It was a terrific first-half result for the Growth-at-a-Reasonable-Price approach we use in Royce Smaller-Companies Growth Fund (formerly Royce Value Plus Fund). The Fund increased 8.9% for the year-to-date period ended June 30, 2015, ahead of its small-cap benchmark, the Russell 2000 Index, which rose 4.8% for the same period.

Along with much of the rest of the small-cap market, the Fund stumbled a bit out of the gate, enduring a bearish January. Its rebound in February was impressive, however, as it finished the month well ahead of its benchmark. For the first quarter Smaller-Companies Growth advanced 4.8%, edging ahead of the Russell 2000, which climbed 4.3% for the same period. The Fund's relative advantage was both more decisive and more evenly spread out in the second quarter— it beat the small-cap index in the slightly bearish April, the more bullish May, and volatile June. The Fund finished the quarter with a 4.0% gain compared to a 0.4% increase for the Russell 2000. The portfolio's strong first half helped long-term results on both an absolute and relative basis. Smaller-Companies Growth outperformed the Russell 2000 for the one-, 10-year, and since inception (6/14/01) periods ended June 30, 2015. The Fund's average annual total return since inception was 12.4%.

What Worked... And What Didn't

The portfolio was slightly overweight in Health Care during the first half, when overall market leadership came overwhelmingly from biotech stocks. Within the Russell 2000, pharmaceuticals and health care providers & services also posted notable net gains. We were very pleased, then, that stock selection and the Fund's overweight, which included greater average exposure to both biotech and pharmaceuticals, made positive impacts on first-half returns vis-à-vis the small-cap index. Shares of Anacor Pharmaceuticals appreciated steadily based on the ongoing successful launch of its first commercial product, Kerydin, a topical antifungal medication. The market was also anticipating positive clinical results for its lead development compound, Crisaborole, a topical treatment for atopic dermatitis. We took advantage of its rising stock price to reduce our position somewhat. However, we remain optimistic about the prospects for both products, and Anacor remained a core holding in the Fund at the end of June. Cambrex Corporation is a life sciences company that provides active pharmaceutical ingredients ("APIs") for the pharmaceuticals industry. We think very highly of this business— pharmaceuticals companies typically outsource around 50% of their API business, and Cambrex has one of the best reputations in this attractive niche. Its shares grew particularly healthy in February after the company reported terrific results for the fourth quarter and fiscal 2015. Among other developments, investors especially liked its expanded partnership with Gilead Science to provide APIs for the Big Pharma firm's hepatitis C drug, Harvoni, which was approved for use in the U.S. and Europe late in 2014.

Four other sectors posted strong-to-solid net gains in the semiannual period, including Consumer Discretionary and Information Technology—the Fund's two largest at the end of June. Gentherm hails from the first of these sectors and is a leader in the manufacture of variable temperature climate control devices primarily for the automotive markets. We like the ways the firm is positioning itself for future growth: First, it has been penetrating further into the automotive markets by offering cooling seats, as well as heated and cooling steering wheels, back seats, and cup holders, in addition to cooling compartments. Second, it is moving into other industries, such as mattresses. Shares of Paylocity Holding Corporation rallied after the company reported strong revenue growth for the first quarter and raised guidance for the full year. We continue to see ample growth potential for this cloud-based software provider specializing in payroll and human resources.

Net losses for the semiannual period were comparatively modest at the sector, industry, and position levels. The Materials, Energy, and Consumer Staples sectors detracted from returns, as did one of 2014's top contributors, Sierra Wireless, which provides wireless data communications equipment for M2M (machine-to-machine) communications and mobile components. Its shares fell due to a slowdown in its wireless solutions business—which typically acts as a key driver of sales for its components. We see this as a temporary issue and view Sierra as a well-managed, quality business with a long runway for future growth. We reduced our position in retailer Zumiez, which sells sports-related apparel, footwear, and other equipment, after tiring of recent losses.

Current Positioning and Outlook

We continue to selectively build positions in Health Care, focusing on areas such as biotech, pharmaceuticals, and behavioral health services, which we continue to see as a vibrant theme. The portfolio was also substantially overweight in Consumer Discretionary at the end of June, which reflects our confidence in the ongoing health of consumer spending against a backdrop of higher employment and lower energy prices.

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

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

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