Royce Value Trust Manager Commentary
article 06-30-2017

Royce Value Trust Manager Commentary

The Fund's first-half results were impressive on both an absolute and relative basis.


Fund Performance

We were very pleased with Royce Value Trust’s (“RVT”) first-half results. Strong on both an absolute and relative basis, performance was all the more impressive in a semiannual period that saw value underperform growth and was thus not entirely conducive to the Fund’s multiple investment theme approach. RVT advanced 7.3% on a net asset value (“NAV”) basis and 13.1% on a market price basis for the year-to-date period ended June 30, 2017, in both cases outperforming its unleveraged small-cap benchmarks, the Russell 2000 and S&P SmallCap 600 Indexes, which had respective increases of 5.0% and 2.8% for the same period.

For the first quarter, RVT gained 3.8% based on NAV and 6.5% on market price, outpacing the Russell 2000, which was up 2.5%, and the S&P SmallCap 600, which rose 1.0%, for the same period. The Fund’s relative advantage extended to the second quarter, when it climbed 3.4% on an NAV basis and 6.2% on a market price basis versus 2.5% for the Russell 2000 and 1.7% for the S&P SmallCap 600. RVT beat both of its benchmarks on an NAV basis for the one-, 30-year, and since inception (11/26/86) periods ended June 30, 2017. The Fund added advantages over the Russell 2000 for the 20- and 25-year periods ended June 30, 2017 based on both NAV and market price. RVT’s average annual NAV total return for the since inception period was 10.6%, all under the management of Chuck Royce.

What Worked… And What Didn't

Seven of the Fund’s 11 equity sectors finished the first half in the black, two were essentially flat, and two more detracted from performance. Information Technology and Industrials made the biggest positive impacts. At the industry level, a group from each sector dominated returns in a similar fashion—the electronic equipment, instruments & components group (Information Technology) and machinery stocks (Industrials).

The Fund’s two top contributors at the position level were holdovers from 2016’s top performers. Laser diode and equipment maker Coherent took the top spot, as it did in 2016, galvanized by ongoing sales and earnings growth driven by vibrant demand for ramped up OLED (organic light-emitting diode) capacity. 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. Another top contributor, The Advisory Board specializes in performance improvement software and solutions to the healthcare and higher education industries. Among 2016’s top detractors, it rebounded soundly in the first half as an activist investor disclosed a large equity stake, which encouraged other investors.

Of the two portfolio sectors that detracted from first-half performance, only Energy had a significant negative impact. Net losses for Consumer Discretionary were modest, a pattern that was mirrored at the industry level. The energy equipment & services group (Energy) was by far the portfolio’s biggest detractor, followed by an appreciably lower negative impact for specialty retail (Consumer Discretionary), which continued to struggle with secular shifts in consumer spending and behavior.

The 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 cratering price of oil created challenges for its business that were reflected in disappointing earnings. Liking the long-term prospects for its niche business, we held shares at the end of June. 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, RVT benefited most from savvy stock picking in three sectors—Financials, where capital markets stood out, Industrials, where machinery and professional services provided a sizable relative edge, and Information Technology, where electronic equipment, instruments & components outperformed. Conversely, poor stock selection in specialty retail and an overweight in distributors created a disadvantage in Consumer Discretionary while our underweights in biotechnology (Health Care) and, to a lesser extent, Utilities also hurt relative results.

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

Cognex Corporation0.34
Advisory Board (The)0.28
MarketAxess Holdings0.27
Community Health Systems0.25

1 Includes dividends

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

Era Group-0.30
Dundee Corporation Cl. A-0.18
Wesco Aircraft Holdings-0.18
Monro Muffler Brake-0.17
Core-Mark Holding Company-0.17

2 Net of dividends

Current Positioning And Outlook

We think that RVT’s portfolio remains well-positioned to benefit from a cyclical upswing, with more than 70% of its net assets invested in Industrials, Information Technology, Financials, and Materials at the end of June. So while a correction would not be surprising, we are optimistic that the expanding rate of global growth can help small-cap companies, especially those with growing earnings, to excel. The message that we receive 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 confidence in the long-term prospects for RVT’s multi-themed core approach.

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

RVT 6.1713.1233.807.0513.964.507.949.799.94 11/26/86
XRVTX 3.397.2925.766.9513.385.568.779.5210.63 11/26/86

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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