article 06-18-2015

3 Takeaways About The Royce Funds for Advisors

WealthManagement.com and Asset.tv caught up with Principal and Portfolio Manager Steve Lipper at this year's Pershing INSITE conference in Orlando, Florida for a quick conversation about Royce's outlook, our low volatility strategy that advisors are using today, and opportunities in the market that we are excited about.

Outlook for Small-Caps

At Royce, we think that the next five years are going to be meaningfully different than the last five years in a number of ways that will have significant consequences as to how advisors build portfolios. Here are three key indicators we think advisors should keep in mind:

  • We think that we're going from an era where performance was led by P/E multiples expanding to one more led by earnings growth.
  • We think we're going from an era where financially oriented companies did better to one where operating results are going to matter more.
  • We think we're going from an era where interest rate sensitive companies and stocks did better to one where more economically sensitive areas are going to do better.

The extraordinary returns which we've had in the equity markets have been a result of earnings plus multiple expansion. We think that's largely behind us. The consequence of that is while we've lived through a period of above average returns, we're probably going to enter a period of below average returns. In this kind of environment, we think that small-caps are going to continue to lead large-caps because you're going to have better earnings growth. We believe this is the type of environment we tend to perform the best in.

Our Low-Volatility Strategy

What we find for advisors with high net worth clients is they need to be in small-cap stocks for an attractive part of the asset allocation, but they really want exposure to those that have reduced volatility. At Royce, we have a total return strategy that invests largely in dividend-paying stocks, which we believe helps to reduce volatility and the inherent risks associated with small-caps. Here's why:

When smaller companies are paying dividends, they're usually those that have more consistent profit streams and more mature business models. During turbulent markets, this total return strategy has consistently held up better than most other small-cap strategies. For those higher net-worth individuals, that tends to be more attractive.

We've been utilizing this approach for more than 20 years, and have seen our share of up and down markets. We believe this lower volatility orientation can be an attractive component in advisors' portfolios.

Opportunities in the Smaller-Company Universe

We have a newer strategy run by a portfolio manager who also works on one of our oldest and best-performing portfolios. It's called Micro-Cap Opportunity. It focuses on stocks that are below $1 billion in capitalization. We still regard the micro-cap asset class as inefficient and very lightly researched, and so it's an area where we find a lot of opportunities that we get excited about.

Micro-Cap Opportunity is going to turn five years old this summer. We think it's going to get on a number of people's radar screens because it has very competitive performance since it launched.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements. 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 Total Return 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.) 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 (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing Foreign Securities" in the prospectus.) Royce Micro-Cap Opportunity Fund invests primarily in micro-cap companies, which may involve considerably more risk than investing in larger-cap stocks. The Fund generally invests a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any 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.) The Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)

Average Annual Total Returns as of Quarter-End 3/31/15 (%)

  Average Annual Total Returns(%) Annual
Operating
Expenses(%)
Fund QTR* 1YR 3YR 5YR 10YR 20YR 40 YR/
SINCE
INCEPT.
INCEPT.
DATE
GROSS NET
Pennsylvania Mutual 1.15 0.11 11.57 11.64 8.17 11.16 14.951 N/A 0.92 0.92
Premier 2.64 -0.01 9.06 11.23 9.85 11.89 12.03 12/31/91 1.10 1.10
Micro-Cap -0.28 -3.64 3.72 6.45 7.17 10.73 11.74 12/31/91 1.48 1.48
Low-Priced Stock 0.53 -4.81 0.91 4.26 5.88 11.09 10.78 12/15/93 1.47 1.47
Total Return 1.77 2.57 12.90 12.12 7.80 11.32 11.16 12/15/93 1.19 1.19
Heritage 1.19 -0.45 8.46 9.64 8.86 8.87 N/A 12/27/95 1.51 1.51
Opportunity 1.11 -2.81 14.66 12.81 8.74 10.30 N/A 11/19/96 1.15 1.15
Special Equity 2.41 4.32 11.68 11.45 8.74 11.97 N/A 05/01/98 1.12 1.12
Small-Cap Value2 3.32 2.23 9.31 9.80 8.57 N/A N/A 06/14/01 1.45 1.45
Smaller-Companies Growth2 4.78 5.25 13.05 11.24 8.21 N/A N/A 06/14/01 1.45 1.45
100 0.46 -3.01 7.82 9.09 8.86 N/A N/A 06/30/03 1.52 1.49
Dividend Value 1.10 -1.23 10.56 11.56 8.77 N/A N/A 05/03/04 1.55 1.55
Micro-Cap Opportunity 5.08 -5.71 18.23 N/A N/A N/A N/A 08/31/10 1.56 1.28
Special Equity Multi-Cap -0.58 8.00 13.80 N/A N/A N/A N/A 12/31/10 1.34 1.24
Russell 2000 Index 4.32 8.21 16.27 14.57 8.82 7.19 9.62 N/A N/A N/A
Russell Microcap Index 3.14 3.79 17.37 14.69 7.11 N/A N/A N/A N/A N/A
Russell 1000 Index 1.59 12.73 16.45 14.73 8.34 4.43 9.63 N/A N/A N/A
* Not Annualized.
1 For Pennsylvania Mutual, the average annual total return shown is for the 40-year period ended as of the date shown above rather than since the Fund's inception.
2 On 5/1/15, Royce Value Fund was renamed Royce Small-Cap Value Fund and Royce Value Plus Fund was renamed Royce Smaller-Companies Growth Fund.

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. Redemption fees are not reflected in the performance shown above; if such fees were reflected, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. All performance and expense information reflect results of the Fund’s oldest share class (Investment or Service Class, as the case may be). Gross operating expenses reflect each Fund’s gross total annual operating expenses, including management fees, any 12b-1 distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements, exclusive of any applicable acquired fund fees and expenses. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2016 to the extent necessary to maintain net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) to no more than 1.49% for the Service Class of Royce 100 Fund and to no more than 1.44% for the Service Class of Royce Special Equity Multi-Cap Fund. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by any applicable Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Shares of a Fund’s Service, Consultant, R, and K Classes bear an annual distribution expense that is not borne by the Fund’s Investment Class. The Royce Funds, other than Royce Special Equity Multi-Cap Fund, invest primarily in securities of micro-cap, small-cap, and/or mid-cap companies, which may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective prospectus). Please read the prospectus carefully before investing or sending money.

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