article 01-17-2014

"It's no wonder that truth is stranger than fiction. Fiction has to make sense."

"It's no wonder that truth is stranger than fiction. Fiction has to make sense."

— Mark Twain

Early in January I was lying in bed scanning the final results for the year, looking over returns for both the market as a whole and our own funds when I noticed two numbers… precisely the same… down to two decimal points.

It turns out that both Royce Micro-Cap and Premier Funds—each a Featured Fund—have the exact same average annual total return of 12.67% for the 22-year/since inception (12/31/91) periods ended December 31, 2013… this strikes me as being statistically improbable even as it confirms, in what seems to me a particularly wonderful way, the validity of the approach that we take in each portfolio.

As of December 31, 2013, Micro-Cap had a weighted average market cap of $449 million while Premier’s weighted average market cap was $2.9 billion… we launched these Funds in the belief that each could be successful in its own right using very different portfolio construction techniques.

Micro-Cap’s portfolio is highly diversified because of the inherent volatility of the asset class (we define micro-caps as companies with market caps up to $750 million). We look for companies with strong balance sheets, high returns on invested capital, and the ability to generate free cash flow that are also trading at a discount to our estimate of their current worth.

Premier’s portfolio is more limited, typically holding no more than 100 companies. We invest primarily in stocks with market caps from $750 million to $2.5 billion that have excellent business strengths and/or prospects for growth, high internal rates of return and low leverage, and that are trading well below our estimate of their current worth.

Throughout their long histories, they have performed quite differently at various times, but I am thrilled with each Fund’s long-term record… and not just their curiously identical since-inception results but average annual total returns for the 10-, 15-, and 20-year periods ended December 31, 2013… as well as their rolling five- and 10-year records.

I see Micro-Cap as seeking to take advantage of what we believe is an almost permanently inefficient segment of the small-cap universe. I view Premier’s long-term record as showing the power of compounding returns in what we think are very high-quality small-cap companies… needless to say, I think they make a great pair… I hope the next 22 years can deliver similar results… with each Fund showing its own patterns of returns and volatility.

Micro-Cap and Premier Funds
Average Annual Total Returns as of Period-Ended 12/31/13
(%)

  QTR YTD 1YR 3YR 5YR 10YR 15YR 20YR Since
Incept.
Date
Micro-Cap 6.96 21.29 21.29 4.82 18.45 8.82 11.36 11.38 12.67 12/31/1991
Premier 7.86 27.73 27.73 12.17 18.92 11.64 12.05 12.21 12.67 12/31/1991
Russell 2000 8.72 38.82 38.82 15.67 20.08 9.07 8.42 9.27 N/A N/A
Russell Microcap 10.26 45.62 45.62 16.52 21.05 6.99 N/A N/A N/A N/A

Micro-Cap Annual Operating Expenses: 1.49%
Premier Annual Operating Expenses: 1.06%

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 180 days of purchase may be subject to a 1% redemption fee, payable to the Funds, 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 here. Operating expenses for Royce Micro-Cap Fund 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. Operating expenses for Royce Premier Fund 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. Acquired fund fees and expenses for Royce Micro-Cap Fund 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.

Important Disclosure Information

Chuck Royce is President, Director of Investments, and a portfolio manager of Royce & Associates, LLC, investment adviser for The Royce Funds. Mr. Royce’s thoughts in this piece are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole.

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. Royce Micro-Cap Fund invests primarily in micro-cap stocks and Royce Premier Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) Royce Micro-Cap Fund’s broadly diversified portfolio does not ensure a profit or guarantee against loss. Royce Premier Fund invests primarily in a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) Royce Micro-Cap Fund may invest up to 35% of its net assets in foreign securities and Royce Premier Fund may invest up to 25% of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.) 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 is an unmanaged, capitalization-weighted 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 Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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