Royce Low-Priced Stock Fund Manager Commentary
article 06-30-2018

Royce Low-Priced Stock Fund Manager Commentary

Boasting a generous number of micro-cap stocks, the top-performing domestic asset class in the first half of the year, the Fund outperformed its small-cap benchmark.

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Fund Performance

Royce Low-Priced Stock Fund outperformed the Russell 2000 Index, its small-cap benchmark, in the first half of 2018. The Fund increased 9.3% while the Russell 2000 was up 7.7% for the year-to-date period ended June 30, 2018. The Fund also outpaced the benchmark for the one-, 20-year, and since inception (12/15/93) periods ended June 30, 2018. The portfolio boasts a generous number of micro-cap stocks, which was the top-performing domestic asset class in the first half. U.S. economic growth continued to accelerate, and many companies continued to post strong earnings, aided by lower tax rates. Their greater reliance on U.S. growth left small- and micro-cap stocks better positioned than large-caps through most of the first half. The strengthening dollar, which tends to historically coincide with relatively stronger small-cap results, also benefited small-cap performance.

What Worked… And What Didn’t

The Fund had strong contributions from the Information Technology, Consumer Discretionary, Health Care, and Energy sectors. Health care equipment & supplies (Health Care) was the top contributor at the industry level, and specialty retail (Consumer Discretionary) and energy equipment & services (Energy) followed closely behind. The portfolio’s top contributor at the position level was biotechnology company Heron Therapeutics, which had strong Phase 3 results during the second quarter for a key product focused on post-operative pain management. With the potential for an “opioid sparing” label, we believe this product has blockbuster potential across a number of applications. Although we sold part of our stake as its stock rose, we maintained a position at the end of June. Profire Energy—an oil field technology company specializing in burner management systems—benefited from a resurgence in field activity fueled by rising oil prices. We sold almost a third of our stake during the first half, maintaining a position because the company is investing heavily in R&D to expand applications outside of oil field services, which has significantly increased its addressable markets.

Stoneridge, which supplies electrical components to cars and trucks, was also among the Fund’s top performers, as the company saw its shares positively reflect its success in winning new business across several product lines. Stoneridge is gaining traction with its MirrorEye camera system, which offers safety and fuel economy benefits by replacing side mirrors on trucks. We maintained our stake in the position because we think its new product pipeline remains strong and could potentially drive above-average growth in the years to come.

Our position in Paratek Pharmaceuticals detracted on both an absolute and relative basis. Its shares fell due to concerns over incremental FDA approval scrutiny, the potential for a slow commercial ramp up, and a capital raise in April. We increased our position in the first half because of the large market opportunity for a new antibiotic associated with the increased human resistance to older varieties. ASV Holdings, which provides skid steers and loading equipment for the construction and agriculture markets, disappointed when the company missed fiscal first-quarter earnings expectations, the result of changes in its parts distribution strategy and higher raw materials prices that crimped gross margins. We view these issues as transitory, so we built our position as its stock price tumbled.

Metals & mining (Materials) and pharmaceuticals (Health Care) detracted most at the industry level from portfolio performance—and detracted versus the Russell 2000—while the Fund’s significant underweight in the Health Care sector created the biggest headwind to relative results. Stock selection was the primary culprit in the relative disadvantage for Materials, with mining companies Orocobre and Pretium being notable detractors.


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Consumer Discretionary, Energy, and Financials were the areas with the strongest relative contributions. The portfolio’s edge in all three areas was driven primarily by broad-based stock selection. In addition to Stoneridge in Consumer Discretionary, Mammoth Energy Services, which offers oil field services as well as engineering and construction services, was a notable standout. During the year, the company was awarded significant follow-on contracts related to hurricane damage in Puerto Rico. We reduced our position as its stock price continued to rise. Although we thought it remained attractively valued, we wanted more clarity as to how sustainable the company’s business in Puerto Rico will be.


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

Heron Therapeutics0.63
Profire Energy0.60
Stoneridge0.53
Mammoth Energy Services0.50
AtriCure0.45

1 Includes dividends

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

Paratek Pharmaceuticals-0.32
ASV Holdings-0.27
Gulf Island Fabrication-0.27
Electro Scientific Industries-0.26
Total Energy Services-0.25

2 Net of dividends

Current Positioning and Outlook

We did not make any major changes to the portfolio positioning in the first half of 2018. Our largest sector weightings at the end of June were Information Technology, Industrials, and Consumer Discretionary. Health Care, particularly biotechnology, continued to be among our largest underweights. We remain cautiously optimistic in anticipation of an increasingly less restrictive regulatory environment. Considering the accelerating pace of the U.S. economy growth, lower corporate tax rates, and the slower pace of global economic growth, we are particularly focused on small- and micro-cap companies that have most of their exposure to the U.S. economy.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Low-Priced Stock 8.959.3418.756.706.614.827.518.5210.25 12/15/93

Annual Operating Expenses: Gross 1.61 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 total gross annual operating expenses and include management 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 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 1.24% through April 30, 2019. 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.

All performance and risk information presented in this material prior to the commencement date of Investment Class shares on 3/15/07 reflects Service Class results. Shares of the Fund's Service Class bear an annual distribution expense that is not borne by the Investment Class.

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: Heron Therapeutics was 0.9%, Profire Energy was 0.8%, Stoneridge was 1.3%, Mammoth Energy Services was 0.6%, AtriCure was 1.3%, Paratek Pharmaceuticals was 0.5%, ASV Holdings was 0.6%, Gulf Island Fabrication was 0.5%, Electro Scientific Industries was 1.1%, Total Energy Services was 0.9%, Orocobre was 0.4%, Pretium Resources was 0.4%


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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