Royce Micro-Cap Trust Manager Commentary
article 06-30-2017

Royce Micro-Cap Trust Manager Commentary

We are optimistic that expanding global growth can help certain micro-cap companies, especially those with earnings growth.


Fund Performance

Royce Micro-Cap Trust (“RMT”) gained a more-than-respectable 5.9% on a net asset value (“NAV”) basis and an impressive 10.1% on a market price basis for the year-to-date period ended June 30, 2017, outpacing each of its unleveraged benchmarks: the small-cap Russell 2000 Index was up 5.0% while the Russell Microcap Index increased 4.2% for the same period. The Fund’s results were all the more notable in that they were achieved in a period that showed more favor to larger market caps, high growth, and low quality than was given to the kind of micro-cap companies we seek using RMT’s diversified, multi-theme core approach. In fact, leadership in the first half of 2017 reversed most of what worked in 2016, when the Fund also beat both its benchmarks.

In a challenging first quarter for both value stocks and micro-caps, RMT gained 2.4% on an NAV basis and 4.8% based on market price while the Russell 2000 was up 2.5% and the Russell Microcap gained 0.4%. The first quarter’s leadership shifts remained largely in place through the end of June—with large-caps, growth, healthcare, and non-U.S. equities all staying in the lead after lagging in 2016. For the second quarter, the Fund advanced 3.5% on an NAV basis and 5.0% on a market price basis compared to 2.5% for the small-cap index and 3.8% for the micro-cap index. On an NAV basis, RMT outpaced the Russell Microcap for the 10- and 15-year periods ended June 30, 2017 while it also beat the Russell 2000 for the 15-, 20-year, and since inception (12/14/93) periods. (Returns for the Russell Microcap Index only go back to 2000.) RMT’s average annual NAV total return for the since inception period ended June 30, 2017 was 10.8%.

What Worked… And What Didn’t

Eight of the Fund’s 11 equity sectors made positive contributions to first-half performance, led by Information Technology, Industrials, and Health Care. (After correcting in 2016, Health Care rallied in the first half to land as the top-contributing sector in both the small- and micro-cap indexes.) While several of the portfolio’s industry groups made solid contributions to performance in the semiannual period, the positive impacts of machinery (Industrials) and biotechnology (Health Care) stood out most. Also notable was the fact that the Information Technology sector had five groups among the Fund’s 10-best performers at the industry level.

RMT’s top contributor at the position level in the first half was Sangamo Therapeutics, which develops genomic therapies and medications that treat genetic diseases. Its share price surged in May when a collaboration with Pfizer to work on gene therapies for hemophilia was announced. From the Information Technology sector, offers home care services for children, adults, seniors, and even pets. Two consecutive quarters of revenue growth made investors feel at home, as did the company’s announcement of increased guidance for the rest of fiscal 2017. Shares of gold miner Exeter Resource were mostly moving upward before the announcement of its acquisition at an attractive premium drove its shares even higher and led us to begin selling our position.

Of the three sectors that detracted from first-half results, only Energy made a notably negative impact, as net losses for Consumer Discretionary and Financials were comparably minor. A similar pattern played out at the industry level, where the only significant detraction came from energy equipment & services. At each level, tumbling oil prices led to formidable difficulties. The Fund’s top detractor at the position level was Era Group, which provides helicopter transportation services and personnel primarily to and from offshore oil drilling rigs and platforms. The challenges wrought by falling oil prices were reflected in disappointing earnings. Liking the long-term prospects for its niche business, we held shares at the end of June.

Our experience with automotive parts recycler and reseller Fenix Parts continued to be highly disappointing as its shares were delisted on Nasdaq when it missed financial reporting filing deadlines. Toronto-based Dundee Corporation, which is involved in wealth management, real estate, and natural resources, experienced losses in mining- and resource-based activities that put downward pressure on its shares.

Relative to the Russell 2000, RMT benefited most from superior stock selection in Industrials, specifically in the previously mentioned machinery group. Also helping relative results were our lower exposure to banks, which gave us an edge in Financials, and stock-picking advantages in Materials and Information Technology. Conversely, stock selection in both Health Care and, to a lesser extent, Consumer Discretionary hurt the Fund vis-?-vis the small-cap index.

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

Sangamo Therapeutics0.39
Exeter Resource0.28
Major Drilling Group International0.25

1 Includes dividends

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

Era Group-0.54
Fenix Parts-0.25
Dundee Corporation Cl. A-0.24
Matrix Service-0.18

2 Net of dividends

Current Positioning And Outlook

We think that RMT’s portfolio remains well-positioned to benefit from a cyclical upswing. So while a correction would not be surprising, we are optimistic that expanding global growth can help certain micro-cap companies, especially those with earnings growth. The message that we have been receiving from the companies we speak to each day remains positive. With order books continuing to fill up, the management teams remain confident about their business, which in turn gives us a lot of confidence in the long-term prospects for RMT’s multi-themed core approach.

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

RMT 5.0310.1227.273.9013.644.448.6310.1210.09 12/14/93
XOTCX 3.455.9322.604.6513.475.759.239.9610.84 12/14/93
Russell Microcap 3.834.2327.606.6913.735.478.44N/AN/A N/A

Annual Operating Expenses: N/A

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 review and report on information available to us on the date of the report, 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.

The Fund is a closed-end registered investment company whose shares of common stock may trade at a discount to their net asset value. Shares of the Fund's common stock are also subject to the market risks of investing in the underlying portfolio securities held by the Fund.



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