article 12-31-2014

Royce Micro-Cap Trust Manager Commentary

Fund Performance

Royce Micro-Cap Trust gained 3.5% on an NAV (net asset value) basis and 3.1% on a market price basis in 2014, trailing its benchmarks, the Russell 2000 Index and Russell Microcap Index, which had respective returns of 4.9% and 3.6% for the same period. We were frustrated that Micro-Cap Trust gave up its first-half advantage, a period in which the Fund advanced 3.1% on an NAV basis and 3.9% on a market price basis compared to the small-cap index's 3.2% advance and the Russell Microcap's 1.6% advance. Following a small-cap high on July 3, small-caps entered a volatile phase that saw July and September in the red. Micro-Cap Trust outperformed both benchmarks for the third quarter as a whole, losing 7.1% on an NAV basis and 4.8% on a market price basis against the Russell 2000's 7.4% decline and the Russell Microcap's 8.2% decrease. The Fund's absolute performance in the fourth quarter was fine, though Micro-Cap Trust was short of both indexes during this bullish swing. During the final quarter of the year, Micro-Cap Trust was up 8.2% on an NAV basis and 4.2% on a market price basis, falling behind respective increases of 9.7% and 11.2% for the Russell 2000 and Russell Microcap.

We were pleased with the Fund's absolute and relative performance results over longer-term periods. On an NAV basis, Micro-Cap Trust outperformed the Russell 2000 for the three-, five-, 10-, 15-, 20-year, and since inception (12/14/93) periods ended December 31, 2014. Micro-Cap Trust also outperformed the Russell Microcap on an NAV basis during the 10-year period. (Data for the Russell Microcap only goes back to June 2000.) On a market price basis, the Fund bested the Russell 2000 for the three-, five-, 15-, 20-year, and since inception periods and beat the Russell Microcap for the five- and 10-year periods. Micro-Cap Trust's average annual NAV total return for the since inception period was 11.5%, a long-term performance record that gives us great pride.

What Worked... And What Didn't

Seven of the Fund's 10 equity sectors made a positive impact on 2014 performance. Health Care was Micro-Cap Trust's largest contributor by more than 160 basis points, followed by Consumer Discretionary and Information Technology. Energy and Industrials were the Fund's largest detractors, with Materials posting modest net losses. A developer of drugs for the treatment of infections caused by HIV, hepatitis B, and hepatitis C, Idenix Pharmaceuticals was a take-out target by pharmaceutical giant Merck in early June. News of the acquisition helped triple the company's stock price, and we gradually sold our stake by the middle of the month. We also sold our shares of Medical Action Industries in June. A Virginia-based manufacturer and distributor of disposable medical products, including operating room supplies, custom procedure trays, sterilizing products, and patient apparel, Medical Action Industries was acquired by Owens & Minor for a 95% premium. Outside of Health Care, long-time holding and a top contributor to first-half performance Rentrak Corporation is a digital media measurement and research company that serves the entertainment, television, and advertising industries. Its share price began to really take off in early September. Investors seemed to like the healthy revenue growth and optimistic outlook the company reported in June. The company cemented a deal to expand its alliance with ABC while also establishing new agreements with CBS and Fox. In October, the firm announced its purchase of Kantar Media, the U.S. television measurement arm of advertising conglomerate WPP. In addition, Rentrak acquired new patents that solidified its position as a leading viewership data provider. We started reducing our position in October.

Computer Task Group is an IT services and staffing company. Its stock price began to decline steeply in early July after reporting lowerthan- expected earnings largely due to higher costs and lower revenues from its healthcare business. While the company claimed these higher expenses were likely anomalous, it also boosted its projected medical costs for the rest of 2014, thus revising guidance downward. Heritage-Crystal Clean provides parts cleaning, used oil re-refining, and hazardous and non-hazardous waste services to small and midsized customers in the manufacturing and vehicle service industries. Its shares took a hit in December when the firm announced that it was issuing more stock to pay down debt incurred to make two recent acquisitions. We added shares in the hope of a rebound. Earnings misses hindered the performance of Sioux Falls-based Raven Industries. Softening demand for agricultural equipment put pressure on its shares.

Top Contributors to Performance
For 2014 (%)

Rentrak Corporation 0.79
Idenix Pharmaceuticals 0.66
Medical Action Industries 0.56
Universal Electronics 0.49
Integrated Electrical Services 0.42
1 Includes dividends

Top Detractors from Performance
For 2014 (%)

Computer Task Group -0.36
Heritage-Crystal Clean -0.33
Raven Industries -0.31
Le Chateau Cl. A -0.28
Cache -0.26
1 Net of dividends

Current Positioning and Outlook

We remain overweight in economically sensitive cyclical sectors such as Industrials, Information Technology, and Consumer Discretionary—areas where we have seen a number of profitable, conservatively capitalized businesses trading at attractive valuations. As the U.S. economy continues to grow and normalize, we believe fundamentals will matter more to investors, especially in an inefficient asset class such as micro-cap.

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

RMT 4.25 3.06 20.62 17.46 6.24 11.59 11.64 10.70 12/14/1993
XOTCX 8.18 3.55 20.64 15.81 8.15 10.97 11.85 11.50 12/14/1993
Russell 2000 9.73 4.89 19.21 15.55 7.77 7.38 9.63 9.22 N/A

* Not Annualized

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

Important Performance, Expense, and 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 larger-cap companies. The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. 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.

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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