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.

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 (%)

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

Important Performance, Expense, and Disclosure Information