Royce Dividend Value Fund Manager Commentary
article 06-30-2018

Royce Dividend Value Fund Manager Commentary

Tariff and trade war talk created challenges for our risk-conscious dividend value approach, which had significant assets invested in companies headquartered outside the U.S. at the end of June.

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Fund Performance

The first half of 2018 was another period of lower-than-average volatility in which small-cap growth stocks beat small-cap value, and small-cap companies that pay no dividends outpaced those that do. Additionally, the Fund’s preference for more economically cyclical dividend-paying stocks, as opposed to those more sensitive to interest rates, worked doubly against it in the more bullish second quarter, when the former group lagged while the latter rallied. Finally, investors responded to tariff and trade war talk by selling off many non-U.S. stocks, which hurt Fund performance because more than a quarter of the portfolio was invested in companies headquartered outside the U.S. at the end of the first half. Needless to say, this made for a less than ideal environment for our risk-conscious dividend value approach. Royce Dividend Value Fund was down 2.0% for the year-to-date period ended June 30, 2018, significantly trailing its small-cap benchmark, the Russell 2000 Index, which gained 7.7% for the same period.

What Worked… And What Didn’t

Seven of the Fund’s 11 equity sectors finished the first half in the red, with the most significant detractions coming from Financials and Industrials, the portfolio’s two largest sectors and its most substantial overweights versus the Russell 2000. The capital markets group (Financials)—also a significant overweight in the Fund—detracted most at the industry level. A perennial area of concentration for the portfolio owing to the number of dividend-paying asset management companies within it, the group saw disappointing performances from several holdings, most prominently Federated Investors, where outflows from a large equity mutual fund as well increased competition in money market funds—resulting in downward pressure on fees—helped to keep investors selling. We chose to hold our shares in the expectation that the firm will be able to rebound. DENTSPLY SIRONA, a dental equipment and consumables manufacturer from the Health Care sector, was the biggest detractor at the position level as the company remained in the midst of turnaround efforts aimed at improving topline growth and operating margins. We were content to be patient at the end of June.

Global staffing and services company Manpower Group detracted most in the Industrials sector, and second most in the portfolio overall. Earnings remained positive in 2018’s first half, prospects in a still-tightening global labor market appear strong, and recent acquisitions expanded its global footprint. Its shares fell mostly on a change in a tax subsidy rate in France for companies that provide temporary labor and loftier expectations for growth than even strong earnings earlier in the year could meet. We remained confident in its core global business at the end of June. Thor Industries is a leading manufacturer of RVs (recreational vehicles) and has emerged as an innovative industry leader over the last several years. The firm announced record fiscal second-quarter sales in March, but also reported higher raw material and commodity costs. Along with concerns that its industry may have hit a sales peak, this was enough to drive investors away. We held our stake at the end of June.

As for positions that made positive contributions to first-half results, the leader was Norway’s TGS-NOPEC Geophysical, which provides geoscience data to oil and gas companies worldwide. Its revenue and earnings were boosted by improving exploration and production spending, higher oil prices, and the longer-term need for energy companies to replenish reserves, which is driving increased spending on seismic data. A top contributor from 2017, alternative asset manager KKR & Co. was a happy exception in the capital markets industry. The firm announced in May that it would make the switch from being a limited partnership to a corporation—one that pays dividends—news that encouraged additional investment in its stock.


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Relative to the Russell 2000, three sectors hurt results most. Poor stock picks were the culprits in the Financial sector, while in Health Care, a combination of lower exposure and stock selection miscues detracted. In Industrials, a mix of higher exposure and ineffective stock picks also hurt relative results. Conversely, a more modest positive contribution on a relative basis came from superior stock selection in Energy.


Top Contributors to Performance Year-to-Date Through 6/30/181 (%)

TGS-NOPEC Geophysical0.70
KKR & Co. L.P.0.47
HEICO Corporation Cl. A0.34
FLIR Systems0.29
Expeditors International of Washington0.26

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/182 (%)

DENTSPLY SIRONA-0.69
ManpowerGroup-0.61
Federated Investors Cl. B-0.39
Thor Industries-0.36
Jupiter Fund Management-0.35

2 Net of dividends

Current Positioning and Outlook

The market’s behavior is curious to us. On the one hand, we hear optimism and solid progress from the management teams we meet with, see solid earnings reports, and observe consistently strong macroeconomic data. On the other hand, small-cap market leadership has stubbornly remained with defensive and yield-oriented stocks, while cyclicals have lagged. Despite new highs for the Russell 2000, we are therefore far from ebullient. We are continuing to reduce the portfolio’s exposure to companies with higher valuations and expectations while modestly raising cash levels. We do anticipate a change in market leadership to more cyclical stocks, but admit that changes in leadership seldom occur without turbulence. If higher volatility reemerges, we aim to be able to take advantage of what may be temporarily lower prices.

Average Annual Total Returns Through 06/30/18 (%)

QTR1 YTD1 1YR 3YR 5YR 10YR SINCE INCEPT. DATE
Dividend Value -0.74-2.0210.668.448.579.168.87 05/03/04
Russell 2000 7.757.6617.5710.9612.4610.609.28 N/A
Russell 2500 5.715.4616.2410.3012.2910.749.83 N/A

Annual Operating Expenses: Gross 1.39 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 www.roycefunds.com. Gross operating expenses reflect the Fund's total gross annual operating expenses for the Investment Class and include management 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 Investment 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 1.09% through April 30, 2019.

All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 9/14/07 reflects Service Class results. Service Class shares bear an annual distribution expense that is not borne by Investment Class shares.

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, 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 June 30, 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 6/30/18, the percentage of Fund assets was as follows: TGS-NOPEC Geophysical was 2.0%, KKR & Co. L.P. was 2.5%, HEICO Corporation Cl. A was 2.1%, FLIR Systems was 2.9%, Expeditors International of Washington was 1.9%, DENTSPLY SIRONA was 1.5%, ManpowerGroup was 1.5%, Federated Investors Cl. B was 0.8%, Thor Industries was 0.8%, Jupiter Fund Management 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.

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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