article 06-30-2014

Royce Value Trust Manager Commentary

Royce Value Trust put up a solid absolute and relative showing in the first half of 2014. The Fund gained 3.0% 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 versus the 3.2% gain for each of its unleveraged small-cap benchmarks, the Russell 2000 Index and the S&P SmallCap 600 Index, for the same period.

While the bull market ran into 2014 after a magnificent run in 2013, the pace of returns was more subdued. This was also the case for Value Trust. Harsh winter weather, geopolitical concerns, and a new Federal Reserve chair all gave investors much to ponder. The Fund was up 0.5% on an NAV basis and 0.2% on a market price basis in the first quarter. Volatility returned to the market in March and April, with the Fund outperforming the Russell 2000 in the down phase from the Russell 2000’s 2014 high on March 4 through May 15. Small-cap stocks then made a strong comeback through the end of June to finish the second quarter in the black. For the second quarter, Value Trust outperformed its benchmark on both an NAV and market price basis, advancing 2.5% and 3.7%, respectively, versus a gain of 2.0% for the Russell 2000 and 2.1% for the S&P SmallCap 600.

We were reasonably pleased with the Fund’s relative performance during a period where the economy is beginning to slowly but surely normalize. On an NAV basis, Value Trust outperformed the Russell 2000 for the 15-, 20-, 25-year, and since inception (11/26/86) periods ended June 30, 2014 while the Fund outpaced the Russell 2000 on a market price basis for each of those periods and the five-year span. The Fund’s average annual NAV total return since inception was 11.0%. We take great pride in the Fund’s long-term performance record.

Nine of the Fund’s 11 equity sectors were positive contributors to first-half performance. Health Care made the largest positive impact, with Energy, Financials, and Materials also posting respectable net gains. Industrials was the the Fund’s largest detractor at the sector level, followed by a modest net loss in the Consumer Discretionary sector. The portfolio’s largest contributor to performance at the industry level was biotechnology, largely as a result of net gains from two of the Fund’s top-five contributing stocks. Idenix Pharmaceuticals focuses on the development of drugs for the treatment of infections caused by HIV, hepatitis B, and hepatitis C. Its stock price was fairly volatile through much of the first half before more than tripling in early June after 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. Myriad Genetics specializes in molecular diagnostics with a specialty in genetic testing for cancer. The company faced a lot of skepticism after the Supreme Court ruled in June 2013 that human genes could not be patented. We believed that neither the Court’s ruling nor increased business competition would hurt the firm’s long-term health, and were pleased that Myriad has been able to continue executing successfully. We were also happy to see the company acquire Crescendo Bioscience in the first half, a strategic acquisition that adds to Myriad’s already promising pipeline.

Tulsa-based Helmerich & Payne is a contract driller with a specialty in high-tech drilling rigs. It’s a long-time Royce favorite that we have owned continuously in the Fund’s portfolio since 1998. Accelerated growth in its order book for new rigs further confirmed that the company’s technologically superior rigs are driving market share gains as E&P (exploration & production) companies eager to reduce drilling costs upgrade to Helmerich & Payne’s more efficient rigs. We reduced our position as its stock price gushed. Headquartered in Denver, Cimarex Energy is a comparatively new addition whose shares we first purchased in 2002. An E&P business operating primarily in Texas, Oklahoma, and New Mexico, we have long liked its balance sheet and sizable margins. During the first half its shares seemed to benefit from ongoing production growth in a few different properties.

As for positions that detracted from performance, the largest was Advisory Board (The), a research and consulting firm that offers services to the healthcare industry. Organic and subscription revenue growth remains healthy. However, investors seemed to tire of its recently fast-paced M&A activity (five deals in the last 20 months, with more likely ahead), and the near-term negative impact these acquisitions have had on profit margins. Our take is that these acquisitions have generally been of smaller companies that provide footholds and capabilities in other fast-growing healthcare information areas, thus enhancing the firm’s long-term growth opportunities. We held our shares through the first half. We also opted to hold our position in Preformed Line Products, a company whose shares we have owned since 1986. The company makes products primarily to support, protect, connect, terminate, and secure cables and wires for the energy, communications, cable provider, and information industries. A weaker global market for infrastructure projects first led its shares to plummet in November 2013. The lack of any sustained earnings recovery continued to hurt its stock.

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

Idenix Pharmaceuticals 0.45
Helmerich & Payne 0.24
Cimarex Energy 0.19
Myriad Genetics 0.18
Harman International Industries 0.15
1 Includes dividends

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

Advisory Board (The) -0.14
Preformed Line Products -0.14
Ethan Allen Interiors -0.13
LKQ Corporation -0.13
KBR -0.12
1 Net of dividends

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

RVT 3.69 3.90 21.64 11.69 20.51 7.20 10.24 10.84 10.26 11/26/1986
XRVTX 2.46 3.00 22.90 10.81 19.30 8.28 9.91 11.09 11.03 11/26/1986
Russell 2000 2.05 3.19 23.64 14.57 20.21 8.70 8.01 9.81 9.75 N/A
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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 invests primarily in securities of small- and 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 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 S&P SmallCap 600 are indices of U.S. large- and small-cap stocks, respectively, selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.



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