We were disappointed with Royce International Premier Fund’s first-half performance on a relative basis. For the year-to-date period ended June 30, 2014, the Fund gained 3.3%, trailing its benchmark, the Russell Global ex-U.S. Small Cap Index, which returned 7.5% for the same period.

While small-cap returns for both U.S. and non-U.S. companies were more subdued in 2014’s opening quarter, international small-cap performance assumed leadership over its domestic peers. This was partially driven by Europe’s ongoing strength in the first quarter, which outweighed corrections for many Asian markets. For the first quarter, International Premier rose 0.9% versus a gain of 3.2% for the international small-cap index. Many of the Fund’s portfolio holdings headquartered in Hong Kong, China, Malaysia, and Japan struggled during this time period—which detracted from the Fund’s first-quarter performance—while holdings in India were generally positive. Holdings in the UK and Finland were also met with difficulty in the first quarter.

European small-cap performance fell slightly into the red in the second quarter while certain key Asian markets mounted a recovery. Holdings in Hong Kong and Japan made an impressive rebound, though China continued to struggle. India remained a stalwart contributor to Fund performance. As a result, the Fund posted stronger returns in the second quarter, advancing 2.4%. However, the Fund was unable to gain an advantage over its benchmark, as the Russell Global ex-U.S. Small Cap returned 4.2% in the second quarter. We were pleased, however, to see the Fund outpace its benchmark index for the since inception (12/31/10) period ended June 30, 2014.

Six of the Fund’s eight equity sectors finished the first half in positive territory. Consumer Discretionary led, followed by Industrials. Health Care also made a solid contribution to first-half performance. Information Technology and Consumer Staples were the Fund’s lone sector detractors, though each made only a modest negative impact. At the industry level, specialty retail led by a considerable margin. The software, pharmaceuticals, machinery, and capital markets groups also posted respectable net gains. The only significant detractor among the portfolio’s industries was the electronic equipment, instruments & components group.

Brazil-based CETIP-Mercados Organizados offers an electronic platform for conducting online transactions, such as auctions and government bond trading, corporate bonds, and fixed-income securities. Its shares rose on what we suspect was a flight to company quality in Brazil’s first-half bear market. Based in Hamilton, Bermuda, Signet Jewelers is a specialty jewelry retailer with operations in the U.S., U.K., and Canada. Signet’s share price made a dramatic jump late in February after news that the company agreed to buy Zales for approximately $1.4 billion. We began trimming our position shortly after the announcement and sold the last of our shares in May. The Fund’s fourth-largest position, Semperit AG Holding is an Austrian business that focuses on specialized rubber products and is the globe’s top supplier of escalator hand rails. In the second half, the company’s two earnings announcements were well in excess of market expectations, helping to drive the stock to new highs. London-based Clarkson is an investment holding company whose subsidiaries provide integrated shipping services worldwide. Its stock price, while volatile, enjoyed mostly strong results through 2013 before really taking off in March of 2014 and then cooling off a bit from its May 2014 high through the end of June.

U.K.-based Oxford Instruments produces advanced instrumentation equipment used for scientific research, diagnostic imaging, semiconductor processing, and patient monitoring. Coming off a strong second half of 2013, its share price began to decline early in the year. Demand slackened during the latter part of 2013 and early in 2014, mostly the result of a slowdown in government-funded research. We trimmed our shares at the end of June but were otherwise optimistic about its long-term prospects. Pico Far East Holdings is a Hong Kong-based business that makes displays for companies presenting at conventions. We like that major global brands such as Mercedes Benz, Lexus, and Citibank trust the company to build signs and displays that accurately portray their brand images. The slowdown in China’s economy hurt its business, but we remain confident in management’s long-term plans. We entered into a position in February and added shares throughout the first half.

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

Annual Operating Expenses: Gross 2.82% Net 1.69%

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

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