article 06-30-2014

Royce Low-Priced Stock Fund Manager Commentary

We were very pleased with the strong first half enjoyed by Royce Low-Priced Stock Fund on both an absolute and relative basis. The Fund gained an impressive 9.0% for the year-to-date period ended June 30, 2014, almost tripling the 3.2% increase for its small-cap benchmark, the Russell 2000 Index, for the same period.

The Fund got off to a strong start that slackened only briefly when small-caps were enduring their only correction of the year thus far between March 4 (the yearto- date high for the Russell 2000) and May 15. Otherwise, it was smooth sailing, a welcome and encouraging development after several years of relative performance disappointments for the portfolio. After a magnificently bullish 2013, the pace of equity returns slowed as 2014 got under way. The Fund was up 2.1% in the first quarter, outpacing the small-cap index, which rose 1.1%. The down phase that began in early March gave many investors pause, wondering what the effects might be of awful winter weather, a new Federal Reserve chair, and worrisome geopolitical happenings. As it happens, stocks as a whole rallied and small-cap results were largely positive from mid-May through the end of June. For the second quarter, which included the bulk of the brief corrective phase, Low-Priced Stock advanced 6.8% while the Russell 2000 was up 2.0%.

We were happy to see the Fund rebound at a time when the economy is both growing and returning to something like the “Old Normal” with the role of the Fed gradually diminishing. Such an environment looks promising in our view for active and disciplined managers who emphasize long-term time spans and absolute returns. Low-Priced Stock outpaced the Russell 2000 for the 15-, 20-year, and since inception (12/15/93) periods ended June 30, 2014. The Fund’s average annual total return since inception was 11.8%. We remain proud of the Fund's long-term performance record.

Over the last five years, we have been building positions in several economically sensitive, cyclical sectors, including Energy, Industrials, Materials, and InformationTechnology. Going back as far as 2009 in some instances, many stocks in these areas looked strong to us on both an absolute and relative basis, in particular based upon balance sheet strength, returns on invested capital, and P/E ratios. Through the first half of 2013, many of the companies that we liked in these sectors, such as Canadian energy services businesses, had not yet seen much, if any, share price recovery. This began to turn around in the second half of last year. Coupled with declining correlation levels across all equity asset classes, these developments left us feeling very confident in the ongoing prospects for many of our holdings in cyclical sectors.

The four sectors previously mentioned made the greatest net contributions to results for the year-to-date period. Energy led by a good-sized margin, driven by robust results for several long-term holdings in the energy equipment & services industry, where the bulk of the portfolio’s positions in that sector are slotted. Trican Well Service is the largest pressure pumping service provider in Canada and a leading fracturing company in Russia, with growing operations in the U.S., Kazakhstan, Algeria, Saudi Arabia, Colombia, and Australia. The Fund’s twelfth largest holding at the end of June, the company benefited from a recovery in the demand for its services in Canada and the U.S. for fracking and other well-related services. We have long liked the diversified business of top-five position Unit Corporation, which is involved in exploring for oil and natural gas, acquiring oil and gas properties, contract drilling of onshore oil and natural gas wells, and the gathering and processing of natural gas. Its broad-based activities have historically made it hard to pigeonhole as most energy businesses focus on only one of these endeavors. Unit has shown over the years that it can be successful at all of them, and its steady execution across each business line made it an attractive target when Energy stocks began to show signs of life in 2013.

Outside of the Energy sector, we were very pleased with the comeback of Myriad Genetics. A molecular diagnostic company that specializes in genetic testing for cancer, its share price fell rapidly in the wake of a mixed ruling from the Supreme Court in June 2013, which held that human genes cannot be patented. Many investors were concerned that the company would struggle to compete or be profitable in the light of this decision. The stock began to recover in the first quarter of 2014. Though its price was a bit volatile during the second quarter, we remain confident. It remains, in our view, a leader in genetic testing with a variety of industry-standard tools for detecting hereditary cancer risk. Fiscal third-quarter revenues, announced in May, were up, helping to make fiscal 2014 nicely profitable. As for those holdings that struggled, we also remain confident in the long-term prospects for personal skin care product maker and distributor Nu Skin Enterprises. The company resolved some distribution issues in China, which accounts for about a third of its growing global business, by paying a small fine.

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

Myriad Genetics 1.36
Pretium Resources 0.81
Trican Well Service 0.64
Industrias Bachoco ADR 0.62
Unit Corporation 0.60
1 Includes dividends

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

Nu Skin Enterprises Cl. A -0.69
E-House (China) Holdings ADR -0.58
Medicines Company (The) -0.50
Alamos Gold -0.34
Luk Fook Holdings (International) -0.30
1 Net of dividends

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

Low-Priced Stock 6.83 9.03 24.64 2.08 13.69 7.38 10.66 12.36 11.82 12/15/1993
Russell 2000 2.05 3.19 23.64 14.57 20.21 8.70 8.01 9.81 9.37 N/A
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Annual Operating Expenses: Gross 1.51% Net 1.49%

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 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 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 for shareholder transactions. Certain immaterial adjustments were made to the net assets of Royce Low-Priced Stock Fund at 6/30/13 for financial reporting purposes, and as a result the net asset values for shareholder transactions and the calendar year total returns based on those net asset values differ from the adjusted net asset values and calendar year total returns reported in the Financial Highlights. Gross operating expenses reflect the Fund’s gross total annual operating expenses for the Service Class, including 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 fees and/or reimburse operating expenses to the extent necessary to maintain the Service Class’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 1.49% through April 30, 2015. Shares of RLP’s R Class bear an annual distribution expense that is higher than that of the Service Class. 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. (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. The Fund may invest up to 35% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" 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 unmanaged, capitalization-weighted index of domestic small-cap stocks. It 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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