Royce Pennsylvania Mutual Fund Manager Commentary
article 06-30-2019

Royce Pennsylvania Mutual Fund Manager Commentary

Our flagship portfolio not only beat its benchmark, but it also outperformed for the one-, three-, 15-, 20-, 25-, 30-, 35-, 40-year, and since index inception (12/31/78) periods ended 6/30/19.

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Fund Performance

Royce Pennsylvania Mutual Fund advanced 17.8% in the first half of 2019, nosing ahead of its small-cap benchmark, the Russell 2000 Index, which was up 17.0% for the same period. Penn also outperformed the small-cap index for the one-, three-, 15-, 20-, 25-, 30-, 35-, 40-year, and since index inception (12/31/78) periods ended June 30, 2019. The Fund’s average annual total return for the 45-year period ended June 30, 2019—all under the management of Chuck Royce—was 14.1%, a long-term record in which we take great pride.

What Worked… And What Didn’t

The portfolio’s breadth of advance was evidenced by each of its 11 sectors contributing to first-half performance. The Fund’s two largest—Industrials and Information Technology—which accounted for almost half of its assets at the end of June, were also its top contributors. Similarly, its two smallest sectors, Utilities and Consumer Staples, delivered the most modest contributions. Machinery (Industrials) was the top contributor at the industry level, followed by electronic equipment, instruments & components, semiconductors & semiconductor equipment (both from Information Technology), and aerospace & defense (Industrials).

HEICO Corporation, the Fund’s top contributor, manufacturers replacement aerospace parts. Its shares reached higher altitudes in June, after the company reported strong organic sales and expanding margins, boosted by strength in its flight support and electronics segments. These developments led HEICO to raise guidance for the rest of the year. Helios Technologies (a machinery company formerly known as Sun Hydraulics), which manufactures hydraulic and electronic controls systems for industrial and recreational equipment, reported a 51% increase in sales over 2018’s first quarter, driven by its Faster and Custom Fluidpower (or CFP) acquisitions. From the tech sector’s electronic equipment, instruments & components group, FLIR Systems has a global business manufacturing thermal imaging and infrared camera systems. In late April, the company announced increased bookings, strong year-over-year margin expansion, and double-digit earnings growth. It also expects revenues to remain robust through the end of 2019. Shares of CIRCOR International, which makes precision valves, rose sharply after receiving a takeover offer from a larger industrial company. We were very pleased to see strong results from these and many other cyclical holdings in the first half.


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Textiles, apparel & luxury goods and leisure products, both from Consumer Dictionary, were among a small group of industries that detracted in 2019’s first half. They did so on a comparatively minor scale. In fact, the four largest industry detractors came from Consumer Discretionary, demonstrating the widespread disruption that continues to create challenges in this diverse sector. Interestingly, of the portfolio’s five positions that detracted most, only the fifth came from Consumer Discretionary—footwear manufacturer and distributor Caleres. The Fund’s top-detracting position in the first half was FutureFuel, which provides custom chemicals and biofuels. The company reported solid results for its chemical business but disappointing ones for its biofuels segment, which was hurt by both falling energy prices and an anticipated tax credit that remained stalled in Congress. Wary of its long-term prospects, we sold our position during June. We took the opposite tack with Virtu Financial, adding shares of this company that uses its technology to act as a market maker and liquidity provider to the global financial markets. Its business endured a recent slump, which we see as short term. We also like a recent acquisition Virtu made. We chose to hold our stake in Lindsay Corporation. A rare detractor in the machinery group, the company supplies agricultural equipment. It faced ongoing weakness in its core market and the negative impact of floods in the Midwest, both of which put pressure on its stock.

The Fund’s first-half relative outperformance was driven by sector allocation. Industrials was the biggest source of strength, due to both our overweight and savvy stock selection. Health Care was another source of outperformance as we avoided struggling pharmaceuticals and benefited from stock selection and an overweight in life sciences tools & services. Conversely, Real Estate detracted from relative results in the first half period, largely due to the share price decline for commercial real estate broker Marcus & Millichap. Ineffective stock picking also hurt in Consumer Discretionary, where six of 11 industries detracted, led by household durables and auto components.


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

HEICO Corporation0.86
Helios Technologies0.49
FLIR Systems0.47
CIRCOR International0.47
Ares Management Cl. A0.45

1 Includes dividends

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

FutureFuel Corporation-0.16
Virtu Financial Cl. A-0.11
Lindsay Corporation-0.11
ArcBest-0.09
Caleres-0.08

2 Net of dividends

Current Positioning And Outlook

Markets are very good at surprising most investors. Today, with widespread concerns about slowing growth, increasing trade tensions, and the extended economic cycle, the most surprising outcome might be a rally. We see four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and increasing liquidity. When taken together, we see these factors as painting an attractive picture for small-cap investors. With so much attention on negative macro issues, we think investors may be missing this positive picture, especially with regard to profitable cyclical businesses.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR 30YR 45YR
Pennsylvania Mutual 3.6317.810.68 13.29 6.16 12.29 8.32 9.77 10.16 14.14
Russell 2000 2.1016.98-3.31 12.30 7.06 13.45 8.15 7.77 9.29 N/A

Annual Operating Expenses: 0.92

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. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.

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: HEICO Corporation was 1.7%, Helios Technologies was 1.3%, FLIR Systems was 1.9%, CIRCOR International was 0.3%, Ares Management Cl. A was 1.0%, FutureFuel Corporation was 0.0%, Virtu Financial Cl. A was 0.7%, Lindsay Corporation was 0.5%, ArcBest was 0.3%, Caleres was 0.2%


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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