article 06-30-2014

Royce Global Value Fund Manager Commentary

Royce Global Value Fund climbed 11.0% for the year-to-date period ended June 30, 2014, easily outpacing its benchmark, the Russell Global Small Cap Index, which was up 5.7% for the same period. It is much too early to begin talk of a comeback, but the Fund’s rebound was a strong performance that bolstered our confidence in its prospects for better results going forward on both an absolute and relative basis.

Although most non-U.S. markets did not match the feverish pace of their small-cap stateside cousins in 2013, they did fine on an absolute basis before going on to enjoy a stronger first half of 2014. For the first quarter, the Fund rose 4.3% while its global small-cap benchmark advanced 2.3%. A strengthening Europe helped to compensate for a generally less robust Asia during the first few months of 2014. There were a few trouble spots for the portfolio based on national exposure. Holdings in two significant countries—Canada and China—struggled while a few nations to which we had less exposure had an outsized negative impact, including the United Arab Emirates, Australia, and India.

For the second quarter, returns were stronger both here in the U.S. and abroad, the latter helped by a sterling recovery for many Asian companies. This was most notable for positions headquartered in India, which pushed past earlier net losses to post a solid contribution for the semiannual period. Portfolio holdings in Canada also rebounded impressively in the second quarter, helped in large part by robust results for stocks in the Energy sector, such as long-time Royce favorite Trican Well Service. The Fund was thus able to take full advantage of the market’s growing strength, increasing 6.4% for the second quarter while the Russell Global Small Cap grew 3.3%. We were also happy to see Global Value ahead of the Russell Global Small Cap for the one-year and since inception (12/29/06) periods ended June 30, 2014.

Seven of the Fund’s eight equity sectors finished the first half in positive territory, with Energy making the largest positive contribution. It was followed by more-than-respectable results from Materials and Health Care and solid net gains from Information Technology and Industrials. Financials was the lone sector to detract from performance, but its net loss was minimal. At the industry level, energy equipment & services led, followed by the metals & mining group. The latter began to show signs of life with a recovery for commodity prices in the first half after a few very challenging years for the industry.

A molecular diagnostic company that specializes in genetic testing for cancer, Myriad Genetics was the Fund’s best-performing position by a considerable margin. In 2013 its stock price was hammered following a June 2013 ruling from the Supreme Court, which held that human genes cannot be patented. Many investors fled the stock for fear that Myriad would be facing increased competition and might have trouble remaining profitable. We thought otherwise and built our position in June and October 2013. The stock began to look healthy again in the first quarter of 2014. Through much of this time, we thought management was deploying capital productively, first by buying back stock late in 2013 and then in February by acquiring Crescendo Bioscience, which diversifies Myriad’s pipeline and gives the firm a potentially billion-dollar market for disease monitoring tests (initially for rheumatoid arthritis). The company also posted strong breast cancer diagnostic test volumes, with its MyRisk panel test meeting initial sales targets. We took gains in the first half.

The top performer in metals & mining was Indian specialty pipe and tube maker Maharashtra Seamless. In 2013 the slow-growing Indian economy and ongoing pipe dumping in that country led to a steep decline in demand and order inflow. Following the recent elections, the economy and markets have picked up. Oil pipeline replacements in certain areas are likely, as is nationwide pipe connectivity for natural gas, both of which would benefit Maharashtra. The company is also expanding into China, Mexico, Sri Lanka, and Canada, among other places. After building a position in 2013, we took gains in the first half as its share price rose. Renewed demand here in the U.S. helped Tulsa-based Helmerich & Payne, the top net gainer in the Energy sector. It’s a company we have long admired for its status as a leader in manufacturing technologically superior rigs and related equipment. Other energy businesses are seeing the benefit in using Helmerich’s wares, as upgrading to its more efficient rigs helps to drive down drilling costs.

E-House (China) Holdings ADR is a leading real estate services company in China with a diverse range of services, including primary sales agency services, online real estate services, and consulting services. It struggled through a difficult year for China’s real estate market, leading us to add shares in April in anticipation of a turnaround for the industry. A similar company in a different part of the world, Brasil Brokers Participacoes offers real estate brokerage services and markets residential real estate through its subsidiaries to all income segments of Brazil’s population. It suffered along with much of the rest of Brazil’s bearish market in the first half, when we increased our stake.

Top Contributors to Performance
Year-to-Date through 6/30/14

Myriad Genetics 2.29
Helmerich & Payne 1.33
Maharashtra Seamless 1.12
Semperit AG Holding 0.94
Trican Well Service 0.80
1 Includes dividends

Top Detractors from Performance
Year-to-Date through 6/30/14

E-House (China) Holdings ADR -0.63
Brasil Brokers Participacoes -0.61
Luk Fook Holdings (International) -0.54
New World Department Store China -0.45
Medicines Company (The) -0.36
1 Net of dividends

Average Annual Total Returns as of Quarter-End 6/30/14 (%)

Global Value 6.45 11.04 23.93 0.86 13.76 6.53 12/29/2006
Russell Global SC 3.31 5.72 23.60 9.22 15.93 5.14 N/A
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Annual Operating Expenses: Gross 1.84% Net 1.7%

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. All performance and risk information reflects results of the Service Class (its oldest class). Price and total return information is based on net asset values calculated for shareholder transactions. Certain immaterial adjustments were made to the net assets of Royce Global Value Fund at 12/31/13 for financial reporting purposes, and as a result the net asset values for shareholder transactions on that date and the total returns based on those net asset values differ from the adjusted net asset values and total returns reported in the Financial Highlights. Gross operating expenses reflect gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service 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 its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Net operating expenses reflect contractual fee waivers and/or reimbursements. 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 Fund’s 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), at or below 1.69% through April 30, 2015. 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 year-to-date performance for 2014.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2014, 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 June 30, 2014 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 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.) The Fund invests primarily in 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.) In addition, as of 6/30/14 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. 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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