article 12-31-2014

Royce International Premier Fund Manager Commentary

Fund Performance

Royce International Premier Fund was down 8.2% in 2014, behind its benchmark, the Russell Global ex-U.S. Small Cap Index, which fell 3.6% for the same period. Europe's renewed strength in 2014's first quarter, which mitigated corrections for many Asian markets, also helped to give international small-caps a brief run of leadership over their domestic peers. European small-cap performance in the second quarter, though, fell back into negative territory while certain key Asian markets mounted a recovery. Amid these shifts, International Premier was in the black for the six-month period ended June 30, 2014, though its 3.3% gain trailed the benchmark's 7.5% advance.

Fortunes reversed again for many U.S. and non-U.S. small-caps in the third quarter, which was an especially tough time for smaller European companies. We were pleased with International Premier's relative performance during this period in which the Fund lost 5.8% versus a decline of 6.2% for the international small-cap index. Holdings in the U.K. had an outsized negative impact on third-quarter performance, while those headquartered in India and China helped to moderate net losses. Domestic small-caps then bounced back off a mid-October low, but many non-U.S. companies continued to decline. For the fourth quarter International Premier was down 5.6% compared to a 4.5% drop for the Russell Global ex-U.S. Small Cap. Holdings in U.K.-based companies remained the Fund's top detractors, followed closely by Brazil, while India continued to contribute. Longer-term results were also disappointing on both an absolute and relative basis, though International Premier outpaced its benchmark index for the since inception (12/31/10) period ended December 31, 2014.

What Worked... And What Didn't

All eight of the Fund's equity sectors were in the red at year end, though Materials, Energy, Health Care, Financials, and Consumer Staples had varying levels of modest net losses. Information Technology was the largest detractor by a significant margin, with a negative impact more than double that of Industrials, the Fund's second-largest detracting sector. At the country level, holdings headquartered in the U.K., Brazil, and Finland were sore spots for the calendar year. Nokian Renkaat is a Finnish company that manufactures and sells tires. Russia accounts for half of the company's sales. A thus-far mild winter, the devalued ruble, the crisis in Ukraine, and other geopolitical concerns all weakened its share price. We believe the company's headwinds are temporary and added to our position in 2014. Late in 2013 we also built a position in Brazil's leading real estate brokerage firm LPS Brasil Consultoria de Imoveis. Mired in a weak housing market, the company also struggled with low consumer confidence and the country's stagnant economy.

From the Industrials sector, Latchways is a U.K.-based protective equipment maker specializing in fall protection systems for people working from heights. A profit warning in October led to a precipitous drop in its shares as the slumping European economy led to delayed capital projects. The company also contended with de-stocking by a large North American customer. However, with its balance sheet and its U.K. business still strong, Latchways appeared more than capable of recovering when Europe's economy does the same. We added to our position throughout the year, and it was International Premier's second-largest holding at year end. AVEVA Group is a British multinational IT company headquartered in Cambridge, U.K. The firm's exposure to the energy industry—it provides technology to the marine, oil & gas, power, and process industries—combined with a profit warning (driven by contract delays) and a restructuring of its sales force combined to push its share price down. We like its mission-critical software and history of not running in sync with oil prices. Germany's LPKF Laser & Electronics develops specialized mechanical engineering products for electronics production, the automotive industry, and in the manufacture of solar cells. A revised outlook for 2014 kept investors selling, but we believe the case for long-term growth remained intact. The strength of the U.S. dollar also played a role in the performance of many non-U.S. holdings.

Holdings headquartered in India made the largest positive impact on performance in 2014. International Premier's top contributor to performance was Bajaj Finance, an Indian business offering an array of services including wealth management, commercial lending, and consumer finance. Improved profitability and earnings, as well as the more optimistic outlook for the Indian economy in the wake of May's elections, seemed to draw attention to the stock. We reduced our position as its shares climbed.

Top Contributors to Performance
For 2014 (%)

Bajaj Finance 1.67
Motherson Sumi Systems 0.62
Signet Jewelers 0.61
Silverlake Axis 0.48
STRATEC Biomedical 0.44
1 Includes dividends

Top Detractors from Performance
For 2014 (%)

LPS Brasil Consultoria de Imoveis -1.38
Nokian Renkaat -1.24
Latchways -1.10
AVEVA Group -0.95
LPKF Laser & Electronics -0.79
1 Net of dividends

Current Positioning and Outlook

At the end of 2014, the portfolio was overweight in cyclical sectors such as Industrials, Consumer Discretionary, and Information Technology. It also had a significant overweight in Health Care. At the country level, the Fund had greater exposure than the benchmark to companies headquartered in the U.K., Switzerland, India, Hong Kong, Brazil, and Germany.

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

International Premier -5.63 -8.22 10.25 2.77 12/31/2010
Russell Glo x US SC -4.45 -3.63 10.31 2.22 N/A
Annual Operating Expenses: Gross 2.82% Net 1.69%

* 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. 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 "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 stocks, which may involve considerably more risk than investing in larger-cap stocks. The Fund also generally invests 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 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. 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.) 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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