Royce Micro-Cap Trust Manager Commentary
article 12-31-2017

Royce Micro-Cap Trust Manager Commentary

Two straight years of strong absolute and relative performance helped RMT to further solidify advantages over both of its unleveraged benchmarks.


Fund Performance

A second consecutive year of strong absolute and relative performance helped Royce Micro-Cap Trust (“RMT”) to further solidify advantages over both of its unleveraged benchmarks, the small-cap Russell 2000 and Russell Microcap Indexes. RMT beat the Russell 2000 on both a net asset value (“NAV”) and market price basis for the one-, 15-, 20-year, and since inception (12/14/93) periods ended December 31, 2017. It also outpaced the micro-cap index on both an NAV and market price basis for the one-, 10-, and 15-year periods ended December 31, 2017. (Data for the Russell Microcap Index goes back only to 6/30/00). The Fund advanced 17.7% on an NAV basis and 25.1% based on market price in 2017, ahead of respective gains of 14.6% and 13.2% for the Russell 2000 and Russell Microcap for the same period. The year was especially gratifying because it presented crosscurrents for the Fund’s multi-discipline approach in the form of leadership for larger companies and the lift from strength for cyclicals, in particular those with global exposure.

What Worked… and What Didn’t

Information Technology, Industrials, and Health Care led the list of nine of 11 equity sectors that made positive contributions to 2017 performance. Energy and Consumer Staples, the two sectors that detracted, made decidedly modest negative impacts. Relative to the Russell 2000, the best performance in 2017 came from Financials, where both our lower weighting and (to a lesser degree) better investments in banks were the primary sources of outperformance. Superior stock selection drove positive relative results in Information Technology, most notably in the Internet software & services group, while both savvy stock picks and lower exposure were additive in Real Estate. Conversely, the largest relative detractor at the sector level came from ineffective stock selection in a number of Consumer Discretionary industries, including Internet & direct marketing retail and distributors. The portfolio’s cash position also had a negative impact on relative performance, as did poor stock selection in Health Care’s pharmaceuticals industry.

At the industry level, three groups made large contributions on an absolute basis—biotechnology (from Health Care and a relative strength in that sector), machinery (Industrials), and the previously mentioned Internet software & services industry. The impact of detractors at this level was comparably light, led by energy equipment & services (Energy which was the only sector in the Russell 2000 to post net losses in 2017), food products (Consumer Staples), and distributors (Consumer Discretionary). These results are mostly consistent with a market that saw the biggest returns go to high-growth areas in healthcare and tech while more economically sensitive cyclical industries did well on an absolute basis while trailing on a relative scale.

Three biotechnology companies topped the portfolio’s list of contributors at the position level in 2017. Abeona Therapeutics develops gene therapies for rare, life-threatening diseases. Positive news in clinical trials for a gene-therapy treatment and a public stock offering in October helped to keep its share price healthy. We reduced our position through much of the fourth quarter as its stock climbed. We acted similarly throughout the second half of 2017 with our stake in Sangamo Therapeutics, which develops genomic therapies and medications that treat genetic diseases. Its share price began to rise in May when a collaboration with Pfizer to work on gene therapies for hemophilia was announced. The firm then reported in the fall that new partnerships with other firms were likely while also detailing promising developments in the progress of other treatments, such as its zinc finger nuclease technology that can be used in genome editing. Mirati Therapeutics develops cancer treatments and saw its stock rise on the steady progress of its product pipeline, along with the November announcement of a new public offering of common stock and warrants. We began to reduce our position in October.

As for positions that detracted, Era Group provides helicopter transportation services and personnel primarily to and from offshore oil drilling rigs and platforms. Earlier in 2017, its shares were challenged by falling oil prices that were reflected in disappointing earnings. Liking the long-term prospects for its niche business, we added shares and were pleased to see a little recovery for the stock in the second half of 2017. Our experience with automotive parts recycler and reseller Fenix Parts continued to be very disappointing as its shares were delisted on Nasdaq when it missed financial reporting filing deadlines.

Top Contributors to Performance 20181 (%)

Mesa Laboratories0.75
Mirati Therapeutics0.45

1 Includes dividends

Top Detractors from Performance 20182 (%)

CIRCOR International-0.82
Sun Hydraulics-0.49
Collectors Universe-0.37
Major Drilling Group International-0.37
Titan International-0.34

2 Net of dividends

Current Positioning And Outlook

While we are cautious about the prospects for small- and micro-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 12/31/18 (%)

RMT -25.20-14.65-14.659.302.4712.956.799.319.32 12/14/93
XOTCX -19.82-11.62-11.628.253.0113.077.389.3910.08 12/14/93
Russell 2000 -20.20-11.01-11.017.364.4111.977.507.408.42 N/A
Russell Microcap -22.14-13.08-13.085.793.0811.715.67N/AN/A N/A

Annual Operating Expenses: N/A

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, net of the Fund's investment advisory fee, 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 recent month-end may be obtained at 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 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.

Closed-End Funds are registered investment companies whose shares of common stock may trade at a discount to their net asset value. Shares of each Fund's common stock are also subject to the market risks of investing in the underlying portoflio securities held by each Fund, respectively. Royce Fund Services, LLC ("RFS") is a member of FINRA and may file this material with FINRA on behalf of each Fund. RFS is not an underwriter or distributor of the closed-end funds.

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. Regarding the “Top Contributors” and “Top Detractors” tables shown above, 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 2017.

As of 12/31/17, the percentage of Fund assets was as follows: Abeona Therapeutics was 0.5%, Sangamo Therapeutics was 0.5%, Mirati Therapeutics was 0.5%, QuinStreet was 1.0%, Kadant was 1.2%, Era Group was 0.8%, Fenix Parts was 0.0%, FTD Companies was 0.1%, Dundee Corporation Cl. A was 0.2%, Aceto Corporation was 0.2%.

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. Frank 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 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 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.




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