Royce Premier Fund Manager Commentary
article 02-14-2019

Royce Premier Fund Manager Commentary

Boosted by index-beating performance in each of the past three years, the Fund remained ahead of the Russell 2000 for the one, three-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended 12/31/18.

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Fund Performance

Boosted by its index-beating performance in each of the past three years, Royce Premier Fund remained ahead of its small-cap benchmark, the Russell 2000 Index, for the one, three-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended December 31, 2018. This helped make a difficult 2018 more bearable. The Fund fell 10.4% for the calendar year, losing less than the Russell 2000, which declined 11.0% for the same period. We were pleased that the Fund’s relative advantages have been driven by its focus on high-quality companies, which also helped to mitigate losses in the down market—as has typically been the case through its long history.

What Worked… And What Didn’t

Seven of the Fund’s nine equity sectors declined in 2018. Industrials was the largest detractor by far, followed by Materials and Information Technology. Each sector consists of a large number of cyclical businesses, and cyclical stocks generally fared worse than defensives in 2018 as concerns mounted about an imminent recession. Health Care and Consumer Discretionary were the only sectors to post positive returns for the year.

At the industry level, machinery detracted most by a substantial margin. Housed in Industrials, this group was also our biggest weighting in that sector and home to two of the portfolio’s three largest detractors for the year—CIRCOR International and Sun Hydraulics (which does business as Helios Technologies). CIRCOR makes valves for fluid control systems. Its shares fell precipitously in the fourth quarter amid concerns that slowing global growth, U.S.-China trade tensions, and the significant drop in oil prices—energy companies being among its larger end markets—would put a damper on CIRCOR’s positive order trends, pushing out a long-awaited improvement in profit margins and free cash flow earmarked for debt reduction. Sun Hydraulics manufactures hydraulic and electronic controls systems for a variety of industrial and recreational equipment makers. The company continued to book solid incoming orders, but labor and materials cost pressures, as well as a series of operational miscues stemming from a rush to meet growing demand, brought margins and earnings below expectations. We held shares in each company at year-end, confident in both ongoing economic growth and their respective abilities to recover.


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Air Lease is a leading aircraft leasing business that saw its shares lose altitude throughout the year, particularly in December, when the airline industry came under considerable pressure throughout the eurozone, which resulted in the shuttering of a number of poorly capitalized carriers. Though Air Lease was less exposed to this dynamic, there were concerns among investors that a similar trend would materialize in other geographies. Confident in the potential for its shares to rise when tailwinds return to its business, we increased our stake in 2018. It was a top-10 position at year-end.

The portfolio’s top contributor for both 2018 and the historically bearish fourth quarter was Dorman Products, the leading provider of formerly dealer-only aftermarket auto parts. Demand for auto replacement parts inflected positively as the industry entered the three- to seven-year sweet spot for replacement parts, as well as from replenished auto retailer inventories. In addition, its growth initiatives in heavy duty truck and electronic components continued to take hold. Copart, a leading provider of auctions for salvaged vehicles, was the second largest contributor as the company saw increases in volume and revenue per car in 2018. After reducing our stake throughout the year, we exited our position in December.

Relative outperformance in 2018 was due to superior stock selection as opposed to sector allocation, which detracted. The struggling Energy sector was the most significant source of outperformance owing to strong stock selection among energy equipment & services holdings, as well as having no holdings in the struggling oil, gas & consumable fuels industry. Financials provided another relative edge as the Fund’s holdings outperformed in the capital markets industry. Our decision to avoid lagging bank stocks also helped. Information Technology was the source of the greatest underperformance in 2018, hurt by ineffective stock selection in electronic equipment, instruments & components and our underweight in software. Our greater exposure to Industrials also detracted—stock selection was additive in this lagging sector.


Top Contributors to Performance 20181 (%)

Dorman Products0.70
Copart0.65
Core-Mark Holding Company0.48
Fair Isaac0.44
IDEXX Laboratories0.38

1 Includes dividends

Top Detractors from Performance 20182 (%)

CIRCOR International-1.27
Air Lease Cl. A-1.27
Sun Hydraulics-1.06
Valmont Industries-0.87
Thor Industries-0.74

2 Net of dividends

Current Positioning And Outlook

We believe that the recent downturn is more likely a risk reset rather than a foreshadowing of recession. While the U.S. economy has slowed and non-U.S. economies have weakened, our conversations with companies and our own research lead us to see the decline as a buying opportunity. As such, we have been adding to existing as well as new names, activities that dropped cash levels down to minimal levels at year-end. We are confident in our current holdings, which generally have solid cash flows, modest valuations, effective managements, and encouraging prospects. These are the businesses that look most likely to weather or even thrive in a period with even more volatility and uncertainty than usual.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Premier -17.23-10.40-10.4010.914.0311.239.049.9911.02 12/31/91
Russell 2000 -20.20-11.01-11.017.364.4111.977.507.409.02 N/A

Annual Operating Expenses: 1.16

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.

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: Dorman Products was 2.8%, Copart was 0.0%, Core-Mark Holding Company was 0.0%, Fair Isaac was 2.6%, IDEXX Laboratories was 0.0%, CIRCOR International was 1.3%, Air Lease Cl. A was 2.8%, Sun Hydraulics was 1.6%, Valmont Industries was 2.5%, Thor Industries was 0.6%


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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