Fund Performance

Royce Premier Fund was up 6.5% for the year-to-date period ended June 30, 2016, more than doubling the 2.2% gain for the Russell 2000 Index, its small-cap benchmark, for the same period.

Particularly in the volatile first quarter, the Fund benefited from long-awaited market reversals in favor of companies with positive earnings, better balance sheets, and higher profitability, all of which fit well with the Fund's strategy. Premier gained 4.4% in the first quarter compared to a decline of 1.5% for the small-cap index.

The second quarter saw a brief but powerful burst of high volatility in the aftermath of the Brexit vote. Following a few very bearish session, the U.S. equity markets resumed their previously placid bullish pace.

The Fund delivered positive returns, but lagged the index in the second quarter, up 2.0% for the period compared to a 3.8% gain for the Russell 2000. Longer-term results remained strong—and encouraging given our belief that the capital markets are slowly but surely returning to what we regard as normal.

The Fund outperformed its benchmark for the one-, 10-, 15-, 20-year, and since inception (12/31/91) periods ended June 30, 2016. Premier's average annual total return since inception was 11.1%—a long-term record in which we take great pride.

What Worked... And What Didn't

Notwithstanding the high volatility in the first half, seven of the Fund’s eight equity sectors finished the semiannual period with net gains. Only Energy detracted, and its net loss was modest. Industrials led by a wide margin, more than doubling the contribution from Consumer Discretionary, the portfolio's second-best performing sector.

Three of the top-five contributing industry groups came from Industrials—commercial services & supplies, machinery, and construction & engineering—as did three of the portfolio's best performing positions.

Ritchie Bros. Auctioneers is a long-time holding that we first bought in Premier's portfolio in 2000. This leading auctioneer of used industrial equipment continued to benefit from management's ongoing efforts to improve profitability as well as robust auction volumes from its construction segment and market share gains in newer target areas such as transportation and agriculture. Although we took some gains as its shares rose, it was the Fund’s second-largest position at the end of June.

Copart was the portfolio's largest holding and another top contributor from the Industrials sector. The company has what we think is a strong niche providing vehicle suppliers, primarily insurance companies, with services to process and sell salvage vehicles through auctions. During the first half, it benefited from favorable industry tailwinds, including aging vehicle fleets and the increased cost and complexity of car repairs due to the greater number of computerized parts, that created higher salvage volumes.

Valmont Industries makes specialty metal products and coatings for lighting, communication, and utility markets as well as agricultural irrigation products. We like the way its management has reduced costs in the face of prolonged depressed demand, which should allow the company to see improved operating margins this year, though we are keeping an eye on the potential partial offset of rising steel prices.

Speaking of steel, and moving outside Industrials, Reliance Steel & Aluminum benefited from a sharp rise in steel and other base metals prices. Strong demand from the auto and aerospace sectors, as well as incremental improvement in commercial construction, continues to underpin solid volume trends, while distributor inventories are lean, with extended mill lead times for some products.

The Industrials sector was also home to the Fund's biggest detractor in the first half. The Advisory Board provides best practice research and analysis to the health care industry. We reduced our position as business in its core healthcare segment decelerated, with below-rate subscriptions signings likely to impact the company through the end of the year.

Jones Lang LaSalle provides real estate brokerage and property management services. It continues to execute well but a deceleration in commercial real estate transaction volumes—mostly related to volatile capital markets in the first half—have hurt its results. We think the market's reaction was extreme and we held shares at the end of June.

Relative to the Russell 2000, the Fund was helped most by its underweight and stock selection in Health Care, with the latter factor strongest in life sciences tools & services and health care equipment & supplies.

The Industrials sector was also a major source of outperformance, thanks to our overweight and effective stock picks in commercial services & supplies and marine. Conversely, our lack of exposure to REITs and the Utilities sector negatively affected first-half performance as these interest-rate sensitive stocks rallied as bond yields fell.

Current Positioning and Outlook

Portfolio positioning remains largely intact, although in Industrials we lowered our exposure to machinery and increased it in construction & engineering. We continue to see the greatest values in leading companies in cyclically sensitive areas, particularly those within the industrial part of the economy, which can be seen in our largest sector weightings in Industrials and Information Technology.

Moreover, while the Fund rarely has holdings among REITs, Utilities, and Telecommunication Services stocks, with Treasury Bond yields at historic lows, we are very comfortable with the Fund's lack of exposure in those areas.

Average Annual Total Returns as of Quarter-End 6/30/16 (%)

* Not Annualized

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

Important Performance, Expense, and Disclosure Information