Royce Low-Priced Stock Fund Manager Commentary
article 02-14-2019

Royce Low-Priced Stock Fund Manager Commentary

Savvy stock selection helped to drive results for this Fund that features a generous number of micro-cap stocks in cyclical sectors.

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Fund Performance

Although Royce Low-Priced Stock Fund had a negative return for the calendar-year period, the Fund outperformed its index, most notably during the bearish environment we saw toward the end of 2018. The Fund returned -9.3% for 2018, outperforming the Russell 2000 Index, which fell 11.0% for the same period. Outperformance resulted from the Fund beating its benchmark in the year’s slightly more volatile first quarter and its very volatile—and bearish—fourth quarter, when the Fund fell 18.0% versus a 20.2% decline for the index.

What Worked… and What Didn’t

As share prices began to decline, we used the pullback, which felt indiscriminate, to allocate capital from lower-conviction names into those in which we had greater confidence, including names in Information Technology, which saw several stocks particularly hard hit on concerns over slowing global growth, a trade war with China, tariff-related supply chain issues, and short-term oversupply in memory semiconductors. We believe all of the longer-term positive demand drivers in the technology sector, a long list that includes growing storage demand, increasing mobility, and connectedness encompassing the “Internet of Things,” remain intact and should benefit the industry’s high-quality micro-cap companies. Along with Industrials, Information Technology was one of our two largest weightings and two largest overweights at year-end, along with Consumer Discretionary. These weightings reflect our confidence in the ongoing growth of the U.S. economy where we remain optimistic about the prospects for micro-cap stocks in what looks to us like a still-vibrant environment. Anticipating more robust growth in the U.S. relative to the rest of the globe, we stayed primarily focused on companies that derive most of their revenues from the U.S. economy.

The sectors making the biggest negative impact in 2018 were Industrials, Energy, Consumer Discretionary, and Materials. In total, seven of the Fund’s 10 equity sectors finished the year in the red. Positive contributions were more modest and came from Information Technology and Health Care.


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At the industry level, energy equipment & services (Energy) hurt performance most as the drop in oil prices adversely affected our holdings. Machinery (Industrials) was another source of negative performance, with many holdings hurt by tariffs, trade war worries and falling oil prices, all of which fueled investors’ concerns about cyclical businesses. Weakness in commodity prices led to a poor showing for the metals & mining group, the Fund’s second-biggest detracting industry.

The portfolio’s biggest detractor at the position level was Ultra Clean Holdings, which provides gas panel subsystems to semiconductor equipment manufacturers. Its shares were hurt by the global slowdown in semiconductor equipment production. We believe the recent acquisition of Quantum Global, which provides ultra-purity cleaning solution to the semiconductor equipment industry, can strengthen the Ultra Clean’s already formidable competitive position. ASV Holdings is a machinery company that provides skid steers and loading equipment for the construction and agriculture markets. The company missed earnings expectations in 2018 as changes in its parts distribution strategy and higher raw materials prices crimped margins. Women’s clothing retailer Francesca’s Holdings was engaged in a turnaround designed to win back core customers who were lost through an ill-advised shift in merchandising strategy. We sold our shares when it seemed to us that the turnaround was proving slower to develop than we had anticipated. Paratek Pharmaceuticals is a clinical stage biotechnology firm whose lead asset is a new antibiotic, omadacycline. It seemed to us that weakness in the stock was due to concerns over incremental FDA approval scrutiny, the potential for a slow commercial ramp, and a capital raise in April. We held our position given the opportunity for a new antibiotic associated with the increased human resistance to older varieties.


Top Contributors to Performance 20181 (%)

Electro Scientific Industries0.89
Attunity0.74
QuinStreet0.56
Fabrinet0.50
AtriCure0.50

1 Includes dividends

Top Detractors from Performance 20182 (%)

Ultra Clean Holdings-0.66
ASV Holdings-0.65
Francesca's Holdings-0.61
Paratek Pharmaceuticals-0.55
Atento-0.53

2 Net of dividends

On the positive side, electronic equipment, instruments & components (Information Technology) and health care equipment & supplies (Health Care) boosted performance most at the industry level. Within the first group, Electro Scientific Industries was acquired at a 100% premium while Fabrinet, a contract manufacturer of fiber optic components and laser solutions, continued to execute successfully and profitably in 2018. The second group is home to medical technology company AtriCure, a global leader in treating atrial fibrillation (Afib) with a successful R&D pipeline that has driven ongoing market share gains.

Relative to the Russell 2000, savvy stock selection drove results—sector allocation detracted slightly. Information Technology was by far the largest source of outperformance, driven mostly by stock selection in the aforementioned electronic equipment instruments & components industry, while Health Care and Industrials followed. The health care equipment & supplies group was the leading industry in the first sector while construction & engineering stood out in the second—in each group thanks mostly to strong stock selection. Our cash position also benefited the Fund relative to its index. Materials was the largest relative detractor for 2018, followed by Consumer Discretionary and Utilities. Ineffective stock picking in metals & mining hurt performance most in Materials, while stock selection in Internet & direct marketing retail and textiles, apparel & luxury goods dampened results in Consumer Discretionary. In Utilities, our lower exposure hindered performance.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Low-Priced Stock -18.03-9.31-9.314.91-0.017.364.648.159.22 12/15/93
Russell 2000 -20.20-11.01-11.017.364.4111.977.507.408.42 N/A

Annual Operating Expenses: Gross 1.61 Net 1.58

1 Not annualized.

Important Performance, Expense, 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 and include management fees, other expenses, and acquired fund fees and 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 Investment 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 1.24% through April 30, 2018. 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.

All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 3/15/07 reflects Service Class results. Shares of the Fund's Service Class bear an annual distribution expense that is not borne by the Investment Class.

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 12/31/17, the percentage of Fund assets was as follows: Ashmore Group was 0.9%, Hamilton Lane Cl. A was 0.9%, Kirkland Lake Gold was 0.8%, Electro Scientific Industries was 0.7%, QuinStreet was 0.7%, Novanta was 0.7%, Unique Fabricating was 0.6%, IXYS Corporation was 0.0%, BioAmber was 0.0%, Stein Mart was 0.0%, Ascena Retail Group was 0.0%, J.C. Penney Company 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 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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