Royce Dividend Value Fund Manager Commentary
article 06-30-2019

Royce Dividend Value Fund Manager Commentary

The Fund outperformed the Russell 2000 and Russell 2500 Indexes in the first half despite challenges for dividend-paying small- and mid-cap stocks.


Fund Performance

Royce Dividend Value Fund gained 20.7% for the year-to-date period ended June 30, 2019, outperforming its benchmarks, the Russell 2000 and Russell 2500 Indexes, which rose 17.0% and 19.2%, respectively, for the same period.

What Worked… And What Didn’t

Nine of the 10 equity sectors in which the Fund had investments finished the first half in the black. Industrials and Financials were the portfolio’s biggest sectors at the end of June, accounting for nearly 60% of its total assets. Unsurprisingly, then, they were also the top-contributing sectors for 2019’s first half by a comfortable margin. Materials and Information Technology also made solid positive impacts, while Consumer Staples detracted modestly, and Utilities and Real Estate made the smallest contribution.

At the industry level, we were happy to see sector diversity among the largest contributors, with the top five groups coming from four different sectors. Capital markets (Financials) made an outsized impact consistent with its status as our largest industry weight during the first half. Machinery and aerospace & defense (both from Industrials), metals & mining (Materials), and electronic equipment, instruments & components (Information Technology) followed. Only two of the portfolio’s 36 industries detracted from performance—food & staples retailing (Consumer Staples) and specialty retail (Consumer Discretionary) while a third—hotels, restaurants & leisure (also from Consumer Discretionary)—was essentially flat.

Each of the Fund’s five top-contributing positions finished June as one if its 10 biggest holdings. HEICO Corporation, which manufacturers replacement aerospace parts, saw its shares reach higher altitudes after the company reported strong organic sales and expanding margins, lifted by strength in its flight support and electronics segments. These developments led HEICO to raise guidance for the rest of the year. Technology and services provider KBR operates in three segments: Government Services, Technology, and Hydrocarbons Services. Its shares benefited from improved revenues that were chiefly driven by its government-facing and technology businesses. Consumer dispensing systems specialist AptarGroup acquired a packing technology company late in 2018. Along with impressive growth in its core business, the acquisition has helped the company to post improved sales and earnings so far in 2019.

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Agricultural equipment supplier Lindsay Corporation was the only one of the portfolio’s nine machinery holdings to finish the first half in the red. The company faced several challenges, including lower farming incomes that have crimped capital spending and led to ongoing weakness in its core market, excess rainfall and flooding in the Midwest, and tariff and trade war woes. In early July, however, Lindsay noted an uptick in domestic irrigation sales, while recent improvement in key crop prices such as corn have brightened agricultural sentiment. In addition, the outlook for international irrigation demand remains favorable. We trimmed our stake in the first half. We acted similarly with our position in FamilyMart UNY Holdings, a Japanese convenience store franchise chain. While the Japanese economy has been improving, its pace has not been vigorous enough to help many retailers. Intensifying competition, skittish consumer confidence, and labor shortages at stores and in logistics also played a role in the decline of its shares during the first half. The stock of footwear manufacturer and retailer Caleres was itself hurt by several factors, including reduced traffic and same-store sales growth at the firm’s Famous Footwear retailer. Our long-term perspective and high regard for its stable of well-known brands, such as Sam Edelman and Allen-Edmonds, led us to begin adding shares in June.

Relative to the Russell 2000, the Fund’s advantage came almost entirely from stock selection, though sector allocation made a small contribution. Boosted mostly by stock picking (with our overweight helping to a lesser degree), Industrials was the biggest source of outperformance in the first half. Stock selection in aerospace & defense was especially additive. Financials followed with an advantage driven by stock selection in capital markets. Conversely, our cash position was the largest source of underperformance. With equity returns running high, even the Fund’s 3.0% average weight was enough to hamper relative results. Consumer Discretionary also detracted, as ineffective stock picks in household durables and specialty retail hurt results versus the Russell 2000.

Top Contributors to Performance Year-to-Date Through 6/30/191 (%)

HEICO Corporation Cl. A1.87
KKR & Co. Cl. A0.84
IDEX Corporation0.84

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/192 (%)

Lindsay Corporation-0.31
FamilyMart UNY Holdings-0.15
State Street-0.08
American Eagle Outfitters-0.07

2 Net of dividends

Current Positioning and Outlook

Markets are very good at surprising most investors. Today, given widespread concerns about slowing growth, increasing trade tensions, and the extended economic cycle, the most surprising outcome might be a rally. We see four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and increasing liquidity. When taken together, we see these factors as painting an attractive picture for small-cap investors. With so much attention on negative macro issues, we think investors may be missing this positive picture. We see highly promising select opportunities in dividend-paying small-cap cyclicals, particularly in Industrials, Financials, and Materials.

Average Annual Total Returns Through 06/30/19 (%)

Dividend Value 5.7520.713.1911.095.0211.978.548.49 05/03/04

Annual Operating Expenses: Gross 1.43 Net 1.34

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, 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, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Service Class'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 1.34% through April 30, 2020.

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 June 30, 2019, 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 June 30, 2019 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 6/30/19, the percentage of Fund assets was as follows: HEICO Corporation Cl. A was 4.3%, KBR was 2.4%, AptarGroup was 3.3%, KKR & Co. Cl. A was 3.1%, IDEX Corporation was 2.7%, Lindsay Corporation was 1.6%, FamilyMart UNY Holdings was 0.4%, Caleres was 1.0%, State Street was 1.0%, American Eagle Outfitters was 0.7%

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 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The returns for the Russell 2500-Financial Sector represent those of the financial services companies within the Russell 2500 index. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI ACWI ex USA Small Cap Index is an index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. 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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