Royce Premier Fund Manager Commentary
article 06-30-2017

Royce Premier Fund Manager Commentary

The Fund's strong first-half performance was notable in a period that otherwise favored high growth and low quality.

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Fund Performance

During the year’s first half, Royce Premier Fund performed impressively on both an absolute and relative basis, despite value stocks lagging growth stocks. The Fund returned 8.7% for the year-to-date period ended June 30, 2017 compared with 5.0% for its small-cap benchmark, the Russell 2000 Index. This was a strong vote of confidence for the kind of high-quality companies that we seek for the portfolio, those with discernible competitive advantages, high returns on capital, and a sustainable, moat-like franchise.

For the first quarter, the Fund gained 6.7% versus 2.5% for the Russell 2000. This strong relative return was all the more notable as the quarter generally favored growth and low-quality stocks, neither of which fit the Fund’s quality approach. Value stocks continued to lag their growth counterparts in the second quarter, when the Fund delivered a respectable return of 1.9% compared with 2.5% for the small-cap index. Long-term results were strong on both an absolute and relative basis as Premier bested its benchmark for the one-, 10-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended June 30, 2017. The Fund’s average annual total return since inception was 11.6%.

What Worked… And What Didn’t

Eight of Premier’s nine equity sectors finished the semiannual period in the black. Information Technology was the top contributor by a sizable amount, with electronic equipment, instruments & components and semiconductors & semiconductor equipment companies doing best. Industrials made the second-biggest contribution, led by machinery stocks. The Fund’s only sector with negative performance for the first half was Energy, where share prices fell along with the price of oil. Detractions at the industry level were similarly modest, led by energy equipment & services (Energy), specialty retail (Consumer Discretionary), and metals & mining (Materials).

The Fund’s two top contributing positions were also top-10 holdings at the end of June. Cognex Corporation is the market leader in machine vision technology, which captures and analyzes visual information to automate tasks that previously relied on human eyesight and is thus a major driver of industrial and process automation. The trend toward automation continues to drive broad order strength for its machine vision systems. Cognex also supplemented its robust technology portfolio with three small acquisitions that should enhance its capabilities in emerging areas such as 3D and adaptive learning. National Instruments supplies computer-based instrumentation hardware and software products for engineers and scientists. The company saw healthier order growth coincident with both improved global industrial activity and new products that should broaden its addressable markets in key growth areas such as semiconductor testing and the Internet of Things.

The impact of detractors was far more modest. SEACOR Holdings provides marine transportation equipment and logistics services mostly for the energy and agricultural markets. Its earnings remained pressured by ongoing weakness in the offshore marine vessel business, which was exacerbated by the decline in oil prices in the first half, as well as overcapacity in its inland river barge and tow business. Weak volumes persisted through most of the first half for industrial equipment auctioneer Ritchie Bros. Auctioneers. This was primarily the result of tight supply in consigned heavy equipment for auction as well as uncertainty about the near-term growth trajectory for Iron Planet, a recent acquisition that conducts online equipment auctions.

Relative to the Russell 2000, Information Technology provided the largest advantage in the first half. Our performance edge in this sector was driven by savvy stock picking, particularly in the electronic equipment, instruments & components industry. Financials was the second-biggest relative contributor. Both the Fund’s underweight in lagging banks and savvy stock picking among capital markets firms, notably Ashmore Group, the emerging market debt asset manager, helped relative returns.

Conversely, our lower exposure to Health Care detracted most from relative performance. A perennial underweight in Premier’s portfolio, it was the top-contributing sector in the Russell 2000 for the first half. Materials also made a minor relative detraction. Shares of our largest holding in the sector, metals distributor and processor Reliance Steel & Aluminum, declined after the company reduced earnings guidance.


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

Cognex Corporation1.06
National Instruments0.80
IDEXX Laboratories0.70
Lincoln Electric Holdings0.68
IPG Photonics0.66

1 Includes dividends

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

SEACOR Holdings-0.35
Ritchie Bros. Auctioneers-0.27
Monro Muffler Brake-0.16
CIRCOR International-0.14
Reliance Steel & Aluminum-0.14

2 Net of dividends

Current Positioning and Outlook

We slightly narrowed the number of portfolio holdings in the first half of 2017, adding three, including one spin-off, while eliminating four. We also actively trimmed some of our largest contributors, most notably in Information Technology and Industrials, where both valuations and portfolio weightings had become elevated. These actions led to the accumulation of a meaningful cash position of close to 8% at the end of June, as we wait for better opportunities to put this money to work. Until then, we are prepared to be patient. We are comfortable that the long and winding road to normalization that we see for equities will continue to be rewarding for the kind of high-quality companies and long-term compounders that we seek to hold in the Fund.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Premier 1.878.7025.543.6310.627.2010.7810.4211.61 12/31/91

Annual Operating Expenses: 1.16

1 Not annualized.

Important Performance, Expense and Disclosure 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, 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: Cognex Corporation was 3.6%, National Instruments was 3.2%, IDEXX Laboratories was 2.2%, Lincoln Electric Holdings was 3.6%, IPG Photonics was 1.9%, SEACOR Holdings was 0.9%, Ritchie Bros. Auctioneers was 1.3%, Monro Muffler Brake was 0.0%, CIRCOR International was 1.9%, Reliance Steel & Aluminum was 1.9%, Ashmore Group was 2.2%.


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 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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