Fund Performance

Royce International Micro-Cap Fund was down 1.0% in 2015, trailing its benchmark, the Russell ex-U.S. Global Small Cap Index, which was up 0.5% for the same period. For the year-to-date period ended June 30, 2015, the Fund advanced 7.5% while its benchmark gained 7.7%.

Stocks across the globe were then sent reeling in the sweeping correction during the third quarter, in which the Fund lost 10.7% versus a decline of 11.2% for the Russell ex-U.S. Global Small Cap. The Fund then gained 3.2% compared to a 5.1% increase for the non-U.S. small-cap index in the fourth quarter. We were pleased that the Fund outperformed its benchmark for the three-year period ended December 31, 2015. International Micro-Cap also celebrated five years of performance history at year-end.

What Worked... And What Didn't

On a sector basis, net gains and losses were split down the middle, with four making contributions and four detracting from calendar-year results. The most significant net gains came from Industrials and Financials while the largest net losses by far could be found in Information Technology.

There was a similar pattern on an industry group basis. Three posted notable contributions—textile, apparel & luxury goods, road & rail, and capital markets, while three areas showed good-sized net losses—electronic equipment, instruments & components, multiline retail, and metals & mining.

Two of the portfolio's top four detractors came from the Consumer Discretionary sector. Malaysia's Parkson Retail Asia has been hit by a slowdown in consumer spending in Southeast Asia and an expansion into Vietnam that encountered setbacks with local partners. Its shares were also hampered by political scandal and a slowdown in the Malaysian economy that further reduced consumer demand. Confident that the firm can bounce back, we continued to hold shares at year-end.

Brazil's T4F Entretenimento operates at all levels of the global entertainment industry, including venue operation, ticketing, food & beverage, merchandise sales, and corporate sponsorships. Its business continued to perform well in 2015, but as U.S. investors our position was compromised by ongoing weakness in the Brazilian real. It was the Fund's fourteenth-largest position at year-end.

Imdex is an Australian business that provides drilling fluids and down hole instrumentation to the mining, oil & gas, water well, and civil engineering industries worldwide. Continued weakness in the mining and oil industries has slowed demand for its equipment. Liking the way in which the company has worked on deleveraging its balance sheet, we think it's well positioned for any recovery and held a stake at the end of 2015.

We thought otherwise about SuperCom, which we exited in November as mounting skepticism about the company's growth prospects seemed to come to a head when the CFO departed, leading to a steep decline in its stock. Based in Israel, the company makes electronic identity solutions including electronic monitoring, identification, and security products.

Ireland's Trinity Biotech was caught up in the sell-off with the rest of the biotech sector in the third quarter. However, we like its product pipeline, so we held a large stake in the company, which provides products for the point-of-care, self-testing, and clinical laboratory segments of the diagnostic market.

There were notable successes as well. Headquartered in Japan, TRANCOM offers distribution information, logistic management service, freight transportation, and system development services. The company continues to gain market share as a growing number of customers are outsourcing their transportation needs. Taiwan PAIHO saw strong growth in demand for sports apparel and shoes translate into strong demand for its fasteners.

On a relative basis, the Fund suffered from ineffective stock selection in the Information Technology and, to a lesser degree, Consumer Discretionary sectors. Conversely, we benefited from successful stock selection in Financials and Industrials.

Current Positioning and Outlook

Europe and Japan have seen underlying improvements in their respective economies, though growth has so far been modest. While these markets rallied in 2015, we still see a large number of mispriced opportunities in the micro-cap space. Canadian stocks sold off dramatically in 2015, which was largely the result of the steep decline in oil prices, though it did not spare our related holdings in technology, manufacturing, and services.

Along with plummeting share prices, the greatly weakened Canadian dollar has presented what we see as a large number of opportunities. The overall environment in developing markets remains challenging as growth rates in these countries have cooled considerably. While there may be a little bit more downside in these markets, we think they should recover nicely once they bottom, as they have done historically.

Canada, Germany, and Hong Kong were the portfolio's largest overweights by country at year-end, though Japan accounted for the largest percentage of net assets. On a sector basis, we had greater exposure to Consumer Discretionary and Information Technology (the Fund's two largest sectors) with comparable exposure to Industrials. We were also underweight Financials, Health Care, Materials, Consumer Staples, and Energy at year-end.

Average Annual Total Returns Through 12/31/15 (%)

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

Important Performance, Expense, and Disclosure Information