article 12-31-2014

Royce Global Value Fund Manager Commentary

Fund Performance

Royce Global Value Fund fell 5.8% in 2014, trailing its benchmark, the Russell Global Small Cap Index, which lost 0.3% for the same period. The Fund's difficulties on both a relative and absolute basis were entirely the result of a poor second half. The year began on a solidly bullish note. For the six-month period ended June 30, 2014, Global Value rose 11.0% versus a 5.7% gain for the global small-cap index. During the first half the Fund benefited from a strengthening Europe and ongoing bullishness in the U.S., both of which were compensation for generally less robust Asian markets during the first few months of 2014.

This positive picture began to shift in the third quarter. Stocks across the globe corrected (with the exception of U.S. large-caps), with European shares among the most adversely affected. The Fund lost 9.8% for the third quarter versus a loss of 6.7% for the Russell Global Small Cap. Portfolio holdings in the U.S., Canada, the United Kingdom, and Austria were the largest detractors from quarterly results. While we were not happy with the Fund's results during the downdraft, we were pleased that at the end of the third quarter Global Value remained ahead of its benchmark for the nine-month period ended September 30, 2014. Unfortunately, this advantage was lost in the fourth quarter, a period in which U.S. small-caps rallied off a mid- October low while many non-U.S. companies saw additional losses or treaded water. For the fourth quarter, the Fund was down 5.9% compared to a 1.1% increase for its global benchmark. As in the third quarter, holdings headquartered in Canada, the U.S., and the U.K. had the most significant negative impact. We were also not pleased with the Fund's longer-term results, which were disappointing on both an absolute and relative basis.

What Worked... And What Didn't

Three of Global Value's eight equity sectors posted net gains in 2014, with Information Technology and Health Care making the largest net contribution. Myriad Genetics, the market share leader in molecular diagnostic testing for cancer, saw its shares decline materially in June 2013 when the U.S. Supreme Court held that human genes cannot be patented. We took advantage of this share price decline. The stock then returned to health in the first half of 2014, when it also acquired Crescendo Bioscience in a move that diversified Myriad's already promising pipeline. In addition, MyRisk, its genetic panel test, showed promise. We reduced our position through much of the year as its valuation returned to more normalized levels. Indian specialty pipe and tube maker Maharashtra Seamless also did well after slumping in 2013 when the slow-growing Indian economy and ongoing pipe dumping depressed demand. India's May elections gave a boost to the economy and markets. Oil pipeline replacements in certain areas are likely, as is nationwide pipe connectivity for natural gas, both of which would likely benefit Maharashtra. After taking gains earlier in the year, we sold the last of our shares in August as it rolled past our sell targets.

Five equity sectors were in the red at the end of 2014. Financials detracted most, losing considerably more than the Fund's other detractors—Materials, Consumer Staples, Energy, and Industrials. Real estate management & development stocks made the largest negative impact in both Financials and the portfolio as a whole. Three of Global Value's five biggest detracting companies also came from that sector. Brazil's number one real-estate brokerage, Brasil Brokers Participacoes remained mired in a weak housing market. Disappointment from autumn's election results exacerbated poor consumer sentiment and did little to revive Brazil's stagnant economy, which also hurt. We sold our position in November. London-based Ashmore Group is among the world's leading emerging markets asset management companies. Its shares were challenged by concerns about the debt cycle and worrisome news from Russia and other emerging markets in 2014. Earnings have been hurt, though revenues have remained mostly consistent. We liked its long-term prospects enough for it to be a top-10 holding at the end of the period. We had a similar level of confidence in the eventual recovery of the Fund's largest position at year end, retailer New World Department Store China. We like how the company is positioned for a pick-up in the Chinese economy as well as its management and very generous dividend policy. The strength of the U.S. dollar was also a factor in the performance of non-U.S. holdings.

Top Contributors to Performance
For 2014 (%)

Myriad Genetics 1.48
Maharashtra Seamless 1.03
Western Digital 0.63
Industrias Bachoco ADR 0.54
Kennedy-Wilson Holdings 0.46
1 Includes dividends

Top Detractors from Performance
For 2014 (%)

Brasil Brokers Participacoes -0.92
Ashmore Group -0.84
New World Department Store China -0.67
Nu Skin Enterprises Cl. A -0.65
E-House (China) Holdings ADR -0.59
1 Net of dividends

Current Positioning and Outlook

Effective November 10, 2014, David Nadel became Lead Portfolio Manager of the Fund after having previously served as assistant portfolio manager (2013-2014) and co-manager (2009-2013). Steven G. McBoyle, James J. Harvey, and Dilip P. Badlani manage the Fund with him. Messrs. Nadel, Harvey, and Badlani are our most experienced international portfolio managers while Mr. McBoyle, who joined Royce in 2007, brings a disciplined business buyer's, balance-sheet-centric approach to the portfolio, with particular attention to domestic holdings. At the end of 2014, Global Value was overweight in cyclical sectors such as Consumer Discretionary and Industrials while it also had reasonable exposure to Financials and Information Technology. The former group was considerably underweight versus the benchmark. These weightings reflect our belief in the recovery of global economic growth.

Average Annual Total Returns as of Quarter-End 12/31/14 (%)

Global Value -5.90 -5.76 3.60 4.17 3.95 12/29/2006
Russell Global SC 1.10 -0.28 13.57 9.56 4.05 N/A
Annual Operating Expenses: Gross 1.84% Net 1.7%

* Not Annualized

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

Important Performance, Expense, and Disclosure Information

All performance information in this piece 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 30 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. All performance and risk information reflects results of the Service Class (its oldest class). Gross operating expenses reflect gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Net operating expenses reflect contractual fee waivers and/or 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 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. Regarding the "Top Contributors" and "Top Detractors" 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 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 December 31, 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 December 31, 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 and/or mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (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, currency or other developments that are unique to a particular country or region. These risk factors may affect the prices of foreign securities issued by companies headquartered in developing countries more than those headquartered in developed countries. (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.) The Fund invests primarily in small-cap and mid-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 12/31/14 the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund's overall value to decline to a greater degree. 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 Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. 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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