article 06-30-2016

2016 Semiannual Manager Commentary for Royce 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 the market has just begun to reward steady earnings and high profitability and is 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 Value Trust (NYSE: RVT) gained 8.2% on a net asset value ("NAV") basis and 4.4% on a market price basis for the year-to-date period ended June 30, 2016, compared to respective increases of 2.2% and 6.2% for its unleveraged small-cap benchmarks, the Russell 2000 and S&P SmallCap 600 Indexes, for the same period.

The year started on a sharply bearish note, with stocks declining precipitously into mid-February before rebounding through much of the late winter and spring. Small-caps felt the brunt of the downturn, and we were pleased to see the Fund show its down market resilience, as it often has throughout its long history.

First-quarter NAV returns for RVT were notable on an absolute and relative basis. The Fund gained 4.4% based on NAV (and advanced 1.7% on a market price basis), outperforming each of its benchmarks: the Russell 2000 declined 1.5% while the S&P SmallCap 600 rose 2.7% for the first quarter.

The second quarter was mostly a period of gradual recovery that favored more defensive areas, such as REITs and utilities. Some of the growth stocks that had been hurt in the winter sell-off also rebounded, while cyclical areas within Materials, Industrials, and Energy continued to do well, in sharp contrast to what we experienced in 2015.

The wave of volatility that hit the markets in the wake of the Brexit vote wound up doing little to impede this low-key bullish phase. Although it had little exposure to defensive stocks, RVT barely lost ground to the Russell 2000 during the second quarter, gaining 3.6% on an NAV basis and 2.6% based on market price versus 3.8% for the Russell 2000 and 3.5% for the S&P SmallCap 600.

The Fund also beat the Russell 2000 on both an NAV and market price basis for the one-, 15-, 20-, 25-year, and since inception (11/26/86) periods ended June 30, 2016. RVT's average annual NAV total return since inception was 10.2%.

What Worked... And What Didn't

Each of the Fund's 10 equity sectors finished 2016's first half with net gains. The resurgent Materials and Industrials sectors led by a sizable margin while a meaningful net contribution also came from Information Technology.

Three industry groups from three different sectors dominated performance—metals & mining (Materials), electronic equipment, instruments & components (Information Technology), and machinery (Industrials). Net losses at the industry level were comparatively modest.

The leading detractors were professional services (also from Industrials) and capital markets (Financials). Each of these five industry groups is an area of investment focus in the portfolio, and we were overweight in all of them relative to the Russell 2000 at the end of June.

“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 the market has just begun to reward steady earnings and high profitability and is 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."

Three of RVT's top four contributing positions came from the electronic equipment, instruments & components group, and two were acquisition targets. The stock price of Newport Corporation climbed by more than 50% in February after the company, which specializes in photonics technology, agreed to be acquired by MKS Instruments, prompting us to begin selling our position.

FEI Company produces specialized electron microscopes for protein analysis, which was a complementary business for Thermo Fisher Scientific. The acquisition was announced in May.

Long-time holding Coherent manufactures lasers and laser-based technology for scientific, commercial, and industrial customers. In January the company reported record setting quarterly bookings, boosted by orders for its Vyper™ Linebeam systems, which helped its stock to soar.

From the metals & mining group, Toronto's Franco-Nevada Corporation owns royalties and streams in gold mining and other commodity and natural resource investments. The company paid down debt, increased its dividend, and offered upward earnings revisions, all as gold prices surged during the first half.

As for those holdings that detracted from performance, we held our position in ZAIS Group Holdings, an investment manager focused on specialized credit strategies—a segment of the capital markets with what we think is considerable long-term potential. Its shares fell with a net quarterly loss reported in March and then were volatile, though mostly down, through the end of June.

We added shares of The Advisory Board Company, which provides best practice research and analysis to the health care industry, after its decelerating core healthcare business and warnings of lower revenues sank its shares. We like its niche business and think its long-term prospects remain promising.


Top Contributors to Performance
For 2016 (%)1

Newport Corporation 0.43
Coherent  0.41
Franco-Nevada Corporation 0.38
FEI Company 0.34
Ritchie Bros. Auctioneers 0.33
1 Includes dividends

Top Detractors from Performance
For 2016 (%)2

ZAIS Group Holdings Cl. A -0.31
The Advisory Board -0.24
On Assignment  -0.20
Zealand Pharma -0.16
Artisan Partners Asset Management Cl. A -0.15
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 RVT'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 the market has just begun to reward steady earnings and high profitability and is 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 3 YR 5 YR 10 YR SINCE INCEPT. DATE
Royce Value Trust NAV 3.57 -2.24 6.13 5.77 5.05 10.15 11/26/1986
Russell 2000 3.79 -6.73 7.09 8.35 6.20 N/A 12/29/1978

* 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 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, Newport Corporation was 0.0% of the Fund’s net assets, FEI Company was 0.7%, Coherent was 1.1%, Franco-Nevada Corporation was 0.9%, ZAIS Group Holdings was 0.1%, and The Advisory Board Company 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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