article 06-30-2015

Royce Premier Fund Manager Commentary

Our focus remains on companies that are poised for profit margin expansion as their revenue growth normalizes in concert with a faster-moving U.S. economy.

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Fund Performance

For the year-to-date period ended June 30, 2015, Royce Premier Fund gained 1.7% versus a 4.8% increase for its small-cap benchmark, the Russell 2000 Index, for the same period. The Fund got off to a slow start in 2015, uncharacteristically losing more than its benchmark in January. While the Fund then made a solid recovery in February, it again trailed the small-cap index slightly in March. Premier advanced 2.6% for the first quarter versus an increase of 4.3% for the Russell 2000.

The second quarter was less robust and less volatile. Or at least it was prior to an eventful—and, for the Fund, unfortunate—end to June courtesy of Greece's default and a dramatic plunge for Chinese stocks. Premier's net gain for the quarter reversed itself during the second-to-last trading day of June. For the second quarter, Premier was down 0.9% versus a 0.4% gain for the benchmark.

Longer-term results offered a more encouraging view. The Fund once again posted a strong absolute average annual total return for the five-year period ended June 30, 2015, up 13.1%. This result was higher than both the portfolio's own historical five-year monthly rolling average for the period ended June 30, 2015, up 11.7%, and its benchmark's average of 7.4% over the same period. Premier outperformed the Russell 2000 for the 10-, 15-, 20-year, and since inception (12/31/91) periods ended June 30, 2015. The Fund's average annual total return for the since inception period was 11.9%. We take great pride in this long-term record.

What Worked... And What Didn't

Six of the portfolio's equity sectors posted net gains for the semiannual period. Consumer Discretionary, the Fund's third largest at the end of June, led by a comfortable margin, helped by strong turns from holdings in the textiles, apparel & luxury goods group. Columbia Sportswear was the top performer in that group and in the sector as a whole. The company makes active outerwear, apparel, and footwear under the Columbia, Sorel, Mountain Hardwear, and other brand names. The long cold winter and robust product innovation helped to drive share gains. Along with a promising fall order book and improvements in its European business, these results showed the benefit of a multi-year infrastructure improvement effort, demand creation initiatives, management changes in underperforming geographies, and the repositioning of certain brands. We were pleased to see the firm experiencing revitalized revenues and margin expansion.

The Fund's top contributor in the first half was Cal-Maine Foods, the largest producer of eggs in the U.S. Egg prices have more than doubled in anticipation of supply constraints caused by a serious outbreak of avian flu in the Midwest, which led to the loss of approximately 11% of egg-laying hens. This came in the context of a favorable environment for egg producers, driven by the high price of competing proteins such as beef, quick-service restaurants broadening their breakfast offerings, and the popularity of high-protein diets. In addition, the price of grain, the main input for egg producers, remains low.

Although Information Technology was in the black during the first half, it was also home to Premier's most significant detractor—Anixter International, which makes specialized wiring systems and distributes cables and electrical and electronic wire products. The company reduced the organic growth outlook for fiscal 2015 for two of its core distribution businesses—enterprise cabling and security solutions and electronic wire and cable—primarily due to mounting competition in cabling and security and slower U.S. industrial production keyed by the stronger dollar and lower energy-related capital spending. Lower energy prices also continued to hurt results for many energy services companies, and long-time holding Unit Corporation was no exception. Unit explores for oil and natural gas, acquires oil and gas properties, does contract drilling of onshore oil and natural gas wells, and performs gathering and processing of natural gas. In the midst of a struggling industry, the company has continued to operate effectively by reducing costs and improving efficiency. Its newly introduced drilling rig has also gained an encouraging amount of market acceptance, increasing that business segment's competitiveness. Looking at Premier's first-half sector results in relation to the Russell 2000, the Fund's underweight in Health Care had a negative effect, as did overweights in Industrials and Energy, each of which detracted from performance for the semiannual period.


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

Cal-Maine Foods 0.66
Columbia Sportswear 0.53
Fair Isaac 0.46
Zebra Technologies Cl. A 0.46
Cognex Corporation 0.36
1 Includes dividends

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

Anixter International -0.52
Unit Corporation -0.33
Trican Well Service -0.32
Lincoln Electric Holdings -0.30
Acacia Research -0.28
2 Net of dividends

Current Positioning and Outlook

After stalling briefly in the first quarter, the economy appears to have resumed its steady pace of growth. This should benefit smallcaps as a whole, particularly those in more economically sensitive areas of the market such as Industrials and Materials—two sectors in which the Fund was overweight at the end of June. As such, our focus remains on companies that are poised for profit margin expansion as their revenue growth normalizes in concert with a faster-moving U.S. economy.

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

QTR* YTD* 1 YR 3 YR 5 YR 10 YR 15 YR 20 YR SINCE INCEPT. DATE
Premier -0.94 1.67 -6.09 11.81 13.09 9.48 10.98 11.38 11.85 12/31/91
Russell 2000 0.42 4.75 6.49 17.81 17.08 8.40 7.50 9.15 9.86 N/A
Annual Operating Expenses: 1.1%

* 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 Investment Class (its oldest class). Operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees and other expenses. Shares of RPR’s Service, Consultant, R, and K Classes bear an annual distribution expense that is not borne by the Investment Class. 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 stocks, which may involve considerably more risk than investing in larger-cap stocks. The Fund also generally invests a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than more broadly diversified portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) 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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