Fund Performance

Royce Low-Priced Stock Fund gained 2.6% for the year-to-date period ended June 30, 2015, trailing its small-cap benchmark, the Russell 2000 Index, which was up 4.8% for the same period. While the Fund's relative results for the first half left something to be desired, we were pleased with the portfolio's absolute return, particularly in a market that continued to present challenges for active, risk-conscious approaches.

The year began on a down note, with most stocks in negative territory in January. The rebound for many small-caps through the remainder of the first quarter, however, was less bullish for Low-Priced Stock than for the Russell 2000. For the first quarter Low-Priced Stock was up 0.5% compared to a 4.3% gain for the small-cap index. While April saw a round of mostly falling small-cap prices, the Fund was able to resist the trend and showed a solid gain for the month. This set the stage for a strong second quarter in which Low-Priced Stock advanced 2.1% while its benchmark was up 0.4%. Without wanting to put too much emphasis on a short-term result, we were encouraged nonetheless, just as we were by longer-term relative and absolute returns. The Fund outperformed the Russell 2000 for the 15-, 20-year, and since inception (12/15/93) periods ended June 30, 2015. Low-Priced Stock's average annual total return since inception was 10.8%, a long-term record in which we take great pride.

What Worked... And What Didn't

The Energy and Materials sectors remained in the red for the first half following turns as the Fund's most significant detractors in 2014. Each was hurt by the combination of a strong dollar, weakness in China, and a related softness in many commodity prices. We meaningfully trimmed positions in both sectors in the second half of 2014, so while net losses were broad based, no individual names stood out as significant detractors. As long-term valuations look compelling, we have remained overweight in each, believing that the strong balance sheets of many holdings should allow them to take advantage of current industry disruptions to build stronger franchises for themselves.

Information Technology posted a net gain for the semiannual period, though a portion of that was due to the Fund's substantial overweight throughout the first half—it was actually a source of underperformance versus the sector within the Russell 2000. We have been slowly trimming certain tech-based holdings while remaining significantly overweight in the sector as we see a number of trends in the data center and mobile computing areas that should drive opportunities for several years. One of the portfolio's top detractors in the sector, Silicon Graphics International provides computing and storage technology for big data applications. Its shares were hurt in the near term over the concern for privacy-driven slowdown in sales to the NSA. We held our shares pending greater visibility into the company's backlog of new products that target more commercially based applications. One of the portfolio's top contributors, Cirrus Logic has established itself as the dominant provider of end-toend, semiconductor-based audio and voice solutions for the mobile industry. During the first half the company was in the early stages of monetizing large R&D investments geared toward supporting Apple, its largest customer, while its recent acquisition of Wolfson made it the dominant provider in the Android ecosystem as well. We see the firm's high-end audio and voice solutions as being in the very early stages of secular growth.

Acacia Research, the portfolio's largest detractor, is a leading patent assertion company known as a Non Practicing Entity (NPE). The company has amassed a formidable portfolio of patents across industries that it is in the early stages of asserting against infringing parties. However, Acacia has not been as successful in monetizing these assets as we had anticipated, in part due to a slightly unfavorable regulatory environment. As a risk control measure, we reduced our position in the first half, though we are prepared to reevaluate if monetization becomes more visible.

The portfolio's top contributor by a wide margin, Value Partners Group is one of the world's largest asset managers focused on Hong Kong and China, with its share price closely tied to movements in those markets. Those markets rose significantly through most of the first half, with positive implications for the firm's assets under management and fees. We meaningfully trimmed our position during the second quarter, though we held some shares given the long-term opportunities we see in Asia. Firearms manufacturer Smith & Wesson Holding Corporation continued to take market share while recent heavy investments in R&D led to significant product innovation. The company also effectively deployed cash to make some strategic acquisitions that provided vertical manufacturing integration as well as adjacent product offerings.

Current Positioning and Outlook

We remain optimistic about the long-term prospects for well-placed companies in Energy, Materials, and certain areas of Information Technology. We are also upbeat about the outlook for the U.S. consumer, as the gradually improving employment outlook and the benefits of lower energy prices provide a strong tailwind for the group. We had a slight underweight in Consumer Discretionary and a marginal overweight in Consumer Staples at the end of June.

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