Royce Total Return Fund Manager Commentary
article 06-30-2018

Royce Total Return Fund Manager Commentary

The Fund was challenged by its preference for more economically cyclical dividend-paying stocks over those more sensitive to interest rates during the more bullish second quarter.

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Fund Performance

Like 2017, the first half of 2018 was a period of lower-than-average volatility in which small-cap growth stocks beat small-cap value, and small-cap companies that pay no dividends outpaced those that do. Non-dividend payers were up 11.8% for the year-to-date period ended June 30, 2018, finishing well ahead of small-cap dividend payers in the Russell 2000, which rose only 3.8% over the same period. Additionally, the Fund’s preference for more economically cyclical dividend-paying stocks, as opposed to those more sensitive to interest rates, worked doubly against it in the more bullish second quarter, when the former group lagged while the latter rallied. Finally, Health Care and Information Technology—the two best-performing sectors in the Russell 2000 during the first half—have been persistent portfolio underweights owing to their relative lack of dividend payers. Needless to say, this made for a less than ideal environment for our risk-conscious dividend value approach. Royce Total Return Fund advanced 0.6% for the year-to-date period ended June 30, 2018, significantly trailing its small-cap benchmark, the Russell 2000 Index, which gained 7.7% for the same period.

What Worked… And What Didn't

Six of the Fund’s 11 equity sectors finished the first half in the black. Energy, where our exposure was low and slightly underweighted, led by a considerable margin, followed by Health Care, another very low weighting. The collective impact of the five detracting sectors was modest, but unfortunately included the Fund’s two largest—Financials and Industrials.

At the industry level, the energy equipment & services (Energy) and specialty retail (Consumer Discretionary) groups led. The first was lifted by the rebound for oil prices. The largest positive contributor in this industry–and in the portfolio overall—was Norway’s TGS-NOPEC Geophysical, which provides geoscience data to oil and gas companies worldwide. Its revenue and earnings were boosted by improving exploration and production spending, higher oil prices, and the longer-term need for energy companies to replenish reserves, which is driving increased spending on seismic data. Specialty retail has been a fairly consistent trouble spot in the market over the previous three-plus years as retailers have struggled with near constantly contracting margins in the face of online competition and related changes in shopping patterns. This began to shift for a select number of businesses in the second quarter when sales began to recover. We took some gains in footwear retailers Shoe Carnival and DSW as well as in casual clothing business American Eagle Outfitters.

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 appear strong, and recent acquisitions expanded its global footprint. Its shares fell mostly on a change in 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 meet. We remained confident enough in its core global business to keep it among the portfolio’s top-10 holdings at the end of June. Thor Industries is a leading manufacturer of RVs (recreational vehicles) and has emerged as an innovative industry leader over the last several years. The firm announced record fiscal second-quarter sales in March, but also reported higher raw material and commodity costs. Along with concerns that its industry may have hit a sales peak, this was enough to drive investors away. We trimmed our stake but were holding shares at the end of June.


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Relative to the Russell 2000, the Financials sector detracted most in the first half of 2018. Ineffective stock selection in that sector’s insurance and capital markets groups was the major source of underperformance, though our overweight also hurt. Our lower exposure made Health Care the portfolio’s second-largest relative detractor, as it was small-cap’s top-performer, while our underweight and poor stock selection created a relative disadvantage in Information Technology. Conversely, Energy’s positive effect was driven by superior stock selection in energy equipment & services holdings, while Real Estate benefited from the portfolio’s underweight as the sector underperformed in the first half.


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

TGS-NOPEC Geophysical0.33
McGrath RentCorp0.21
HEICO Corporation0.19
MKS Instruments0.17
Shoe Carnival0.17

1 Includes dividends

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

ManpowerGroup-0.51
Thor Industries-0.36
Federated Investors Cl. B-0.32
Hubbell Cl. B-0.26
Clarkson-0.25

2 Net of dividends

Current Positioning and Outlook

The market’s behavior is curious to us. On the one hand, we hear optimism and solid progress from the management teams we meet with, see solid earnings reports, and observe consistently strong macroeconomic data. On the other hand, small-cap market leadership has stubbornly remained with defensive and yield-oriented stocks, while cyclicals have lagged. Despite new highs for the Russell 2000, we are therefore far from ebullient. We are continuing to reduce the portfolio’s exposure to companies with higher valuations and expectations while modestly raising cash levels. We do anticipate a change in market leadership to more cyclical stocks, but admit that changes in leadership seldom occur without turbulence. If higher volatility reemerges, we aim to be able to take advantage of what may be temporarily lower prices.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
Total Return 2.900.5911.239.859.758.709.289.0110.83 12/15/93
Russell 2000 7.757.6617.5710.9612.4610.6010.508.039.44 N/A

Annual Operating Expenses: 1.21

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, other expenses, and acquired fund fees and expenses. 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.

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: TGS-NOPEC Geophysical was 0.9%, McGrath RentCorp was 0.7%, HEICO Corporation was 1.0%, MKS Instruments was 0.9%, Shoe Carnival was 0.5%, ManpowerGroup was 1.1%, Thor Industries was 0.6%, Federated Investors Cl. B was 0.6%, Hubbell Cl. B was 0.9%, Clarkson was 0.9%, DSW Cl. A was 0.5%, American Eagle Outfitters was 0.6%


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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