Royce Value Trust Manager Commentary
article 02-19-2019

Royce Value Trust Manager Commentary

Valuations reflected more pessimism than we thought was warranted at the end of 2018—at least in select instances. As a result, we put cash to work as we identified what we thought were terrific opportunities to the point where the Fund was fully invested at year-end.

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Fund Performance

Following two consecutive years of strong absolute and relative performance, Royce Value Trust pulled back in 2018 compared to its unleveraged small-cap benchmarks—though it maintained its longer-term relative advantages. The Fund was down 14.4% on an NAV (net asset value) basis and 20.4% based on market price in 2018, compared to respective declines of 11.0% and 8.5% for the Russell 2000 and S&P SmallCap 600 Indexes for the same period. Still, we were pleased that on an NAV basis, RVT outpaced the Russell 2000 for the three-, 10-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended December 31, 2018. On a market price basis, the Fund outperformed for all of these periods except the 10-year span.

What Worked… And What Didn’t

Eight of the Fund’s 11 equity sectors declined in 2018. Industrials detracted most by a sizable margin, followed by Information Technology and Consumer Discretionary while Health Care, Utilities, and Consumer Staples made modest positive contributions.

The five industry groups with the most significant net losses for the Fund came from five different sectors, which gives a sense of how broad declines were for small-caps in 2018. By sizable margins, the machinery group was both the biggest detractor and our heaviest weighting in Industrials at year-end. Fourth-quarter difficulties for two machinery stocks—Sun Hydraulics (which does business as Helios Technologies) and CIRCOR International—had appreciable negative impacts on performance. 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. 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. We held shares in each company at year-end, confident in their respective abilities to recover.


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Information Technology’s electronic equipment, instruments & components group had the second-largest negative impact at the industry level and was home to RVT’s top-detracting position. Coherent is a laser diode and equipment maker that made the journey from first to worst between 2017 and 2018 as the company faced something of a perfect storm in the latter year. First, the materials processing market in China slowed. Although the slowdown was somewhat expected, the steep rate of change was not. Coherent also faced some early struggles with its acquisition of Rofin-Sinar. Perhaps most important, the firm saw appreciably slower demand for its laser systems, where it effectively holds a monopoly position for OLED (organic light-emitting diode) manufacturing for smartphones. Our analysis indicated that these challenges had been more than priced in, so we added shares in 2018. Our confidence was rooted in Coherent’s highly profitable and growing OLED service segment and OLED penetration into the television and automotive industries. Coherent also stands to benefit from Apple’s possible switch from LCD phones to exclusively OLED.

The portfolio’s top-contributing positions also hailed from the electronic equipment, instruments & components group. Fabrinet is a contract manufacturer that offers specialized products and services to original equipment manufacturers in the technology space. The merger of two large customers appeared to drive investors away in 2017 over concerns that the consolidation would contract Fabrinet’s business. The company then went ahead and executed successfully, and profitably, in 2018, which led its stock to recover. An industrial company that’s a leading provider of auctions for salvaged vehicles, Copart saw increases in volume and revenue per car in 2018.

Relative to the Russell 2000 in 2018, sector allocation was a much larger source of underperformance than stock selection. Ineffective stock picks did hurt significantly, however, in Information Technology and Consumer Discretionary while our overweight in Industrials also hampered performance versus the index. Conversely, the portfolio benefited from savvy stock selection in the Materials and Energy sectors.


Top Contributors to Performance 20181 (%)

Fabrinet0.33
Copart0.20
HEICO Corporation0.18
Seeing Machines0.14
Quaker Chemical0.13

1 Includes dividends

Top Detractors from Performance 20182 (%)

Coherent-0.76
Sun Hydraulics-0.60
CIRCOR International-0.58
Thor Industries-0.55
Cognex Corporation-0.47

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 reflected, perhaps even excessively so, in current valuations. In short order, we shifted from a period 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. As a result, we put cash to work as we identified what we thought were terrific opportunities —the Fund was fully invested at year-end. Down years for small-caps have often been followed by strong ones. 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 15YR 20YR SINCE INCEPT. DATE
RVT -25.48-20.43-20.438.643.1911.686.028.339.16 11/26/86
XRVTX (NAV) -19.45-14.45-14.459.003.7012.147.178.429.94 11/26/86

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 www.roycefunds.com. 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 small-cap and 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. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments.

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, 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: Fabrinet was 0.6%, Copart was 0.0%, HEICO Corporation was 1.5%, Seeing Machines was 0.0%, Quaker Chemical was 1.8%, Coherent was 0.7%, Sun Hydraulics was 0.8%, CIRCOR International was 0.7%, Thor Industries was 0.4%, Cognex Corporation was 1.0%


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 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.

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