Fund Performance

Royce International Premier Fund enjoyed a strong year on both an absolute and relative basis. The Fund advanced 16.2% in 2015, substantially ahead of its benchmark, the Russell Global ex-U.S. Small Cap Index, which advanced 0.5% for the same period. The portfolio’s advantage was wire to wire. For the year-to-date period ended June 30, 2015 the Fund gained 13.7%, outperforming its benchmark, which was up 7.7%.

During the widespread global correction in the third quarter International Premier was down 5.8% versus a decline of 11.2% for the Russell Global ex-U.S. Small Cap. The Fund then increased 8.5% for the fourth quarter while its benchmark rose 5.1%.

The portfolio’s terrific results in 2015 helped it establish a relative advantage over longer-term periods. International Premier outpaced the Russell Global ex-U.S. Small Cap for the three-year and identical five-year/since inception (12/31/10) periods ended December 31, 2015.

What Worked... And What Didn't

Seven of the Fund’s eight equity sectors finished 2015 in the black. The most significant net gains came from Industrials and Health Care, followed by Financials and Information Technology. At the industry level, health care equipment & supplies, commercial services & supplies, and pharmaceuticals made large positive impacts.

Net losses at the sector and industry level were decidedly modest. Energy was the lone sector in negative territory while the chemicals, aerospace & defense, and real estate management & development groups detracted most on the industry level.

The share price of Swiss financial advisory business VZ Holding rose through most of the year. VZ exceeded earnings estimates twice in 2015, extending a record of profitable growth going back 14 years to its founding. The company’s ability to drive growth via recurring revenues and substantial barriers to entry—bundled in a highly profitable and relatively low-risk structure—exemplifies the qualities we seek in all of our holdings. VZ was one of seven positions at year-end headquartered in Switzerland, a country that houses an impressive concentration of what we think are premier companies.

The rise in Bajaj Finance’s share price was similar, building through much of the year without any dramatic advances. In our estimate one of the best-managed, and certainly one of the fastest-growing non-bank finance companies in India, Bajaj is located in a market which is home to the fastest-growing middle class among the major emerging markets. Strong performance from its consumer unit was a major factor in both growth in assets under management and better-than-expected earnings. A nascent credit market, India should see greater credit penetration, which should benefit Bajaj. Both were top-10 positions at year-end.

The share price of London-based AVEVA Group, by contrast, shot upward in July, following a somewhat complicated deal with France’s Schneider Electric to purchase 54% of the company, which produces CAD-CAM software used in the production of large-scale infrastructure, via an asset swap. We exited our position after this announcement, as we thought AVEVA’s shares were fully valued.

Far and away the biggest detractor for 2015 was Brazil’s TOTVS, which supplies enterprise resource planning (ERP) software. Bucking the trend of that nation’s economic and political challenges, TOTVS exploited its coveted brand and 70% market share to execute in Brazil’s fledgling software market, where only 13% of IT spending goes to software (compared to 26% in the U.S.) However, foreign currency posed a challenge for us as unhedged investors as the Brazilian real lost 47% of its value against the U.S. dollar in 2015, overwhelming the company’s more modest 13% share-price decline in local currency.

Senior is a manufacturing company specializing in the aerospace, defense, land-vehicle, and energy markets with operations in 14 countries. Earnings and margins were challenged a bit, though revenues and cash flows remained brisk. We built our position throughout the year.

On a relative scale, Industrials, Health Care, and Financials gave the portfolio large—and quite substantial— advantages over the benchmark, in each case keyed by strong stock selection. This was especially the case in the commercial services & supplies and marine industry groups in Industrials. In Health Care, pharmaceuticals was strongest while in Financials consumer finance and capital markets had the biggest relative advantages. The Fund was slightly disadvantaged by our underweight in the Consumer Staples sector.

Current Positioning and Outlook

We have high confidence in our holdings given their prospects to grow a-cyclically, generate cash, self-fund, and maintain or improve market share. Further, the countries on which our strategy focuses—the U.K., Japan, Switzerland, and other European nations north of the Alps—have a high concentration of what we see as well-managed, high-quality businesses with ample room for growth.

Valuations remain attractive in large part because many non-U.S. stocks underperformed over much of the last five years. We also see currency as a positive. So while U.S. dollar strength has created a performance headwind, U.S. dollar-based investors have substantially more purchasing power than they did when we launched the Fund five years ago because, unlike some of our peers, we do not hedge currency.

At year-end we had relatively greater exposure to the U.K., Switzerland, Germany, and France while at the sector level we had larger weightings in Industrials, Information Technology, and Health Care.

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

* Not Annualized

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

Important Performance, Expense, and Disclosure Information