Royce Special Equity Multi-Cap Fund Manager Commentary
article 02-14-2019

Royce Special Equity Multi-Cap Fund Manager Commentary

The Fund outperformed its large-cap benchmark during the fourth-quarter even though 2018 proved to be a difficult year when growth outpaced value and defensive sectors outperformed cyclicals.


Important News for Shareholders

The Royce Fund’s Board of Trustees has approved a plan of liquidation for Royce Special Equity Multi-Cap Fund, to be effective on February 25, 2019. The Fund is being liquidated primarily because it has not attracted and maintained assets at a sufficient level for it to be viable. A distribution was paid on January 23, 2019 to shareholders of record on January 22, 2019.

Fund Performance

Royce Special Equity Multi-Cap Fund was down 10.6% in 2018, lagging its large-cap benchmark, the Russell 1000 Index, which fell 4.8% for the same period. A relatively solid performance in the fourth-quarter downturn, when the Fund lost 13.3% versus a decline of 13.8% for the Russell 1000, was not nearly enough to turn the tide of the Fund’s relative disadvantage through the year’s first three quarters. This capped a difficult and disappointing year in which growth again outperformed value, and defensive sectors outpaced their cyclical counterparts. So while our emphasis on companies with low leverage, dividends, and low beta—all characteristics of our discipline— certainly helped in the fourth quarter, they were decidedly out of favor during the rest of 2018—and over large stretches of the Fund’s history, a period dominated by low interest rates, little volatility, and growth-stock leadership.

What Worked… And What Didn’t

Four of the six equity sectors in which the Fund had investments detracted from performance in 2018. By far, the biggest negative impact came from Industrials, where the portfolio was also significantly overweight relative to its benchmark. Within that sector, we had the largest exposure to the machinery group, which had a correspondingly substantial negative effect on 2018’s results. Four of the portfolio’s five holdings in machinery detracted from performance, with two making an outsized impact. Illinois Tool Works has a global business manufacturing products such as industrial fluids and adhesives, tooling for specialty applications, welding products, and quality measurement equipment and systems. Parker Hannifin specializes in motion control products, including fluid power systems, electromechanical controls, and related components. ManpowerGroup, a holding in Industrials from outside the machinery group that provides workforce solutions and services to a global market, was another significant detractor. Housed in the aerospace & defense group within Industrials, General Dynamics is a diversified defense company with a broad portfolio of products and services in business aviation, combat vehicles, weapons systems, munitions, shipbuilding design and construction, information systems, and technologies. From the Materials sector, Packaging Corporation of America also disappointed. The firm manufactures containerboard and corrugated packaging products that are used to protect goods during shipment.

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On the positive side, the Information Technology and Financials sectors made positive contributions. From the first of these sectors, Cisco Systems was the portfolio’s top-performing position in 2018. The company makes Internet Protocol based networking and other products that transmit data, voice, and video. The top contributor in Financials was Brown & Brown, an insurance broker offering a range of insurance and reinsurance products as well as providing risk management, employee benefit administration, and managed health care services. Four holdings in Consumer Discretionary made positive contributions in 2018. The top contributor was Genuine Parts, which distributes automotive and industrial replacement parts, office products, and electrical and electronic materials while V.F. Corporation, the sector’s second-best contributor, operates a slate of popular retail brands including The North Face, Vans, Timberland, and JanSport.

Top Contributors to Performance

1 Includes dividends

Top Detractors from Performance

2 Net of dividends


Relative to the Russell 1000, the Fund’s disadvantage came from both sector allocation and ineffective stock selection in 2018. The bulk of its underperformance came from its holdings in machinery companies, as well as from ManpowerGroup in the professional services group. The portfolio’s lack of exposure to Health Care was another source of underperformance. Conversely, the Fund benefited from its low exposure to Financials, as well as drawing a smaller advantage from stock selection in the sector. Our lack of any holdings in Energy, which suffered the deepest losses of any sector in the Russell 1000, also helped relative performance.

If you would like to know more about Charlie Dreifus’s outlook on the market, please read the Manager’s Discussion for Royce Special Equity Fund.

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

-13.34-10.57-10.575.472.067.67 01/01/01

Annual Operating Expenses: Gross 1.39 Net 1.24

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 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 to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Fund'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, 2019.

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: Cisco Systems was 8.5%, Genuine Parts was 9.2%, Brown & Brown was 0.0%, V.F. Corporation was 0.0%, McDonald's Corporation was 4.3%, Illinois Tool Works was 12.8%, ManpowerGroup was 3.1%, Parker Hannifin was 4.7%, Packaging Corporation of America was 8.4%, General Dynamics was 4.9%

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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