Fund Performance

Royce Low-Priced Stock Fund gained 16.1% in 2016, a solid absolute result that nonetheless fell well short of its small-cap benchmark, the Russell 2000 Index, which advanced 21.3% for the same period. This disappointing relative result notwithstanding, we were encouraged by other developments in 2016.

In particular, there were three reversals that we think should continue to bode well for small-cap stocks and active management in that space: the Russell 2000 turned around 2015's negative results, value outperformed growth, and cyclicals beat defensives.

During the first half of 2016, the Fund was down 2.5%, lagging its small-cap benchmark, which gained 2.2% for the same period. Although small-caps stayed strong in the third quarter, much of the action was in growth companies, which edged out their value counterparts. The Fund also enjoyed a strong third quarter on both an absolute and relative basis, advancing 10.4% compared to 9.0% for the small-cap index.

The fourth quarter, which saw a robust, post-election rally, was less encouraging in terms of its relative result. The Fund gained 7.7% in the period versus 8.8% for the Russell 2000. The Fund was ahead of the small-cap index for the 20-year and since inception (12/15/93) periods ended December 31, 2016. Low-Priced Stock's average annual total return since inception was 10.1%.

What Worked... And What Didn't

Ten of the Fund's 11 equity sectors made net contributions to performance in 2016. Information Technology led by a wide margin, making a contribution more than twice as impactful as that of Industrials, the portfolio's second-best contributor. These were also our two largest sectors at year-end. Health Care—the only sector within the Russell 2000 with a negative return in 2016—detracted.

Two industries made substantial contributions: semiconductors & semiconductor equipment and electronic equipment, instruments & components (both from Information Technology). Software (Information Technology), pharmaceuticals (Health Care), and capital markets (Financials) detracted most, though less meaningfully, on the industry level.

The Fund's top-contributing holding was TTM Technologies, which provides time-critical, one-stop manufacturing services for printed circuit boards. Over the past year the company has begun to benefit from an earlier strategic acquisition of a key competitor that created significant cost savings while also giving TTM a much broader and more diversified product line. We held some shares at year-end as we believe we may be in the early innings of gains driven by TTM's improved position.

Cirrus Logic develops audio and voice semiconductors used primarily in mobile communications. The company is the sole provider of an end-to-end solution that spans the entire audio signal chain, which is allowing it to pick up significant incremental share in its target markets. We think its intermediateterm opportunities remained open-ended at the end of 2016.

As for detractors, our view of SeaChange International remained intact. The company provides video-on-demand software to cable television and telecommunications operators. Its efforts to offer a similar turnkey video solution to over-the-top video providers such as Netflix are proving to be a longer-term project than we had originally anticipated and which resulted in an unexpected CEO change. However, we like its inexpensive valuation and long-term prospects for success.

ZAIS Group Holdings is an investment manager focused primarily on structured credits. Recent credit market turmoil has caused investment performance to fall below various "high-water" marks, meaningfully dampening profitability and future growth opportunities. We added to our position in 2016 given its highly discounted valuation.

On a relative basis in 2016, the Fund was hurt most by both poor stock selection in capital markets and its underweight in banks, both in Financials, a source of strength for small-caps in 2016. Stock picking also detracted in Industrials and Consumer Discretionary. Conversely, savvy stock picking in Information Technology and our underweight in the underperforming Health Care sector both provided sizable relative advantages in 2016.

Current Positioning and Outlook

We were net sellers across the board in the face of the strong post-election rally, as we believe valuations have become extended based on our 2017 estimates. We continue to see a number of secular trends such as The Internet of Things and mobile computing that have positive implications for niche small-cap technology companies. While oil prices remain volatile, they appear to have bottomed in the summer. To the extent this trend holds, we expect well-capitalized companies in our portfolio to begin putting their balance sheets to work to drive long-term shareholder value.

We have added slightly to the Consumer Discretionary sector as valuations remain attractive and the U.S. consumer looks reasonably well positioned given the relative strength of our economy. However, fundamental performance continues to disappoint, so we are proceeding cautiously. We were underweight in Health Care, particularly in biotechnology, where multiples have been especially stretched relative to our valuation-sensitive discipline. However, as one of the only small-cap sectors to sit out the year-end rally, valuations in some areas of medical technology are becoming more intriguing to us.

Average Annual Total Returns Through 12/31/16 (%)

*Not Annualized

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.roycefunds.com. Operating expenses reflect the Fund’s gross total annual operating expenses for the Service Class as of the Fund’s most current prospectus, including management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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

Important Performance, Expense, and Disclosure Information