article 06-30-2014

Royce Micro-Cap Trust Manager Commentary

Royce Micro-Cap Trust gained 3.1% on an NAV (net asset value) basis and 3.9% on a market price basis for the year-to-date period ended June 30, 2014 compared to its unleveraged benchmarks, the Russell 2000 Index and Russell Microcap Index, which had respective gains of 3.2% and 1.6%, for the same period. We were pleased with the Fund’s results in the first half, which remained solid on both an absolute and relative basis after a particularly good year in 2013 for both the Fund and micro-cap stocks more generally.

2014 began with many share prices accelerating at a much slower pace than they did in the torrid second half of 2013. For the first quarter of 2014, Micro-Cap Trust stayed in step on an NAV basis, though it fell out of step with the market as a whole—and micro-caps more specifically—during the more moderate market that ushered in the year. The Fund advanced 1.3% in the first quarter on an NAV basis while falling 1.2% based on market price compared to a gain of 3.0% for the Russell Microcap and 1.1% for the Russell 2000. The Fund’s results improved in the second quarter, which saw the year’s only small-cap correction so far. Investors seemed to be trying to determine the effects on the market of a new Fed chair, a miserable winter, and potentially dangerous international situations in Ukraine and Syria. The verdict was apparently that the first of these was a positive (or at least not a negative), the second temporary, and the third not worth selling stocks over. Small-caps rallied from mid-May through the end of June, which helped Micro-Cap Trust to post positive results on both an NAV (+1.7%) and market price basis (+5.1%) for the second quarter.

These results helped the Fund to post strong long-term results on both an absolute and relative basis. On an NAV basis the Fund bested the Russell 2000 for the one-, three-, five-, 10-, 15-, 20-year, and since inception (12/14/93) periods ended June 30, 2014. Value Trust beat the small-cap index on a market price basis for each of those aforementioned periods except the 10-year span. The Fund also outpaced the Russell Microcap on both an NAV and market price basis for the one-, three-, five-, and 10-year periods ended June 30, 2014. (Data for the Russell Microcap only goes back to June 2000.) The Fund's average annual NAV total return for the since inception period was 11.8%. We remain proud of the Fund’s 20-plus years of history.

Seven of the Fund’s 10 equity sectors produced net gains in the first half. Health Care led by a wide margin, followed by Financials, Energy, and Materials. Net losses, which were mostly modest at the sector level, came from Industrials and Information Technology. The same was true at the industry level, where the leading detractors were specialty retail, electrical equipment, road & rail, software, and consumer finance. The most significant net gainers at the industry level were biotechnology, which was out in front by a considerable margin, machinery, media, and the electronic equipment, instruments & components group.

Four of the Fund’s five largest contributors came from the Health Care sector and two of those were slotted in the biotechnology group, including the Fund's top performer in the first half, Idenix Pharmaceuticals. The company develops drugs that treat infections caused by HIV, hepatitis B, and hepatitis C. Its stock price was somewhat volatile through much of the first half before more than tripling in early June on the news that pharmaceutical giant Merck would be acquiring the company at a healthy premium. We began selling after the announcement and had sold our shares by mid-June. We also sold our shares of Medical Action Industries, which makes custom procedure trays and minor procedure kits, shortly after the news came out that Owens & Minor would be acquiring the company at a whopping 95% premium. Another example of the “urge to merge” came with Furiex Pharmaceuticals, which first saw strong results in phase III clinical trials for an IBS treatment before being acquired at a healthy premium. The announcement in April led us to sell our shares. Just the possibility of being acquired, along with restarted trials of a hepatitis C product, were the primary drivers of the rapidly rising share price of Achillion Pharmaceuticals. These developments prompted us to greatly reduce our position in June.

As for those positions that detracted, Regional Management extends fixed-rate loans primarily to people with limited access to bank credit, credit cards, and other traditional lenders. Its shares plunged on news of an investigation into possible breaches of its fiduciary duty. We held a small position at the end of June. We also held a small position in PMFG, which provides custom-engineered systems and products primarily for the oil and natural gas industries. Falling revenues and earnings kept investors selling.

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

Idenix Pharmaceuticals 0.66
Medical Action Industries 0.56
Rentrak Corporation 0.45
Achillion Pharmaceuticals 0.35
Furiex Pharmaceuticals 0.34
1 Includes dividends

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

Regional Management -0.21
PMFG -0.19
Cache -0.19
Patriot Transportation Holding -0.17
Universal Truckload Services -0.17
1 Net of dividends

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

RMT 5.08 3.87 32.30 17.61 22.54 8.32 12.36 11.92 11.02 12/14/1993
XOTCX 1.71 3.06 31.32 16.09 20.67 9.09 11.65 12.04 11.78 12/14/1993
Russell 2000 2.05 3.19 23.64 14.57 20.21 8.70 8.01 9.81 9.37 N/A
Please swipe to view the complete data

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

Important Disclosure Information

All performance information reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the most recent month-end may be obtained here. The market price of the Fund’s shares will fluctuate, so that shares may be worth more or less than their original cost when sold. The Fund normally invests in micro-cap companies, which may involve considerably more risk than investing in a more diversified portfolio of larger-cap 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 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.

The Fund is a closed-end registered investment company whose shares of common stock may trade at a discount to their net asset value. Shares of the Fund's common stock are also subject to the market risks of investing in the underlying portoflio securities held by the Fund. This Fund is a closed-end fund whose shares of common stock trade on the NYSE. Royce Fund Services, Inc. ("RFS") is a member of FINRA and has filed this material with FINRA on behalf of the Fund. RFS does not serve as a distributor or as an underwriter to the Fund. 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 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 Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.



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