Fund Performance

We were very pleased with Royce International Premier Fund's absolute and relative performance in the first half. For the year-to-date period ended June 30, 2015 the Fund gained 13.7%, outperforming its benchmark, the Russell Global ex-U.S. Small Cap Index, which advanced 7.7% for the same period. While U.S. stocks kicked off 2015 on a decidedly bearish note, results for non-U.S. equities were more mixed. International Premier finished January with a small gain before increasing its edge over the benchmark when shares rallied in February. Though the Fund's fortunes reversed in March, its underperformance during this period did little to deter its first-quarter relative advantage (+5.4% versus +3.7% for the index).

International Premier also enjoyed a strong second quarter, outpacing the Russell Global ex-U.S. Small Cap in all three months. This included a solid advantage in June, in which equities were rocked both by the Greek default and China's rapidly declining stock market. For the second quarter, International Premier was up 7.9% compared to the index's 3.9% advance. In addition to its strong first-half showing, the Fund outperformed its benchmark in the one-, three-year, and since inception (12/31/10) periods ended June 30, 2015.

What Worked... And What Didn't

All of the Fund's eight equity sectors contributed to performance in the first half, with Industrials nearly doubling the net gain of Consumer Discretionary, the Fund's second-largest contributor. Notable contributions also came from Information Technology and Financials. It's important to point out that most of these sectors also fared very well compared to the Fund's non-U.S. small-cap benchmark. The portfolio's strongest industries in the first half included electronic equipment, instruments & components stocks, consumer finance companies, and capital markets. Net losses at the industry level were comparatively modest and limited to two groups—real estate management & development stocks and diversified financial services companies. At the country level, the healthiest overall contributions came from holdings headquartered in the U.K., Switzerland, Japan, and India, while Brazil, Malaysia, Chile, Sweden, and Germany detracted, albeit on a relatively smaller scale.

The Fund's two largest positions at the end of June were also its two top contributors to first-half performance. India's Bajaj Finance offers an array of services including wealth management, commercial lending, and consumer finance. Its shares have been rising more or less steadily for more than a year. The company continued to experience profitable growth in the first half, largely in its consumer finance segment. London-based Clarkson is an investment holding company whose subsidiaries provide integrated shipping services worldwide. Its stock began to rise in February and did well through the remainder of 2015's first half, reaching new highs at the end of June. Strong results for fiscal 2014, which were well ahead of market expectations, and a double-digit growth outlook helped drive performance. Clarkson's entrance into the FTSE 250 index on the London Stock Exchange in mid-April, a move that required U.K. index funds to invest in the stock, also played a part. Japan's TOTO also made a strong contribution to performance. The world's largest toilet manufacturer, TOTO saw its shares rise when it announced an increase to its dividend in April.

Conversely, LPS Brasil Consultoria de Imoveis—Brazil's leading real estate brokerage firm—detracted from performance in the first half. Brazil's troubled economy continued to weigh on real estate sales as a combination of government scandals and painfully slow reforms has hurt consumer confidence. LPS's secondary sales (preexisting properties) have also been weak. Another detractor was Singapore-based Silverlake Axis—a top contributor in 2014. The company, which provides customized software to banks and insurance companies, found itself in the curious position of seeing its shares decline when a financial blogger questioned its accounting practices. After a disappointing 2014, the stock price of LPKF Laser & Electronics briefly rallied in early 2015 before falling again in March. A disappointing fiscal first quarter accelerated the decline. Seeing what we deemed were more promising long-term opportunities elsewhere, we sold our shares in all three companies during the first half.

Current Positioning and Outlook

At the end of June the portfolio was slightly overweight in Consumer Discretionary, comfortably overweight in Industrials, and had substantially more exposure than its benchmark in Information Technology and Health Care. Holdings headquartered in the U.K. and Switzerland comprised slightly less than half of net assets. Our highest conviction is, as always, reserved for conservatively capitalized companies that earn high returns on invested capital and demonstrate the ability to compound wealth over the long term. We believe corporate profit margins for many non-U.S. companies that fit this profile were trading well below their historic peaks during the first half.

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