Royce Global Financial Services Fund Manager Commentary
article 06-30-2019

Royce Global Financial Services Fund Manager Commentary

We believe that higher rates and higher volatility will benefit the Fund, but we have also positioned the portfolio with stocks we believe can perform well if normalization takes longer than anticipated.

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Fund Performance

Royce Global Financial Services Fund enjoyed a strong first half on an absolute basis, though it trailed its benchmarks for the period. For the year-to-date period ended June 30, 2019, the Fund increased 16.3%, while its U.S.-based benchmarks, the Russell 2000 Index and the Russell 2500 Financial Services Index, posted respective gains of 17.0% and 17.5% for the same period. For additional context in light of the Fund’s global embrace, the MSCI ACWI Small Cap Index was up 15.0% in the first half of 2019. 


What Worked... And What Didn't

Relative results notwithstanding, we were pleased that gains were widespread through the portfolio. Seventeen of the 22 subindustries in which the Fund had investments contributed to year-to-date returns. As is often the case, the two largest subindustries, asset management & custody banks and regional banks, were the two largest contributors. 
At the other end of the scale, application software and diversified capital markets were the largest subindustry detractors. A somewhat similar level of broad gains could be found at the country level, where 12 of 18 countries made positive contributions to first-half returns. Outside the U.S.—our largest weighting and the biggest contributor by country—notable positive impacts came from holdings headquartered in Canada and the U.K. while positions headquartered in France, India, and South Africa detracted most, though on a modest scale.


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MarketAxess Holdings, which operates an electronic, multi-dealer trading platform for investment grade and high-yield corporate and emerging market bonds, was the largest contributor at the position level in the first half. Recent results demonstrated an acceleration in market share gains in high-yield and emerging market bonds, which suggested that the company’s total addressable market may be larger than previously thought. The next two contributors reflected the Fund’s positioning pivot a few years ago within asset management stocks. Seeing certain seismic shifts in the industry, we trained our sights on traditional managers with specialties that we thought were sustainable over the long term while also beginning to research and investigate alternative asset management companies. An example of the latter, Ares Management is a market leader in managing private credit pools. Its stock advanced during the first half as it continued to benefit from strong fundraising and yield-hungry investors favoring investments that deliver attractive amounts in a period with generally low interest rates. Based in London but with a global investment reach, Ashmore Group is the leader in emerging market debt investing and an example of a specialist asset manager with a core business that we really like. So far this year, the company has seen strong inflows for its products while also benefiting from an investment rebound in its asset class.

Benefitfocus, a cloud-based software provider of benefits solutions to employers and brokers, was the largest detractor for the year-to-date period. The company reported two consecutive disappointing quarters, particularly regarding expectations in achieving profitability. Along with a large insider sale and the resignation of the CFO, all of this spooked investors. We retained our shares because we are optimistic about the company’s long-term prospects to help its customers manage benefits costs efficiently. Virtu Financial, a market maker and liquidity provider, suffered through a difficult market environment for its business model, which tends to do best when equity trading volumes are rising and volatility levels are moderate to high, which was precisely the opposite of what happened in the first half, which featured both low trading volumes and (aside from May) low volatility. We expect these market conditions to normalize, ultimately supporting growing profits for Virtu. National Western Life Group, a life insurer, also detracted. The company reported a decline in fourth-quarter revenue due to shuttering their international insurance operations.


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

MarketAxess Holdings1.30
Ares Management Cl. A0.97
Ashmore Group0.97
Sprott0.96
FirstService Corporation0.95

1 Includes dividends

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

Benefitfocus-0.48
Virtu Financial Cl. A-0.42
National Western Life Group Cl. A-0.22
Rothschild & Co-0.16
JSE-0.13

2 Net of dividends

Current Positioning and Outlook 

The financial sector is undergoing meaningful change due to the convergence of several important factors, such as persistently low interest rates, the increasing popularity of passive investment vehicles, low equity market volatility, and low equity trading volumes. These conditions have created difficulties for many traditional financial business models, including banks, insurers, brokerages, and traditional asset managers. As a result, we have evolved our positioning to include companies that we believe can prosper if current conditions persist. One example is the preference we mentioned earlier for both traditional asset managers with a sustainable specialty and alternative asset managers. We are also attracted to certain specialty lenders that look capable of thriving in the current low-rate environment and selected service companies that are using technology to deliver superior service or lower prices. While we still expect an eventual return to normalization, one that will include higher rates and higher volatility that should benefit many of the Fund’s holdings, we also want to own stocks that can do well if “normal” takes a longer time to arrive than we initially anticipated.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR SINCE INCEPT. DATE
Global Financial Services 5.5516.26-1.9211.475.7811.118.087.88 12/31/03
Russell 2000 2.1016.98-3.3112.307.0613.458.158.34 N/A
Russell 2500 Fnl Svc 4.0917.532.1711.309.4414.227.467.58 N/A

Annual Operating Expenses: Gross 1.77 Net 1.58

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 gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and 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 1.49% through April 30, 2020. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

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: MarketAxess Holdings was 3.6%, Ares Management Cl. A was 2.6%, Ashmore Group was 2.6%, Sprott was 3.3%, FirstService Corporation was 3.1%, Benefitfocus was 0.7%, Virtu Financial Cl. A was 2.6%, National Western Life Group Cl. A was 1.2%, Rothschild & Co was 2.3%, JSE was 1.3%


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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