.83 24.77 24.77 8.09 8.09 N/A

Annual Operating Expenses: Gross 2.87% Net 1.70%

Current month-end performance may be obtained from our Prices and Performance page.

Important Disclosure Information

All performance information in this Report 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 2% 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. Gross operating expenses reflect total gross annual operating expenses and include management fees, 12b-1 distribution and service fees, other expenses, and 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 most current prospectus. Royce & Associates has contractually agreed to waive its fees and/or reimburse operating expenses to the extent necessary to maintain the Fund’s net annual operating expenses, other than acquired fund fees and expenses, at or below 1.69% through April 30, 2014 and at or below 1.99% through April 30, 2023. 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. Regarding the two “Good Ideas” tables shown above, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Fund’s performance for 2013.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2013, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds' portfolios and Royce's investment intentions with respect to those securities reflect Royce's opinions as of December 31, 2013 and are subject to change at any time without notice. There can be no assurance that securities mentioned above will be included in any Royce-managed portfolio in the future.

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 micro-cap, small-cap, and mid-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 a significant portion of its assets in foreign companies which may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of the securities of foreign companies in particular countries or regions may, at times, move in a different direction than those of the securities of U.S. 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 Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. Index returns include net reinvested dividends and/or interest income. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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