Royce Dividend Value Fund Manager Commentary | Royce Funds
article 06-30-2015

Royce Dividend Value Fund Manager Commentary

Our focus remains on what we believe are well-run dividend-paying businesses, particularly in Financials and the more cyclical sectors of the market.


Fund Performance

Royce Dividend Value Fund advanced 2.6% for the year-to-date period ended June 30, 2015 compared to a 4.8% gain for its small-cap benchmark, the Russell 2000 Index, for the same period. In terms of relative performance, the first half was a tale of two quarters for the portfolio. Dividend Value was up 1.1% for the first quarter while the Russell 2000 gained 4.3%. For the second quarter, however, Dividend Value gained 1.4% versus 0.4% for the small-cap index.

Although recent results have been underwhelming, compared to those for the Russell 2000, they have not been unexpected. The small-cap market over the last five years has been dominated at times by high-yield, bond-like REITs and Utilities or by fastgrowing, more speculative stocks that typically have no earnings. There has been only short-term, inconsistent favor shown to the kind of steadily profitable, conservatively capitalized small- and mid-cap dividend payers that we prefer. We were pleased with the Fund's long-term results on both an absolute and relative basis. Dividend Value outpaced the Russell 2000 for the 10-year and since inception (5/3/04) periods ended June 30, 2015. The Fund's average annual total return since inception was 9.0%.

What Worked... And What Didn't

The portfolio's underweight in Health Care—in particular its lack of exposure to biotech stocks—played the leading role in its first-half relative disadvantage. There was better news from other areas. Financials led all of the Fund's sectors by a comfortable margin, followed by respectable net gains for Industrials and Consumer Discretionary. In all, seven of the Fund's 10 equity sectors finished the semiannual period with net gains. Three sectors—Materials, Energy, and Utilities—were in the red at the end of June, though their net losses were relatively modest, especially for the third group. Three of the Fund's top-seven industry groups came from Financials—capital markets, insurance, and banks. Holdings headquartered in the U.K. and Japan also notably boosted results.

Two of the portfolio's four largest holdings at the end of June were also among its top contributors to first-half results. Columbus, OH-based asset manager Diamond Hill Investment Group rode a wave of strong earnings and growing revenues to a more than 40% increase in the value of its shares. We like the firm's emphasis on disciplined approaches and long-term investment results. Another asset manager, SEI Investments also runs a business creating technology solutions for its clients. Although its overall gain was not quite as heady, it saw a rising share price along with improved earnings and revenues keyed by double-digit growth in assets under management and administration. We have held shares of SEI in the portfolio for more than 10 years. In our view, it's a very well-run business, and we see its global presence, focus on active management, technology niche, and close attention to risk as significant attributes. In general, we have a marked preference for investment management firms, especially as part of a portfolio of dividend-paying companies. From our perspective, the industry's better firms are global growth businesses that should continue to benefit from expanding economic strength and the correspondent need for expertise in wealth management.

GameStop Corporation, the Fund's thirteenth-largest holding at the end of June, was one of a handful of retailers that enjoyed success in the first half. The company sells new and used video game hardware, software, and accessories. We like its core business, which rallied in the first half as a new gaming console cycle took off. The development of video game digital downloads, which many analysts predict will ultimately consign GameStop to the same fate as Blockbuster Video, has also been slow to catch fire. We like GameStop's innovative ways of cultivating customer loyalty as well as its expansion into running other businesses, such as Simply Mac—an authorized seller and repairer of Apple products in smaller cities and towns.

Industrial packaging products manufacturer Greif led all of the portfolio's detractors in the first half, hurt by earnings disappointments and revised guidance for fiscal 2015. We think its global business can eventually right itself. Long-time holding Carpenter Technology has a global business fabricating and distributing specialty metals. Recent results have been hampered by the firm's exposure to the energy markets as well as by increased operating costs and the price of reducing inventory. The firm has been taking steps to both reduce costs and improve margins in the face of a slumping market for industrial metals. Vishay Intertechnology, which makes semiconductors and components, has a low-debt balance sheet and a history of successful and profitable execution. Its stock began to fall in March in the context of an uncertain market for many tech businesses.

Top Contributors to Performance
Year-to-Date Through 6/30/15 (%)1

Diamond Hill Investment Group 0.36
GameStop Corporation Cl. A 0.26
SEI Investments 0.25
Steven Madden 0.23
ManpowerGroup 0.22
1 Includes dividends

Top Detractors from Performance
Year-to-Date Through 6/30/15 (%)2

Greif Cl. A -0.24
Carpenter Technology -0.24
Vishay Intertechnology -0.20
Coronation Fund Managers -0.19
Genesco -0.17
2 Net of dividends

Current Positioning and Outlook

Our focus remains on what we believe are well-run dividend-paying businesses, particularly in Financials and the more cyclical sectors of the market. The ongoing expansion of the U.S. economy has been the primary driver of our portfolio positioning over the past two years, as has our anticipation of a more earnings-led small-cap market. As a result, the portfolio was significantly overweight in Industrials and Materials, overweight in Energy and Financials, and close to the Russell 2000's weighting in Consumer Discretionary at the end of June. Health Care remained a significant underweight.

Average Annual Total Returns as of Quarter-End 6/30/15 (%)

Dividend Value 1.44 2.55 -2.89 13.53 13.45 8.88 8.99 5/3/2004
Russell 2000 0.42 4.75 6.49 17.81 17.08 8.40 8.83 N/A
Annual Operating Expenses: 1.55%

* 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). Operating expenses reflect the Fund’s gross total annual operating expenses for the Service Class as of the Fund’s most current prospectus and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. 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 year-to-date performance for 2015.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2015, 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 June 30, 2015 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 and mid-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 25% 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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