Royce Value Trust Manager Commentary | Royce Funds
article 06-30-2015

Royce Value Trust Manager Commentary

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


Fund Performance

Royce Value Trust (NYSE: RVT) gained 1.7% on an NAV (net asset value) basis and 0.3% on a market price basis for the year-to-date period ended June 30, 2015, lagging each of its unleveraged small-cap benchmarks. For the same period, the Russell 2000 Index rose 4.8% while the S&P SmallCap 600 climbed 4.2%. Equities got off to a slow start in 2015 but soon righted themselves, with a bearish January giving way to solid first-quarter gains that were driven mostly by a strong rebound in February. RVT was up 1.0% on an NAV basis and 2.0% on a market price basis during the first quarter, trailing the Russell 2000, which gained 4.3%, and the S&P SmallCap 600, which advanced 4.0%.

A similar pattern could be seen in the second quarter, as small-cap share prices stumbled through a downturn in April (when RVT lost less than both small-cap indexes on an NAV and market price basis) before rallying in May. June wound up being a volatile month, though this was not fully felt until its second-to-last day when the Greek default sent global stock prices into a tailspin. On an NAV basis, the Fund felt the brunt less than its benchmarks, which helped to make the second quarter a relatively strong one. RVT was up 0.7% based on NAV but fell 1.7% based on market price, while the Russell 2000 was up 0.4% and the S&P Small Cap 600 rose 0.2%. This was not enough, however, to overcome the portfolio's firstquarter disadvantage. On an NAV and market price basis, the Fund outperformed the Russell 2000 for the 15-, 20-, 25-year, and since inception (11/26/86) periods ended June 30, 2015 while trailing the S&P SmallCap 600. RVT's average annual NAV total return for the since inception period was 10.6%.

What Worked... And What Didn't

On a relative basis versus the Russell 2000, two sectors made a significant negative impact for the semiannual period. Health Care was the clear leader within the small-cap market as a whole, driven by highly impressive results for biotech stocks. The Fund was significantly underweight this sector and had very limited exposure to biotech companies, which hurt relative performance. RVT was slightly overweight in Information Technology during the first half but was also meaningfully underweight in software companies, which dominated overall small-cap returns in a fashion similar to what biotech did in Health Care.

RVT's first-half results were also affected by net losses in the Energy and Materials sectors. In the former, the energy equipment & services group had a sizable negative impact while the metals & mining group in Materials detracted most out of all the Fund's industry groups. Net losses at the position level were relatively modest. ADTRAN manufactures telecommunications networking equipment and internetworking products. We began reducing our position in the first half, primarily due to our frustration with waiting several quarters for revenues from a telecom equipment deal with AT&T to produce revenue. ADTRAN then announced that this project had been effectively scrapped because AT&T was rethinking its capital spending plans. Absent this business, which we thought would be a key revenue driver going forward, ADTRAN's outlook looked far less attractive relative to other opportunities. We chose to hold our shares of Anixter International as its stock slipped. The company provides security systems and solutions, makes enterprise cabling, and also distributes electrical and electronic wire. Its stock was hurt when the company reduced its organic growth outlook for the year in two of its core distribution businesses—the enterprise cabling and security solutions line and its electronic wire and cable segment. Still, we like its prospects for recovery. We also held shares of another detractor, Qalaa Holdings (formerly Citadel Capital), a leading investment company in Africa and the Middle East. Its stock suffered from fears that lower oil prices would result in a reduction in Egyptian investment by the oil-producing countries of the Persian Gulf.

Turning to those areas that contributed to first-half returns, Industrials topped all of RVT's 10 equity sectors and was positive relative to the Russell 2000. Top-contributing positions included The Hackett Group, which offers business consulting and technology implementation services. The firm's shares moved higher in mid-May following the announcement of sterling results for its fiscal first quarter. Value Partners Group is a Hong Kong-based asset manager. Its stock rose sharply into May before correcting with the decline in Chinese stocks. We were pleased to see growth in its assets under management and improved performance and management fees, all of which helped its earnings. Nautilus, like The Hackett Group a top-10 holding at the end of June, makes branded health and fitness products such as Schwinn, Bowflex, and Nautilus itself. Its stock grew stronger after the firm reported double-digit earnings growth for its fiscal first quarter.

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

Hackett Group (The) 0.37
Value Partners Group 0.34
Nautilus 0.33
Insperity 0.18
On Assignment 0.17
1 Includes dividends

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

ADTRAN -0.14
Anixter International -0.13
Citadel Capital -0.13
Preformed Line Products -0.12
Ethan Allen Interiors -0.11
2 Net of dividends

Current Positioning and Outlook

At the end of June, RVT remained overweight in Industrials, Materials, and Information Technology—substantially so in the first two of the three sectors. Our focus remains on companies that look 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 (%)

RVT -1.72 0.27 -2.60 15.13 14.51 5.22 9.10 10.32 9.78 11/26/1986
XRVTX 0.73 1.69 -0.49 15.08 13.90 7.34 8.87 10.26 10.61 11/26/1986
Russell 2000 0.42 4.75 6.49 17.81 17.08 8.40 7.50 9.15 9.63 N/A

* Not Annualized

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

Important Performance, Expense, and Disclosure Information

All performance information reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the most recent month-end may be obtained here. The market price of the Fund’s shares will fluctuate, so that shares may be worth more or less than their original cost when sold. The Fund invests primarily in securities of small- and micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. Regarding the "Top Contributors" and "Top Detractors" tables, 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.

The Fund is a closed-end registered investment company whose shares of common stock may trade at a discount to their net asset value. Shares of the Fund's common stock are also subject to the market risks of investing in the underlying portoflio securities held by the Fund. This Fund is a closed-end fund whose shares of common stock trade on the NYSE. Royce Fund Services, Inc. ("RFS") is a member of FINRA and has filed this material with FINRA on behalf of the Fund. RFS does not serve as a distributor or as an underwriter to the Fund. 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 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 S&P SmallCap 600 are indices of U.S. large- and small-cap stocks, respectively, selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.



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