Fund Performance

Royce Premier Fund fell well short of our expectations in 2014. For the calendar year, the Fund was down 0.9%, significantly trailing its small-cap benchmark, the Russell 2000 Index, which gained 4.9% for the same period. The Fund handily outpaced the small-cap index in the year’s first half with a gain of 7.3% compared to 3.2% for the Russell 2000. But small-cap share prices corrected soon after making a high on July 3. Down phases typically result in the Fund holding its value more effectively than its benchmark, as it so often has through its history. The third quarter of 2014, however, offered an ill-timed exception. For the quarter as a whole, the Fund lost 8.6% versus 7.4% for the small-cap index.

The Russell 2000 then rebounded through much of the fourth quarter, when the Fund posted a comparably paltry 1.0% return while the Russell 2000 rose 9.7%. This was an unfortunate end to a frustrating final half. We were pleased, however, with longer-term results. Although the Fund trailed the small-cap index for the three- and five-year periods ended December 31, 2014, it did so with strong absolute returns that were in excess of both its own and its benchmark’s historical three- and five-year monthly rolling average returns (respective rolling returns of +11.8% versus +8.2% for the three-year span and +11.6% versus +7.6% for the five-year period). Premier also outperformed the Russell 2000 for the 10-, 15-, 20-year, and since inception (12/31/91) periods ended December 31, 2014. The Fund’s average annual total return for the since inception period was 12.0%, a long-term record in which we take great pride.

What Worked... And What Didn't

Energy was one of Premier’s best-performing sectors in the first half before oil prices abruptly plummeted and handed the Fund its largest net losses for the calendar year. An overweight in energy stocks—all of them in the equipment & services industry, and six of the seven not in the Russell 2000—did not help. Trican Well Service is an oilfield services company and the largest pressure pumping service provider in Canada. Over the last few years, its operations in the U.S. and other energy-rich spots around the world have been growing. Yet its ongoing operational successes meant little to anxious investors fleeing energy stocks in the second half. Much the same could be said for the Fund’s other holdings in the industry, most of which are also long-time holdings. Unit Corporation operates several businesses—it explores for oil and natural gas, acquires oil and gas properties, does contract drilling of onshore oil and natural gas wells, and performs gathering and processing of natural gas. Unit has shown over the years that it can be successful at all of them, and its steady execution has made its hard-to-pigeonhole business a Royce favorite. Albertabased Ensign Energy Services is a global provider of oilfield services such as contract drilling. Drill rig orders were drying up as the oil price plunge was driving its shares into the ground. Ever contrarian, we took an admittedly (and customarily) long-term view and held good-sized positions in each stock at year end in anticipation of an eventual recovery in energy prices.

Elsewhere in the portfolio, we modestly reduced our position in Nu Skin Enterprises. A maker and distributor of personal care products, Nu Skin endured a litany of challenges over the last 18 months, including the restructuring of its debt and trouble in its previously fast-growing—but more recently stagnating—Asian business. It has been handling its difficulties with success, and we think it can engineer a reversal when sales in China improve. We took the opposite tack by selling our shares of GrafTech International, which manufactures synthetic and natural graphite and carbon-based products used in steel production. Ongoing earnings disappointments, most recently resulting from graphite electrode order push outs, weakening international business, and poor sales tied to the Galaxy Samsung 5 phone pushed the stock down more than 50% in the third quarter.

On the positive side, we continued to be pleased with molecular diagnostic company Myriad Genetics. A specialist in genetic testing for cancer, its share price fell rapidly in the second half of 2013 once the Supreme Court held that human genes cannot be patented. The stock then began to get healthy in the first six months of 2014. The first-half acquisition of Crescendo Bioscience diversified Myriad’s already promising pipeline, and its genetic panel test—MyRisk—looked promising. Its stock stumbled in the fourth quarter when the MyRisk adoption proved more expensive than expected, causing sales deferrals and higher operating costs. Still, we remained confident enough in its long-term prospects for Myriad to be the Fund’s thirteenth-largest holding at the end of 2014.

Current Positioning and Outlook

We reduced our exposure to Materials primarily by selling the Fund’s remaining precious metals & mining holdings. We remained overweight in Industrials and Information Technology, consistent with our view that we will eventually see an earnings-led market. We also had increased exposure to Consumer Discretionary, Financials, and Health Care companies by the end of 2014.

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

* Not Annualized

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

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