Royce Value Trust Manager Commentary
article 06-30-2018

Royce Value Trust Manager Commentary

Our oldest closed-end portfolio maintained its longer-term relative advantages in spite of a curious market.

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Fund Performance

Following two consecutive years of strong absolute and relative performance, our oldest closed-end portfolio fell behind each of its unleveraged small-cap benchmarks in the first half of 2018. Royce Value Trust (“RVT”) advanced 2.8% on a net asset value (“NAV”) basis and 1.4% on a market price basis for the year-to-date period ended June 30, 2018, in both cases underperforming the Russell 2000 and S&P SmallCap 600 Indexes, which had respective increases of 7.7% and 9.4% for the same period. The Fund maintained its longer-term relative advantages, outperforming the Russell 2000 based on both NAV and market price for the three-, 20-, 25-, 30-year, and since inception (11/26/86) periods ended June 30, 2018.

What Worked… And What Didn’t

Although the first half was challenging for our multi-discipline small-cap core strategy with the market continuing to favor higher growth, lower quality, and more yield-sensitive equities, nine of RVT’s 11 equity sectors nonetheless finished the period in the black. Energy, which recovered significantly in the second quarter, was by far the top contributor, while Consumer Discretionary and Consumer Staples had only modest negative results.

At the industry level, the top contributor was energy equipment & services (Energy) as the rebound for oil prices fed through to improved prospects for these businesses. SEACOR Marine Holdings, which provides global marine and support transportation services to the energy industry, was the Fund’s top performer overall and in this industry. Stronger operating results came from nearly all of its geographic markets, which helped its shares to rise. Norway’s TGS-NOPEC Geophysical, which provides geoscience data to oil and gas companies worldwide, was also a significant contributor in this industry and in the portfolio as a whole. 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. Outside of energy, Copart, the largest online salvage auction provider in the U.S., 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.

RVT’s top-two contributors from both 2016 and 2017 made the list of top detractors in 2018’s first half. The stock of laser diode and equipment maker Coherent underwent a correction in the first half after the company’s announcement of slightly better-than-expected results came with a more muted profit outlook. Already reducing our position in 2017, we sold additional shares in June 2018. Cognex Corporation has a dominant position as the global leader in machine vision technology. It was hurt by slackening demand in its consumer electronics market, in particular by iPhone sales that were well below expectations. We also suspect that many technology businesses with global reach may have suffered amid concerns about the effect trade wars would have on worldwide growth. We held our shares in the first half.


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The largest negative effect on returns relative to the Russell 2000 came from poor stock selection in Information Technology, most impactfully in the electronic equipment, instruments & components group and in Internet software & services companies. Stock selection also hurt in Consumer Discretionary, while our underweight in Health Care, especially in biotechnology, and our overweight in Industrials, most notably in the machinery group, also detracted. Machinery was also the biggest detractor for RVT at the industry level, due in large part to disappointing performance from Sun Hydraulics. In fact, several holdings in this group reported disappointing earnings and lackluster guidance, due partially to margin compression caused by higher input costs. We think that some of these margin issues should prove transitory as manufacturers must first absorb these increased costs before realizing higher product prices. Conversely, savvy stock selection gave RVT an advantage in the Energy and Real Estate sectors, as did our lower exposure to Utilities.


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

SEACOR Marine Holdings0.48
TGS-NOPEC Geophysical0.39
Copart0.31
Wesco Aircraft Holdings0.25
FRP Holdings0.25

1 Includes dividends

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

Coherent-0.64
Cognex Corporation-0.37
Thor Industries-0.35
Sun Hydraulics-0.32
ManpowerGroup-0.27

2 Net of dividends

Current Positioning and Outlook

The market’s recent behavior looks curious to us. 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, as we anticipate that increased volatility will accompany a shift in market leadership to value/cyclical leadership. We are also mindful that these shifts rarely occur without some turbulence. We have therefore sought to position the portfolio for both lower small-cap returns and increased volatility.

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

QTR1 YTD1 1YR 3YR 5YR 10YR 15YR 20YR SINCE INCEPT. DATE
RVT 3.421.3616.9313.7711.778.349.068.9810.16 11/26/86
XRVTX 3.222.7814.3712.0311.458.8110.049.1510.74 11/26/86
Russell 2000 7.757.6617.5710.9612.4610.6010.508.039.76 N/A

Annual Operating Expenses: N/A

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, net of the Fund's investment advisory fee, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained at www.roycefunds.com. The market price of the Fund's shares will fluctuate, so that shares may be worth more or less than their original cost when sold.

The Fund invests primarily in securities of small-cap and micro-cap companies, which may involve considerably more risk than investing in larger-cap companies. The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. From time to time, the Fund may invest a significant portion of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments.

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: SEACOR Marine Holdings was 1.0%, TGS-NOPEC Geophysical was 1.0%, Copart was 1.2%, Wesco Aircraft Holdings was 0.7%, FRP Holdings was 0.8%, Coherent was 0.6%, Cognex Corporation was 1.0%, Thor Industries was 0.6%, Sun Hydraulics was 1.2%, ManpowerGroup 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.

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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