article 03-31-2014

"When it comes to stocks, nothing stays the same for very long..."

More on the impressive five-year returns for the Russell 2000 Index—when looking at quarterly five-year returns for the small-cap Russell 2000 Index since its inception in 1979, we found there have been only 11 five-year periods out of 122 during which average annual total returns were 20% or higher.

The most recent of these was the five-year period ended March31, 2014, in which the small-cap index was up 24.3%.

Even before the end of 2013, many investors were wondering what was going to happen next… with the obvious implication that these heady times simply couldn't last.

History offers strong support for this idea. What happened in those other nine five-year periods in which the Russell 2000 gained 20% or more? The average of the subsequent five-year annualized returns was 7.1%…

The Russell 2000's high five-year period was 26.7%, which occurred for the period ended December 31, 1983.

I also think drawing comparisons to the late 1990s is interesting… before the current post-financial crisis period it was the last time we saw our investment style so out of sync with the market as a whole.

If you look at the three-year average annual total return of the Russell 2000 for the period ended March 31, 2000 it was 17.8% versus 12.2% for Royce Pennsylvania Mutual Fund—a disadvantage of more than 500 basis points… yet the subsequent three-year period saw a reversal—the Russell 2000 was down 11.0% while our flagship rose 5.4%… a performance advantage of more than 1,600 basis points.

I'm not predicting a return to 1984 or even 2000. However, I do believe in the cyclical nature of markets and reversion to the mean. I also know that when it comes to stocks, nothing stays the same for very long…

Royce Pennsylvania Mutual Fund [PENNX]
Average Annual Total Returns as of Quarter-End 3/31/14 (%)

QTR* YTD* 1 YR 3 YR 5 YR 10 YR 15 YR 20 YR 30 YR 40 YR
Pennsylvania Mutual 0.34 0.34 23.18 10.95 23.36 9.36 12.20 11.40 11.83 14.53
Russell 2000 1.12 1.12 24.90 13.18 24.31 8.53 8.91 9.48 10.11 N/A

Annual Operating Expenses: 0.93%

*Not Annualized

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 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 here. 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 it's investment 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. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

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 Pennsylvania Mutual Fund invests primarily in small-cap and micro-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. The 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 performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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