Royce Dividend Value Fund Manager Commentary
article 02-14-2019

Royce Dividend Value Fund Manager Commentary

In the tumultuous fourth quarter, the Fund held its value better than the Russell 2000, making this the eighth time the Fund has outperformed its benchmark in the 10 negative quarters the Russell 2000 has endured in the last decade.

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Fund Performance

Royce Dividend Value Fund was down 16.2% in 2018 versus a loss of 11.0% for its small-cap benchmark, the Russell 2000 Index, for the same period. Underperformance came as a result of the Fund lagging its benchmark through the first three, more bullish quarters of the year, a period of low volatility in which small-cap growth stocks beat small-cap value, and small-cap companies that pay no dividends outpaced those that do. We were pleased, then, to see the Fund hold its value better than its index in the fourth-quarter downturn, -17.7% versus -20.2%. This was the index’s tenth negative quarter over the last decade—and the Fund outperformed in seven of them, consistent with what its lower volatility dividend value strategy seeks to deliver.

What Worked… And What Didn’t

Ten of the portfolio’s 11 equity sectors finished 2018 in the red, with the biggest negative impacts coming from Financials and Industrials, its two largest sectors at year-end as well as two of its most significant overweights versus its benchmark. Consumer Staples was the only sector to make a positive contribution, and it did so modestly. At the industry level, capital markets detracted most by a wide margin. A perennial area of concentration for the Fund due to the large number of dividend-paying asset management companies within it, the group saw disappointing performances from several holdings, including SEI Investments, which provides investment processing, investment management, and investment operations solutions to clients around the globe. With products and services knit into the operations of several customers, SEI has what we think is a strong niche that’s built for the long term. Investors mostly avoided its stock in 2018, however, especially in the downturn, when most companies associated with asset management slumped. Shares of Jupiter Fund Management, a U.K. based asset manager, fell earlier in the year due to concerns about ongoing investments in the business that will lead to cost increases in excess of revenue growth, along with continued fee declines and fund outflows. Its shares slipped further in the fourth quarter after the company reported larger-than-expected outflows. We held our position based on our belief that Jupiter is a well-managed franchise positioned for long-term growth and capable of a strong recovery.

Global staffing and services company ManpowerGroup detracted most in the Industrials sector and in the portfolio overall. Its 2018 revenues slid, as the economic environment, particularly in its European business, proved more challenging than the company had been anticipating. We held shares based on the ongoing strength of its North American and Asian business and its record of successful execution. Recreational vehicle manufacturer Thor Industries suffered through a 65% decline for its stock in 2018. Sales began to decline in the fall, forcing Thor to scale back production as independent RV dealers had overstocked their inventories earlier in the year. However, inventories were normalizing at the end of December, and Thor has also improved its production process in order to meet variable levels of demand. DENTSPLY SIRONA, a dental equipment and consumables manufacturer, was engaged in turnaround efforts aimed at improving topline growth and operating margins. The firm then suffered a serious enough decline in its fiscal third-quarter earnings for us to exit our position.


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Positive contributions at both the industry and position levels were modest. The aerospace & defense (Industrials), chemicals (Materials), and specialty retail (Consumer Discretionary) groups contributed most at the industry level. The portfolio’s top-contributing holding was footwear and accessories retailer DSW, which benefited from robust business. The firm also raised guidance in December for the remainder of fiscal 2018. HEICO Corporation, which supplies electronics and other parts to aerospace companies has defensible strength in a highly specialized niche and a conservatively capitalized balance sheet. Both attracted our initial attention while other investors seemed drawn to its steady earnings growth in 2018.

Relative to the Russell 2000, performance was impacted most in 2018 by sector allocation—stock selection was additive. Three sectors drove underperformance: ineffective stock picking hurt most in Financials, primarily due to the aforementioned capital markets group, while stock selection and our underweight each detracted in the Information Technology and Health Care sectors. Conversely, the portfolio had sizable stock selection advantages in Energy and Materials.


Top Contributors to Performance 20181 (%)

DSW Cl. A0.37
HEICO Corporation Cl. A0.27
Gaztransport Et Technigaz0.21
Expeditors International of Washington0.20
Quaker Chemical0.20

1 Includes dividends

Top Detractors from Performance 20182 (%)

ManpowerGroup-0.88
DENTSPLY SIRONA-0.76
SEI Investments-0.67
Thor Industries-0.64
Jupiter Fund Management-0.62

2 Net of dividends

Current Positioning and Outlook

While we acknowledge the many potential sources of risk on the horizon—economic, geopolitical, and financial—we also think that these concerns have already been largely reflected, perhaps even excessively so, in current valuations. In short order, we went from a period this summer when small-cap’s extended valuations seemed out of sync given the index’s high levels of debt and low profitability, to one at the end of the year where valuations seemed more pessimistic than we think is warranted—at least in select instances. We believe that the portfolio’s cyclical tilt will be rewarded as recessionary concerns dissipate during the year.

Average Annual Total Returns Through 12/31/18 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR SINCE INCEPT. DATE
Dividend Value -17.72-16.24-16.245.841.8111.087.40 05/03/04
Russell 2000 -20.20-11.01-11.017.364.4111.977.54 N/A
Russell 2500 -18.49-10.00-10.007.325.1513.158.30 N/A

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. Gross operating expenses reflect the Fund's total gross annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce & Associates has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.34% through April 30, 2018.

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, 2018, 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, 2018 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 12/31/18, the percentage of Fund assets was as follows: DSW Cl. A was 0.3%, HEICO Corporation Cl. A was 3.0%, Gaztransport Et Technigaz was 1.4%, Expeditors International of Washington was 0.0%, Quaker Chemical was 3.0%, ManpowerGroup was 1.5%, DENTSPLY SIRONA was 0.0%, SEI Investments was 1.8%, Thor Industries was 0.6%, Jupiter Fund Management was 0.9%


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 Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. 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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