article 02-24-2016

Royce Value Trust Manager Commentary

Our own research and regular meetings with management teams have made us comfortable with a contrarian, pro-cyclical bias for the portfolio. Moreover, we suspect that the protracted leadership of growth over value stocks is likely to reverse in 2016 and believe that companies with better balance sheets will do well in an environment of elevated corporate bond spreads.

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Fund Performance

Royce Value Trust (NYSE: RVT) fell 8.1% on an NAV (net asset value) basis and 9.6% on a market price basis in 2015, behind both of its unleveraged small-cap benchmarks. For the same period, the Russell 2000 was down 4.4% while the S&P SmallCap 600 slid 2.0%. For the year-to-date period ended June 30, 2015, RVT gained 1.7% on an NAV basis and 0.3% based on its market price versus respective gains of 4.8% and 4.2% for the Russell 2000 and S&P SmallCap 600.

The third quarter saw a significant correction for equities. In this challenging environment, the Fund was down 12.4% on an NAV basis and 14.6% on a market price basis. For the same period, the Russell 2000 fell 11.9% and the S&P SmallCap 600 was down 9.3%. Stocks then rallied in the fourth quarter through most of October and November. For the quarter as a whole, RVT advanced 3.2% based on NAV and 5.6% based on market price while the Russell 2000 increased 3.6% and the S&P SmallCap 600 rose 3.7%.

For a sense of how challenging the year was for small-cap stocks (and the active managers who pick them), consider that the Russell 2000 lost 10.1% on an equal-weighted basis in 2015. This shows just how hard it was to find stocks that grew appreciably by year-end, especially in the more economically sensitive, cyclical areas of the market that have been our primary focus over the last few years. In this climate, we continued to focus on companies that in our analyses showed a combination of attractive valuation, balance sheet strength, and/or promising growth prospects.

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 December 31, 2015 while trailing the S&P SmallCap 600. RVT’s average annual NAV total return for the since inception period was 10.0%.

What Worked... And What Didn't

Six of the Fund's 10 equity sectors finished the year in negative territory, which compares favorably to the eight of 10 detracting sectors in the Russell 2000. Industrials, where we were substantially overweight at the end of 2015, detracted most on an absolute basis. It also hurt relative performance, but our disadvantage resulted from greater exposure to the sector—stock selection was a net positive versus the benchmark.

On an industry level, the sector's largest net losses in Industrials came from machinery stocks, which was also a significant overweight. Long-time holding Kennametal makes tools and tooling systems, focusing on the metalworking, mining, oil, and energy industries, all of which faced sluggish industry conditions in 2015.

The Financials, Energy, Information Technology, Consumer Discretionary, and Materials sectors also posted notable net losses. At the industry level, significant detractors other than machinery included electronic equipment, instruments & components, energy equipment & services, and capital markets. Slumping commodity prices and slowing industrial activity on a near-global scale were major factors behind poor performance for these areas. Modest net gains came from Health Care and Consumer Staples.

At the position level, RVT's biggest detractor was Dundee Corporation, a holding company based in Toronto that is involved in investment advisory, corporate finance, energy, resources, agriculture, real estate, and infrastructure. The company also holds investment portfolios in these areas. Its stock was hurt by its large exposure to the commodity markets. Confident in its long-term potential, we added shares in 2015.

We did the same with our position in Tejon Ranch. Based in Lebec, CA., Tejon is a diversified real estate development and agribusiness company that is also one of the largest private landowners in the Golden State. Reduced revenues in its commodity-based farming and mineral resources businesses, as well as increased expenses across several business units, drove investors away from its shares.

"We expect reversals in a number of trends that should benefit many portfolio holdings over the next few years… We also expect the combined effects of these reversals to put the market's focus squarely on the attributes we emphasize, which we think are overdue for recovery."

The largest detractor to relative performance on a sector basis in 2015 was Information Technology, where poor stock selection in the electronic equipment, instruments & components and semiconductors & semiconductor equipment industries hurt most.

The combination of an underweight in banks, an overweight in capital markets, and poor stock selection in insurance all hampered relative results in Financials. Health Care's modest net gain in the portfolio was mitigated by our significant underweight in the sector (particularly in biotech)—it detracted from results relative to the Russell 2000.

We were pleased, however, with our stock-picking strength in Materials and Consumer Discretionary—two highly challenged sectors in which we sought to high-grade positions in 2015.


Top Contributors to Performance
For 2015 (%)1

Hackett Group (The) 0.59
American Woodmark 0.35
On Assignment 0.30
MarketAxess Holdings 0.30
John Bean Technologies 0.24
1 Includes dividends

Top Detractors from Performance
For 2015 (%)2

Dundee Corporation Cl. A -0.37
Tejon Ranch -0.28
Kennametal -0.25
Greenlight Capital Re Cl. A -0.25
UTi Worldwide -0.25
2 Net of dividends

Current Positioning and Outlook

We expect reversals in a number of trends that should benefit many portfolio holdings over the next few years. Our own research and regular meetings with confident management teams have made us comfortable with a contrarian, pro-cyclical bias for the portfolio. Moreover, we suspect that the protracted leadership of growth over value stocks is likely to reverse in 2016 and believe that companies with better balance sheets will do well in an environment of elevated corporate bond spreads. We also expect the combined effects of these reversals to put the market's focus squarely on the attributes we emphasize, which we think are overdue for recovery.

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

  QTR* 1 YR 3 YR 5 YR 10 YR 15 YR 20 YR SINCE INCEPT. DATE
Royce Value Trust NAV 3.21 -8.09 7.51 5.22 5.19 7.57 9.30 10.03 11/26/1986
Russell 2000 3.59 -4.41 11.65 9.19 6.80 7.28 8.03 9.11 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 December 31, 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 December 31, 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.

As of 12/31/15, Dundee Corporation was 0.3% of the Fund’s net assets, and Tejon Ranch was 0.6%.

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 portfolio 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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