article 06-30-2015

Royce Global Financial Services Fund Manager Commentary

In terms of individual companies, we continue to lean more toward financial services businesses with little or very low leverage and sterling fundamentals, which typically encompasses asset managers, insurance companies, investment or insurance brokers, and technology firms with financial expertise or specialization.

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Fund Performance

We were very pleased with both absolute and relative first-half results for Royce Global Financial Services Fund Royce Global Financial Services Fund (formerly Royce Financials Services Fund). For the year-to-date period ended June 30, 2015, the Fund advanced 7.2%, easily outperforming both its small-cap benchmark, the Russell 2000 Index, which was up 4.8%, and the Russell 2500 Financial Services Index, which was up 3.1% for the same period. The Fund underperformed both indexes during the slightly volatile first quarter, increasing 2.7% compared to 4.3% for the Russell 2000 and 3.7% for the financial services companies in the Russell 2500. Much of this relative disadvantage was due to a positive but relatively underwhelming performance from capital markets, the portfolio's largest industry group.

The second quarter saw the Fund rebound on a relative basis thanks to a very strong performance in April, an otherwise bearish month for most stocks. For the second quarter as a whole, the Fund gained 4.4% compared to gains of 0.4% for the Russell 2000 and a loss of 0.5% for the financial services companies in the Russell 2500. Long-term results remained impressive on both and absolute and relative scale. The Fund beat the Russell 2000 for the one-, three-, and 10-year periods ended June 30, 2015 while it was essentially even with the small-cap index for the five-year and since inception (12/31/03) time spans. It outperformed the Russell 2500 Financial Services companies for the three-, five-, 10-year, and since inception periods ended June 30, 2015. The Fund's average annual total return since inception was 8.7%.

What Worked... And What Didn't

As mentioned above, the capital markets group dominated the portfolio's performance in the first half. The industry is home to several asset management companies, a business we believe we know well and in which we have many years of investment experience. So while six of the portfolio's 10 most significant detractors came from that industry, eight of its 10 largest contributors did as well. Needless to say, net gains for contributors had a far more meaningful impact on performance than those whose shares were in decline for the first half.

The Fund's top-two performers made particularly notable contributions to results for the semiannual period. First was WisdomTree Investments, an asset management company that primarily sponsors ETFs (exchange traded funds). The company enjoyed record inflows and revenues in the first quarter of 2015, which prompted us to reduce our position during the first half, though we still held a good-sized stake at the end of June. A rising share price inspired a similar reduction for Diamond Hill Investment Group, which saw strong earnings and growing revenues draw investors. Though not quite as lofty, Jupiter Fund Management also posted a noteworthy net gain. This London-based business manages open-end funds with an active management approach. The firm also offers investment services to institutional and other private clients. Its shares were helped by healthy inflows and increased assets under management, and we were pleased to hold a large position at the end of June.

In January we chose to sell our shares of automotive financial services company Ally Financial, formerly GMAC, the financing arm of General Motors. Steady losses dating back to late 2014—primarily the result of a growing number of missed auto loan payments—convinced us that better opportunities could be found elsewhere in the market. We were more confident in the long-term prospects for South African investment firm Coronation Fund Managers. Although we trimmed our shares in January, we held onto a sizable position. Its shares were challenged throughout the first half, falling especially hard in April after the firm announced that earnings were likely to drop anywhere from 5% to 15% for its fiscal semiannual period.


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

WisdomTree Investments 0.83
Diamond Hill Investment Group 0.80
Jupiter Fund Management 0.50
Value Partners Group 0.47
MarketAxess Holdings 0.40
1 Includes dividends

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

Ally Financial -0.36
Coronation Fund Managers -0.33
Medley Management Cl. A -0.31
Piper Jaffray -0.31
GMP Capital -0.30
2 Net of dividends

Current Positioning and Outlook

Effective June 15, 2015, we renamed the Fund while simultaneously expanding its ability to invest in non-U.S. financial services companies, which have become an area of increasing interest and opportunity for us over the last several years. The Fund may now invest up to 50% of its net assets in foreign companies, where 33.7% of its net assets were invested in at the end June, slightly less than half of which were headquartered in Western Europe.

In terms of individual companies, we continue to lean more toward financial services businesses with little or very low leverage and sterling fundamentals, which typically encompasses asset managers, insurance companies, investment or insurance brokers, and technology firms with financial expertise or specialization. While historically we have invested comparatively little in banks, we have been looking at them more closely of late. Looking forward, we like the growing global reach of some of the best-managed asset management firms and anticipate that these businesses will continue to remain a focal point of the portfolio. Considering this emphasis, we would expect the Fund to remain periodically out of sync with the financial services companies in the Russell 2500 and to often move in a different direction than the Russell 2000.

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

  QTR* YTD* 1 YR 3 YR 5 YR 10 YR SINCE INCEPT. DATE
Global Financial Services 4.41 7.22 7.05 20.66 17.07 8.71 8.74 12/31/2003
Russell 2000 0.42 4.75 6.49 17.81 17.08 8.40 8.73 N/A
Russell 2500 Fnl Svc -0.51 3.13 8.45 17.02 15.80 5.76 6.85 N/A
Annual Operating Expenses: Gross 1.93% Net 1.74%

* 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. Gross operating expenses reflect the Fund’s gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse expenses to the extent necessary to maintain the Fund’s net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.49% through April 30, 2016. 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 equity securities that are "principally" engaged in the financial services industry. The Fund is not a complete investment program. It is designed for long-term investors who can accept the risks of investing in a fund with common stock holdings primarily in small-cap and mid-cap financial services companies. Therefore, the Fund is subject to certain risks associated with the industry, including, among other things, changes in government regulations, interest rate levels, and general economic conditions. The Fund invests primarily in small-cap and/or 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.) As of 6/30/15 the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund’s overall value to decline to a greater degree. The Fund may invest up to 50% 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 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 Russell 2500 index represents the smallest 2,500 companies in the Russell 3000 index. The returns for the Russell 2500—Financial Sector represent those of the financial services companies within the Russell 2500 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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