article 06-30-2014

Royce International Premier Fund Manager Commentary

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.

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

CETIP - Mercados Organizados 0.81
Signet Jewelers 0.68
Semperit AG Holding 0.60
Clarkson 0.57
Silverlake Axis 0.56
1 Includes dividends

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

Oxford Instruments -0.49
Pico Far East Holdings -0.42
LPS Brasil Consultoria de Imoveis -0.41
Abcam -0.37
Nokian Renkaat -0.36
1 Net of dividends

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

International Premier 2.38 3.26 16.80 6.43 6.71 12/31/2010
Russell Glo x US SC 4.20 7.54 23.86 6.52 5.81 N/A
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Annual Operating Expenses: Gross 2.82% Net 1.69%

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, and other 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, (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 and at or below 1.99% through April 30, 2024. 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 invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. The Fund also invests primarily in 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. (Please see "Primary Risks for Fund Investors" in the prospectus.) 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 ex-U.S. Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. 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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