article 12-31-2014

Royce Value Trust Manager Commentary

Fund Performance

In what was a solid year for smallcaps overall, we were disappointed that Royce Value Trust was unable to keep pace on a relative scale. The Fund was up 0.8% on an NAV (net asset value) basis and 0.9% on a market price basis in 2014 versus respective gains of 4.9% and 5.7% for its small-cap benchmarks, the Russell 2000 and the S&P 600 Indexes, for the same period. Equally frustrating was the fact that Value Trust was more competitive for the six-month period ended June 30, 2014, in which it outperformed both the Russell 2000 and S&P 600's 3.2% advance on a market price basis (+3.9%) and narrowly lagged on a NAV basis (+3.0%).

Unlike the first half of the year when equity returns were placid yet decidedly bullish, the last six months were a more volatile period for small-caps. Historically, the Fund has exhibited an ability to hold more value than its benchmarks during down markets. However, this was not the case in the third quarter of 2014, when Value Trust fell 7.5% on a NAV basis and 7.4% on a market price basis. (The Russell 2000 lost 7.4% and the S&P 600 lost 6.7%.) The Fund's relative performance woes would continue into the fourth quarter, though its absolute results were respectable. During this period small-caps had a prominent upward bias, especially in the last few weeks of December when they rallied to finish the year well in the black. Value Trust gained 5.8% on an NAV basis and 4.9% on a market price basis while the Russell 2000 advanced 9.7% and the S&P 600 climbed 9.8%. Despite the Fund's near- and intermediate-term struggles, we remain proud of Value Trust's longer-term performance. On an NAV and market price basis, Value Trust outperformed the Russell 2000 for the 15-, 20-, 25-year, and since inception (11/26/86) periods ended December 30, 2014. The Fund's average annual NAV total return since inception was 10.7%.

What Worked... And What Didn't

Six of the Fund's 10 equity sectors posted net gains in 2014, with Information Technology leading the list by a solid margin. Health Care also made a sizable contribution to performance at the sector level, followed by a modest net gain for Financials. The top contributor to first-half performance, Idenix Pharmaceuticals focuses on the development of drugs for the treatment of infections caused by HIV, hepatitis B, and hepatitis C. In early June, news of pharmaceutical giant Merck's acquisition of the company helped the stock price to more than triple. By the middle of the month we had sold our stake. Value Trust also benefited from IT services company Sapient Corporation's takeout by French advertising giant Publicis Groupe in early November. A long-time holding in the portfolio, Sapient provides integrated management consulting services, Internet commerce solutions, and systems implementation services. While the acquisition confirmed Sapient's value and the increasing importance (and share gains) of digital marketing for more traditional advertising businesses, the company's valuation exceeded our sell targets and we sold our shares shortly after the announcement. Miami-based technology consulting firm The Hackett Group provides executive advisory programs, best practice research, and benchmarking services. Its stock price was generally flat for much of 2014 until the company announced third-quarter earnings that topped Wall Street expectations in early November. We took some gains in early December and decided to hold our position.

Conversely, net losses from Industrials, Energy, and Materials detracted from 2014 performance. Three of Value Trust's top detractors came from the Industrials sector, including Houston-based engineering and construction firm KBR. Further execution delivery issues on several fixed-price projects, as well as a decline in bookings and cautious commentary regarding possible delays in oil and gas work in light of the oil price decline, continued to weigh on results. Later in the quarter, the company's relatively new CEO unveiled a restructuring plan after strategic review of the business that includes streamlining operations and reducing overhead costs, refocusing on core E&C areas where it has had traditional strength, and exiting four non-core businesses. Bullish on the company's prospects and an eventual turnaround in Energy, we last added to our position in mid-December. It was a top-40 holding at year end. Persistent weakness in the mining sector continued to stifle a sustained return to organic sales growth for cutting tools manufacturer Kennametal. Having some exposure to the oil and gas drilling market created some near-term headwinds for its business. Interested to hear what initial strategic priorities the company's recently appointed CEO may implement, we held on to our remaining shares after trimming a bit in April, October, and November.

Top Contributors to Performance
For 2014 (%)

Idenix Pharmaceuticals 0.44
Sapient Corporation 0.31
Hackett Group (The) 0.29
Nautilus 0.29
Mechanics Bank 0.21
1 Includes dividends

Top Detractors from Performance
For 2014 (%)

KBR -0.31
Kennametal -0.24
Steel Excel -0.23
Raven Industries -0.22
Qalaa Holdings -0.19
1 Net of dividends

Current Positioning and Outlook

We remain overweight in more economically sensitive areas such as Industrials and Information Technology. Despite recent headwinds in Energy, we believe the U.S. economy is still growing (albeit slowly), credit spreads will continue to expand, and that increasing volatility and decreasing stock correlation can help stock pickers to emerge as performance leaders.

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

RVT 4.93 0.93 16.74 13.98 4.81 9.75 10.78 9.96 11/26/1986
XRVTX 5.78 0.78 15.98 12.82 6.94 9.29 10.84 10.74 11/26/1986
Russell 2000 9.73 4.89 19.21 15.55 7.77 7.38 9.63 9.63 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 invests primarily in securities of small- and 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 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 S&P SmallCap 600 are indices of U.S. large- and small-cap stocks, respectively, selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.



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