Royce Value Trust Manager Commentary
article 12-31-2017

Royce Value Trust Manager Commentary

With a second consecutive year of strong absolute and relative performance, RVT further solidified long-term advantages over its unleveraged small-cap benchmark, the Russell 2000 Index.

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Fund Performance

With a second consecutive year of strong absolute and relative performance, Royce Value Trust further solidified long-term advantages over its unleveraged small-cap benchmark, the Russell 2000 Index, outperforming on both a net asset value (“NAV”) and market price basis for the one-, three-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended December 31, 2017. The Fund advanced 19.4% on an NAV basis and 30.5% based on market price in 2017, ahead of respective gains of 14.6% and 13.2% for the Russell 2000 and S&P SmallCap 600 for the same period.

The year presented crosscurrents for the Fund’s multi-discipline approach in the form of leadership for growth stocks and the lift from strength for cyclicals, in particular those with global exposure.

What Worked… and What Didn’t

Nine of the Fund’s 11 equity sectors made positive contributions to 2017 performance. Industrials and Information Technology—the portfolio’s two largest sectors—led by a wide margin, followed by solid net gains for Financials while Energy and Consumer Discretionary made only modest negative impacts.

Relative to the Russell 2000, the best performance in 2017 came from Financials, where both our lighter weighting in banks and (to a lesser degree) heavier investment in capital markets companies were additive against the benchmark. Savvy stock selection in both Information Technology and Industrials was another important source of outperformance.

Conversely, the largest relative detraction at the sector level came from our lower weighting in Health Care—the best-performing sector in the Russell 2000 in 2017—and ineffective stock selection in Consumer Discretionary. The portfolio’s cash position also had a negative impact on relative performance.

At the industry level, the largest contribution by far on an absolute basis came from electronic equipment, instruments & components (Information Technology), followed by machinery (Industrials), each from one of the Fund’s leading sectors, while the largest detractors, energy equipment & services (Energy) and Internet & direct marketing retail (Consumer Discretionary), came from its two worst.

For many years, the portfolio has invested heavily in companies that increase productivity or otherwise help business operate faster, cheaper, and more effectively. This ‘picks and shovels’ approach often leads us to industrial and technology companies with very interesting—and in many cases ultimately profitable—niche businesses.

Over the last few years, there has been a significant amount of innovation in areas such as process automation, robotics, lasers, cloud storage, etc.—all of which need equipment, components, and related technology. This has led us to invest in several companies that specialize in process automation or other innovative ways that boost productivity.

Moreover, the long-term outlook for select companies in these areas looks very promising to us as the current global technology build-out continues. It was no surprise, then, that three of the portfolio’s five top-contributing stocks in 2017 were technology stocks while a fourth came from the Industrials sector.

The Fund’s two top contributors exemplify our goal for these kinds of companies. Laser diode and equipment maker Coherent saw its shares climb thanks to a record-setting fiscal 2017, which saw sales and earnings growth driven by increasing demand for ramped up OLED (organic light-emitting diode) capacity and service.

Cognex Corporation is the market leader in machine vision technology, which captures and analyzes visual information to automate tasks that previously relied on human eyesight and is thus a major driver of industrial and process automation.

The firm has just begun to move into key end markets, such as consumer electronics, while adoption is expanding to other industries, including a fast-growing logistics segment. With ever-evolving proprietary technology and an unmatched global corps of engineers serving customers, the firm looks poised to sustain its well-above-average ROIC and compound its business value into the future.

As for positions that detracted, we believe the new management team at Wesco Aircraft Holdings is well positioned to address the firm’s operational issues and eventually improve results. The situation is essentially a turnaround in waiting, and we built our position significantly in the fourth quarter.

We held steady with our stake in FTD Companies, which provides flowers and other gifts through various subsidiaries. Disappointing sales and revenues were addressed with some changes in upper management that we think could help business to bloom.


Top Contributors to Performance 20171 (%)

Coherent1.22
Cognex Corporation0.99
Ash Grove Cement Cl. B0.94
IPG Photonics0.53
Sun Hydraulics0.53

1 Includes dividends

Top Detractors from Performance 20172 (%)

Wesco Aircraft Holdings-0.39
FTD Companies-0.38
Era Group-0.27
MBIA-0.23
Core-Mark Holding Company-0.22

2 Net of dividends

Current Positioning and Outlook

While we are cautious about the prospects for small-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 12/31/17 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 30YR SINCE INCEPT. DATE
RVT 4.6530.4930.4913.3614.806.9810.199.6510.28 11/26/86
XRVTX 3.8519.3819.3811.6313.477.1810.799.4510.83 11/26/86
Russell 2000 3.3414.6514.659.9614.128.7111.177.899.66 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 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 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: Coherent was 1.5%, Cognex Corporation was 1.4%, Ash Grove Cement Cl. B was 0.0%, IPG Photonics was 0.8%, Sun Hydraulics was 1.2%, Wesco Aircraft Holdings was 0.5%, FTD Companies was 0.1%, Era Group was 0.4%, MBIA was 0.5%, Core-Mark Holding Company was 0.5%.


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 SmallCap 600 is and index of U.S. small-cap stocks selected by Standard & Poor’s based on market size, liquidity, and industry grouping, among other factors. 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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