article 12-31-2014

Royce Low-Priced Stock Fund Manager Commentary

Fund Performance

Royce Low-Priced Stock Fund was down 3.4% in 2014, substantially behind its small-cap benchmark, the Russell 2000 Index, which gained 4.9% for the same period. The year got off to a highly promising start when the Fund posted terrific results on both an absolute and relative basis in the first half, advancing 9.0% and outpacing the 3.2% gain for its benchmark. This was a welcome development after several years of relative performance disappointments for the portfolio.

Small-cap stocks then took a turn for the worse in the third quarter following a high for the Russell 2000 on July 3. Low-Priced Stock fell 9.8% in the third quarter compared to a 7.4% decline for the benchmark over the same span. At this point, the Fund was in negative territory year-to-date, but still ahead of the small-cap index. That changed in the fourth quarter. Small-cap stocks rallied through most of the year's last three months, with October and December especially robust. The Fund, however, was essentially flat in each of those months and had a loss in November. For the fourth quarter as a whole, Low-Priced Stock lost 1.7% while the Russell 2000 increased 9.7%. The Fund outperformed the benchmark for the 15-, 20-year, and since inception (12/15/93) periods ended December 31, 2014. Low-Priced Stock's average annual total return since inception was 10.9%. We remain proud of the Fund's long-term performance record.

What Worked... And What Didn't

After being the top-contributing sector (and thus a major source of outperformance) in the first half of the year, Energy stocks finished 2014 as the portfolio's leading detractor. The second-half collapse in energy prices and pressure on other commodities thus took an enormous toll on results for both the second half and full year. Being substantially overweight in the Energy sector versus the Russell 2000 hampered relative results as well. We are well aware of the near-term stresses on energy prices, which include surging supply from U.S. shale plays, weaker European and emerging market economies (the latter having been a key source of incremental demand), and a strong U.S. dollar. However, we have also been quite pleased with the way that many of the portfolio's energy names have been executing. As such, we have mostly chosen to hold positions in the belief that lower energy prices will ultimately spur demand and thus eventually start the next up cycle in commodity prices. We did, however, trim our position in Trican Well Service, a Canadian oilfield services company and that nation's largest pressure pumping service provider. In the Materials sector, which posted net losses for the year, we greatly reduced Low-Priced Stock's exposure to the metals & mining industry, which involved selling most of our positions in Hochschild Mining and Alamos Gold.

Nu Skin Enterprises is a personal care product manufacturer and distributor. The aggressive rollout of its direct marketing model in China set off an investigation by authorities into its sales model. The official result was a modest fine, though it also derailed growth more than we would have expected. The company has been working through inventory issues and rebuilding its sales team in China to create a more sustainable growth model there. At year's end, we believed we were near the bottom in terms of company fundamentals and remain constructive on Nu Skin going forward. We were less confident in the rebound potential for GrafTech International, which makes graphite and carbon material used in steel production and other industries. Depressed sales and ongoing earnings disappointments influenced our decision to reduce our position.

Information Technology dominated, leading all of the Fund's equity sectors by a hefty margin. Two top-performing semiconductor companies were takeover targets—OmniVision Technologies and International Rectifier. We sold both as news of their respective acquisitions drove shares higher. From the Health Care sector, Myriad Genetics is a leading provider of diagnostic cancer testing that proved the value of patience. In 2013, its shares fell as Wall Street worried about the firm's ability to maintain market share and price in the face of creeping competition. However, the accuracy and rapid turnaround times of the company's tests have proven to be highly effective barriers to entry. We took gains through much of 2014, though we were happy to hold a decent-sized stake at the end of the year.

Top Contributors to Performance
For 2014 (%)

Myriad Genetics 1.00
OmniVision Technologies 0.67
International Rectifier 0.64
Industrias Bachoco ADR 0.48
Cato Corporation (The) Cl. A 0.45
1 Includes dividends

Top Detractors from Performance
For 2014 (%)

Nu Skin Enterprises Cl. A -1.20
Trican Well Service -0.90
GrafTech International -0.84
Hochschild Mining -0.73
Alamos Gold -0.69
1 Net of dividends

Current Positioning and Outlook

Effective November 10, 2014, Jim Stoeffel became the Fund's portfolio manager after serving as assistant portfolio manager since 2013. Bill Hench, Jim Harvey, and Carl Brown joined him as assistant portfolio managers. Our general view is that the U.S. economy should remain strong. The Fund remained overweight in Energy at the end of 2014 for the reasons previously discussed. We see Information Technology as a vital source of ideas, particularly in mobile, Big Data, and the Internet of Things. Industrials were also a key investment focus because we suspect that many of our holdings can take advantage of lower energy prices. Finally, there was increased exposure to both consumer sectors for similar reasons—lower gas and heating oil prices should continue to benefit consumers by putting more money in their pockets.

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

Low-Priced Stock -1.71 -3.37 4.46 5.07 5.33 8.85 11.31 10.89 12/15/1993
Russell 2000 9.73 4.89 19.21 15.55 7.77 7.38 9.63 9.22 N/A
Annual Operating Expenses: Gross 1.51% Net 1.49%

* 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 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). 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 "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 low priced 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.) The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. 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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