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.

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 (%)

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

Important Performance, Expense, and Disclosure Information