Royce Small/Mid-Cap Premier Manager Commentary
article 06-30-2018

Royce Small/Mid-Cap Premier Manager Commentary

Though our outlook is guarded, we think the portfolio holds companies that are well prepared to execute effectively in a more challenging period.

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Fund Performance

Royce Small/Mid-Cap Premier Fund fell 3.1% for the year-to-date period ended June 30, 2018, underperforming its small- and mid-cap benchmark, the Russell 2500 Index, which was up 5.5% for the same period.

What Worked… And What Didn’t

Four of the Fund’s nine equity sectors finished the first half in the red, with Consumer Discretionary having by far the biggest negative impact on performance. In this sector, the recreational vehicle industry coped with fears—which then proceeded to materialize—of an inventory correction. This was the primary cause of first-half decline for the stocks of both Thor Industries—the U.S.’s largest RV manufacturer—and Camping World Holdings—its largest retailer. With RV sales growing at a healthy clip for eight consecutive years and unit shipments topping a record of more than 500,000 in 2017, retailers ordered aggressively heading into 2018. Concurrently, producers began to add capacity before the longer-than-usual winter delayed the beginning of this year’s RV sales season. As a result, excess retail inventory needed to be worked off, and orders were cut back. While this inventory rebalancing has slowed near-term results, the age of retail inventory being cleared is relatively young. And while demand has slowed, it is still growing off peak levels thanks to favorable RV-buyer demographic trends and generally solid consumer discretionary spending. We held shares in both companies at the end of June.

Manpower Group is a Milwaukee-based temporary staffing business. Earnings remained positive in 2018’s first half, its prospects in a still-tightening global labor market appeared strong, and recent acquisitions expanded its global footprint. Its shares fell mostly on a change in a tax subsidy rate in France for companies that provide temporary labor and loftier expectations for growth than even strong earnings earlier in the year could match. We remained confident enough in its core global business to keep it among the portfolio’s top-12 holdings at the end of June. LKQ Corporation, which distributes automotive replacement parts, saw its shares tumble in April when the company reduced its full year guidance. Thinking that its long-term ability to execute remains strong, we held a large position.

As for companies that did well, Copart is the largest online auto salvage auction provider in the U.S. The company saw higher volumes and revenue per car as market conditions remained robust in the first half. Copart’s continuous improvement of its virtual bidding platform is expanding the pool of potential buyers, auction participants, and bids per car. A shift within its non-insurance auto auction business toward dealers and financial institutions has been lifting both average selling prices and gross margins higher. Finally, the company has been supplementing its expanding European footprint with the acquisition of a salvage operation in Finland, augmenting its buyer base in Russia and the Baltic States. Kirby Corporation has the largest inland and coastal tank barge fleet in the U.S. and also draws revenue from servicing and distributing industrial engines, transmissions, parts, and oil field services equipment. The tank barge markets seem to be recovering well, thanks to retirements of older barges, limited new builds, and solid utilization rates. Kirby has also benefited from two recent acquisitions over the last 18 months that are allowing it to drive industry consolidation. In addition, higher land drilling activity resulting from rising oil prices has been stoking demand for new and remanufactured hydraulic fracturing units. It was the portfolio’s fifth-largest position at the end of June.


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Relative to the Russell 2500, first-half results were impaired most by ineffective stock selection in the Consumer Discretionary sector, particularly in the distributors and specialty retail groups. Both our position in DENTSPLY SIRONA, a dental equipment and consumables manufacturer, and our significantly lower sector exposure were headwinds in Health Care, which was the best performer among the 11 sectors in the Russell 2500, while results in Financials were hurt most by our position in asset management business Affiliated Managers Group. Conversely, we derived smaller relative benefits from our underweight in Utilities and from a combination of having no exposure to lagging REITs and effective stock selection in the Real Estate sector’s real estate management & development group.


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

Copart0.97
Kirby Corporation0.51
UGI Corporation0.36
CarMax0.27
Cabot Microelectronics0.25

1 Includes dividends

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

Thor Industries-0.88
Camping World Holdings Cl. A-0.80
ManpowerGroup-0.77
LKQ Corporation-0.77
Affiliated Managers Group-0.60

2 Net of dividends

Current Positioning and Outlook

Our outlook is guarded. While we have not made any significant alterations to positioning or sector weights, our cash position is higher than typical. This is the consequence of seeing a dearth of high-quality opportunities trading for what we believe are fair prices. We see additional risk in the run-off effects of tax cuts and deregulation that will begin to challenge earnings growth over the next two quarters. The rate of change in global growth has also diminished, with global PMIs (the Purchasing Managers’ Index, an indicator of economic health for manufacturing and service sectors) slowing, while the effects of tariffs are just now registering—and are only likely to intensify. All of this raises the degree of difficulty for equities to maintain their recent performance pace. We also believe, however, that the portfolio holds companies that are well prepared to execute effectively in a more challenging period.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Small/Mid-Cap Premier -0.59-3.1411.098.548.048.849.8310.6412.28 12/27/95
Russell 2500 5.715.4616.2410.3012.2910.7410.999.1110.26 N/A
Russell 2000 7.757.6617.5710.9612.4610.6010.508.039.07 N/A

Annual Operating Expenses: 1.32

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.

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: Copart was 2.1%, Kirby Corporation was 2.6%, UGI Corporation was 2.2%, CarMax was 2.2%, Cabot Microelectronics was 1.0%, Thor Industries was 0.5%, Camping World Holdings Cl. A was 0.7%, ManpowerGroup was 1.6%, LKQ Corporation was 2.8%, Affiliated Managers Group was 1.7%, DENTSPLY SIRONA was 1.0%


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 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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