article 06-30-2016

2016 Semiannual Manager Commentary for Royce Global Value Trust

We continue to believe that an extended period of slow growth should be enough to keep profitable cyclicals climbing. In many cases, it appears that several global markets have just begun to reward steady earnings and high profitability and are only gradually recognizing how low valuations had become for many cyclicals. Going forward, we remain confident that earnings, profitability, and low leverage will matter more and more to investors through what we expect should be a long-running cycle.

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Fund Performance

Royce Global Value Trust (NYSE: RGT) increased 3.9% on a net asset value ("NAV") basis and 2.0% on a market price basis for the year-to-date period ended June 30, 2016, outperforming its unleveraged benchmark, the Russell Global Small Cap Index, which was up 1.4% for the same period.

The year began on a distinctly bearish note, with small-cap stocks across much of the globe declining into the middle of February before recovery for many began. The Fund outperformed on an NAV basis in the first quarter, up 2.3% (while falling 1.1% on a market price basis) compared to a decline of 0.2% for its benchmark. 

The second quarter was moving along at a modestly bullish pace until the Brexit vote upended capital markets on a worldwide basis. For many markets outside Europe, however, the disarray proved very temporary, with many global small-caps already rebounding before the end of June.

RGT, notwithstanding its much greater weighting in Western Europe—and in the United Kingdom in particular—fell only fractionally behind its benchmark in the period.

For the second quarter, the Fund was virtually even with the Russell Global Small Cap, up 1.6% on an NAV basis (and +3.1% based on market price) versus 1.6% for the benchmark. The Fund's strong first half helped it to outperform the Russell Global Small Cap on an NAV basis for the one-year period ended June 30, 2016.

What Worked... And What Didn't

Materials and Financials led the list of eight of the Fund's 10 equity sectors that made net contributions to first-half results. Health Care, Consumer Discretionary, Energy, and Telecommunication Services detracted, with comparatively modest net losses.

The metals & mining group in the Materials sector had by far the biggest net gains of the portfolio's industry groups. We were overweight in this industry in the first half, holding what we think is an attractive balance of industrials metals companies and businesses involved in precious metals mining.

Three of the Fund's top five contributing holdings hailed from the industry—Pan American Silver, Agnico Eagle Mines, and Major Drilling Group International—and benefited from the rebound in precious metals prices during the first half. Canada's Major Drilling Group International was also helped by increased revenues and margins in what was a challenging environment for its business in early 2016.

Moving from Materials to Financials, Genworth MI Canada is that country's leading residential mortgage insurance provider. Its stock rebounded with consecutive quarters of strong results which were driven by a loss ratio that remains below the low end of its guidance. This has eased investor anxieties about the impact of lower oil prices in resource-rich Alberta, where about 20% of its policies are written. The recovery in oil prices also helped its shares to surge.

Positions that detracted from first-half performance included two holdings in the Health Care sector.

Virbac is a French firm that makes vaccines, antibiotics, and other veterinary medications. Its shares suffered mostly from the negative results of a 2014 FDA investigation of its U.S. plant in St. Louis that were released earlier this year. We were confident that the company had dealt effectively with these issues, though we reduced our position in the first half.

Consort Medical is a U.K. based business that supplies drug delivery devices and development services to pharmaceutical companies. It continued to execute effectively and profitably in the first half, but its shares were caught up first in the widespread sell-off for bio-pharma companies and then in the crashing wave of Brexit.

On a country level, the largest positive contributions came from Canada, Brazil, and Japan while the U.K. and France detracted most. Relative to its benchmark, RGT was helped chiefly by its overweight and savvy stock picking in the previously mentioned metals & mining group, its underweight in biotechnology, and successful stock selection both in thrifts & mortgage services and in a number of industries in Information Technology.

Conversely, our underweight in REITs, ineffective stocks picks in pharmaceuticals, and our lack of exposure to Utilities all hurt versus the benchmark.


Top Contributors to Performance
For 2016(%)1

Pan American Silver 0.61
Genworth MI Canada 0.60
CETIP - Mercados Organizados 0.46
Agnico Eagle Mines 0.42
Major Drilling Group International 0.38
1 Includes dividends

Top Detractors from Performance
For 2016 (%)2

Virbac -0.49
Consort Medical -0.29
Value Partners Group -0.29
Midland Holdings -0.26
Gaztransport Et Technigaz -0.21
2 Net of dividends

Current Positioning and Outlook

While the corporate earnings picture is a phenomenon we continue to watch quite carefully, we are cautiously optimistic about RGT's near- and long-term prospects, basing our belief primarily on two factors—the growing performance advantage of small-cap value versus growth and the relatively attractive valuation and earnings picture for many cyclical stocks.

We continue to believe that an extended period of slow growth should be enough to keep profitable cyclicals climbing, especially after factoring in the ways in which low expectations and—for some industries—oversold conditions depressed the stock prices of so many small-caps that we see as attractive—that is, solidly profitable—businesses.

In many cases, it appears that several global markets have just begun to reward steady earnings and high profitability and are only gradually recognizing how low valuations had become for many cyclicals.

Going forward, we remain confident that earnings, profitability, and low leverage will matter more and more to investors through what we expect should be a long-running cycle.

Average Annual Total Returns Through 6/30/16 (%)

  QTR* 1 YR SINCE INCEPT. DATE
Royce Global Value Trust NAV 1.55 -5.05 -1.26 10/17/2013
Russell Global Small Cap 1.56 -6.37 0.95 07/01/1996

* 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 investments in securities of larger-cap companies. The Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency and other risks not encountered in U.S. investments. 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 2016.

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, 2016, 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, 2016 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 6/30/16, Pan American Silver was 0.5% of the Fund’s net assets, Agnico Eagle Mines was 0.3%, Major Drilling Group International was 0.7%, Genworth MI Canada was 0.5%, Virbac was 0.7%, and Consort Medical was 0.8%.

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 Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. Index returns include net reinvested dividends and/or interest income. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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