Royce Dividend Value Fund Manager Commentary
article 02-12-2018

Royce Dividend Value Fund Manager Commentary

In a year that presented formidable headwinds, the Fund impressively extended its relative edge over the Russell 2000 Index.

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Fund Performance

An impressive year on both an absolute and relative basis enabled Royce Dividend Value Fund to extend its relative edge to the one-, three-, 10-year, and since inception (5/3/04) periods ended December 31, 2017. The Fund increased 21.7% in 2017, well ahead of its small-cap benchmark, the Russell 2000 Index, which was up 14.6% for the same period.

We were especially pleased to see outperformance during a year in which dividend-paying small-cap strategies faced formidable headwinds—small-caps underperformed mid- and large-caps, small-cap dividend payers trailed small-caps that pay none, and growth beat value up and down the asset class scale. Fortunately, there was also a favorable tailwind (beyond a pervasive stock selection advantage and our mid-cap holdings) in the form of exposure to international companies, as non-U.S. stocks raced ahead of their domestic cousins in 2017.

What Worked… and What Didn’t

Nine of the portfolio’s 11 equity sectors made positive contributions to calendar-year performance, with pronounced leads for Financials and Industrials. Only a slight negative impact came from the combined detraction of Telecommunication Services and Consumer Staples, two of the portfolio’s smallest sectors.

Helping relative results most were significant stock selection advantages in Financials and Industrials while our lower exposure to Health Care, the best-performing sector in the Russell 2000, hampered relative results. Ineffective stock picking in Information Technology had a much lower negative impact. (We also maintain that outperforming the benchmark with very little exposure to its highest-returning sector is an accomplishment worth noting.)

At the industry level, the capital markets industry (part of the Financials sector) made by far the biggest positive contribution to performance on both an absolute and relative basis. Alternative asset manager KKR & Co. was both the portfolio’s top contributor and its largest holding at year-end. Its shares were lifted by strong investment performance, improved fee-related earnings, and increased capital inflows that drove asset growth.

Other holdings in the group that enjoyed strong results in 2017 included top-25 positions The Carlyle Group, a multi-product global alternative asset management firm, SEI Investments, which provides technology, research, information services, and asset management to financial companies, and U.K.-based emerging market fixed income specialist Ashmore Group.

From the Industrials sector, machinery was the portfolio’s second-best performing industry and another source of significant outperformance versus the Russell 2000. Two machinery companies were among the top-five contributors to 2017 performance. IDEX Corporation manufactures industrial pumps, lubrication systems, banding and clamping devices, and rescue tools. Its shares rose on very strong results, as the company announced increases in orders, sales, and earnings per share, along with margin improvement. It was a top-10 position at year-end.

Pfeiffer Vacuum Technology, a German firm that makes specialized pumps, benefited from steady growth in the semiconductor and solar industries in China and Europe, which helped the firm to post increased earnings. Elsewhere in the Industrials sector, staffing services business ManpowerGroup benefited from improved employment trends in the U.S. and Europe as well as its optimistic expectations for broad-based global improvement in both hiring trends and economic growth.

Recordati is an Italian pharmaceuticals company from an industry that has been one of the few high-growth areas in an otherwise sluggish Italian economy, with drug companies increasing output and exports over the last seven years. Strong revenues and profits were driven by an expanded product line, specifically in its established niche of treating rare diseases.

The Fund’s top detractor was ATM provider Diebold Nixdorf, which is still transitioning to a service-based, software-centric business. While recent results showed improvement on a quarter-over-quarter basis, investors remained disappointed, and its near-term prospects looked uncertain to us at year-end, prompting us to sell our stake.

Earlier in the year we also opted to sell our shares of footwear, headwear, and sports apparel retailer Genesco as first-quarter results and revised full-year guidance fell well below expectations due to intensified competition and management’s overconfidence that it could rebalance inventory to compensate for a key fashion shift it missed last year in its Journeys footwear chain. Ongoing net losses from declining sales also led us to sell our shares in value-priced fashion retailer The Cato Corporation.


Top Contributors to Performance 20171 (%)

KKR & Co. L.P.0.88
IDEX Corporation0.88
ManpowerGroup0.87
Pfeiffer Vacuum Technology0.73
Recordati0.71

1 Includes dividends

Top Detractors from Performance 20172 (%)

Diebold Nixdorf-0.31
Genesco-0.25
Cato Corporation (The) Cl. A-0.20
Western Union-0.18
Shoe Carnival-0.17

2 Net of dividends

Current Positioning and Outlook

Our current outlook is mixed. While we are cautious about the prospects for small-cap returns as a whole, we are also optimistic about the portfolio’s return potential as it leans towards three factors that we believe will be rewarded going forward—economically sensitive cyclicals, global exposure, and—in many cases—high profitability. These are the select qualities that we anticipate will drive small-cap leadership. In this environment, we see the opportunity for the Fund to continue outperforming in the years ahead.

Average Annual Total Returns Through 12/31/17 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR SINCE INCEPT. DATE
Dividend Value 6.5521.6621.6610.1011.308.889.37 05/03/04

Annual Operating Expenses: Gross 1.39 Net 1.34

1 Not annualized.

Important Performance and Disclosure Information

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 total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 9/14/07 reflects Service Class results. Service Class shares bear an annual distribution expense that is not borne by Investment Class shares.

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

Notes to Performance and Other Important Information

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2017, 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, 2017 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future.


As of 12/31/17, the percentage of Fund assets was as follows: KKR & Co. L.P. was 2.4%, IDEX Corporation was 2.1%, ManpowerGroup was 1.9%, SEI Investments was 1.9%, Carlyle Group L.P. was 1.5%, Ashmore Group was 1.4%, Pfeiffer Vacuum Technology was 1.2%, Recordati was 1.2%, Cato Corporation (The) Cl. A was 0.0%, Diebold Nixdorf was 0.0%, Genesco was 0.0%, Shoe Carnival was 0.0%, Western Union was 0.0%.


Sector weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI. 

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. 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 Index is an 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 Russell 2000 Value and Growth Indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell 1000 Index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. The Russell Global ex-U.S. Small Cap Index is an index of global small-cap stocks, excluding the United States. The Russell Global ex-U.S. Large Cap Index is an index of global large-cap stocks, excluding the United States.

The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information.

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to: 

-the Funds’ future operating results,

-the prospects of the Funds’ portfolio companies,

-the impact of investments that the Funds have made or may make, the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

-the ability of the Funds’ portfolio companies to achieve their objectives.

This discussion uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Royce Funds have based the forward-looking statements included in this commentary on information available to us on the date of the commentary, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see ""Primary Risks for Fund Investors"" in the prospectus.)

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