Royce International Micro-Cap Fund Manager Commentary
article 06-30-2017

Royce International Micro-Cap Fund Manager Commentary

The Fund more than fully participated in the first half’s impressive rebound for international equities.

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Fund Performance

The first half of 2017 saw an impressive rebound for international equities, and Royce International Micro-Cap Fund fully participated. For the year-to-date period ended June 30, 2017, the Fund advanced 15.2%, just ahead of the 15.0% gain for its benchmark, the Russell Global ex-U.S. Small Cap Index, for the same period. After several years in which international small- and micro-cap stocks languished, the current resurgence has been more than welcome.

The Fund got off to a strong start on an absolute basis in 2017, climbing 8.1% in the first quarter compared to 9.0% for its international small-cap benchmark. In the second quarter, the Fund improved on a relative basis, gaining 6.6% versus 5.5% for the benchmark. We were also pleased that International Micro-Cap beat the Russell Global ex-U.S. Small Cap for the one- and three-year periods ended June 30, 2017.

What Worked… And What Didn’t

Nine of the Fund’s 10 equity sectors made positive contributions to first-half performance, with the most substantial positive impacts coming from its three largest—Information Technology, Industrials, and Consumer Discretionary. At the industry level, three technology industries led by a wide margin—IT services, semiconductors & semiconductor equipment, and electronic equipment, instruments & components. Energy was the only sector that detracted. It did so with comparatively minor losses. Net losses at the industry level were similarly modest, with oil, gas & consumable fuels (Energy) and distributors (Consumer Discretionary) detracting most.

The Fund’s top contributing position for the semiannual period was South Korea’s Modetour Network. One of that nation’s largest travel agencies, the company provides a wide range of services that include overseas bookings, package tours, air courier services, and discounted airline tickets. Modetour has benefited from South Korea’s growing GDP per capita, which has led to increased spending on travel. Seeing ongoing potential, we held a decent-sized position at the end of June. Conviviality is the largest distributor of liquor in the United Kingdom and also operates franchised off-license and convenience chain stores in the U.K. The company was formed through a series of acquisitions that were completed in 2015-16. The anticipated synergies from the combination have recently begun to bear fruit, lifting its stock price.

Canada’s AGT Food and Ingredients made the biggest negative impact among the portfolio’s holdings. The company exports pulses—edible seeds—as well as rice, wheat, and other staples. It experienced a major headwind as its key market of India had higher-than-anticipated pulse output of its own, thus curtailing demand for imports. There has also been heightened uncertainty surrounding a possible policy shift by the Indian government for imported pulses. Liking its core business and long-term prospects, we held shares at the end of June. We felt less confident about Quintis, an Australian firm that manages and cultivates sandalwood forests to produce sandalwood oil products. The resignation of its CEO and co-founder in March created uncertainty over the pricing of its Chinese contracts, which exerted substantial downward pressure on its shares. We chose to exit the position over concerns about the company’s uncertain future, including what we deemed to be growing corporate governance risk.

Relative to the Russell Global ex-U.S. Small Cap, the Fund benefited most from savvy stock selection in Consumer Discretionary names, our larger weighting in Information Technology, and our significantly lower exposure to the Energy sector, in which share prices mostly followed the downward trajectory of oil prices. Conversely, the portfolio’s cash position had the largest negative effect while stock selection in Health Care and Financials also impeded relative results. Based on geography, positions in Japan and the U.K. contributed most while those in the U.S. and Greece topped the list of countries that detracted.


Top Contributors to Performance Year-to-Date Through 6/30/171 (%)

Modetour Network0.62
Conviviality0.61
Nova Measuring Instruments0.59
Integrated Micro-Electronics0.54
Proact IT Group0.40

1 Includes dividends

Top Detractors from Performance Year-to-Date Through 6/30/172 (%)

AGT Food and Ingredients-0.37
Quintis-0.37
Aegean Marine Petroleum Network-0.19
AURELIUS Equity Opportunities-0.18
Handsome-0.18

2 Net of dividends

Current Positioning and Outlook

Even after the strong start to 2017, we continue to find attractive opportunities in international micro-cap companies. Valuations in many parts of the world still looked attractive to us at the end of June, especially in the context of expanding global growth. Recent data showed that the second quarter of 2017 was the eurozone’s best in more than six years, boosted by strong manufacturing numbers, job growth, and elevated business confidence. Additionally, in mid-July China reported surprisingly strong GDP growth for the second quarter, driven by increased retail sales, investment, and industry output—all of which exceeded estimates.

We also think the historical performance pattern of international small-caps relative to their large-cap peers is relevant. For example, the Russell Global ex-U.S. Small Cap outperformed the Russell Global ex-U.S. Large Cap in both rising and falling rate interest rate environments, but enjoyed a wider edge when rates were moving up. In fact, U.S. dollar investors received the best results when German Bund Yields were rising. This is arguably due to three overlapping factors: bond yields usually rise when economies are improving, international small-caps have more cyclical exposure than international large-caps, and Bund Yields have often risen during periods of U.S. dollar weakness, resulting in enhanced gains for U.S. dollar investors.

Average Annual Total Returns Through 06/30/17 (%)

QTR1 YTD1 1YR 3YR 5YR SINCE INCEPT. DATE
International Micro-Cap 6.5815.2322.273.168.973.57 12/31/10

Annual Operating Expenses: Gross 3.35 Net 1.64

1 Not annualized.

Important Performance, Expense and Disclosure Information

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, 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 June 30, 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.


As of 6/30/17, the percentage of Fund assets was as follows: Modetour Network was 0.9%, Conviviality was 0.7%, Nova Measuring Instruments was 0.4%, Integrated Micro-Electronics was 0.4%, Proact IT Group was 0.8%, AGT Food and Ingredients was 0.8%, Quintis was 0.0%, Aegean Marine Petroleum Network was 0.3%, AURELIUS Equity Opportunities was 0.0%, Handsome was 0.0%.


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 Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. 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 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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