Royce Premier Fund 4th-Quarter Manager Commentary

Fund Performance

Thanks to a strong second half, Royce Premier Fund advanced 16.4% in 2021, outperforming its small-cap benchmark, the Russell 2000 Index, which was up 14.8% for the same period. In addition to its calendar-year outperformance, the Fund beat its benchmark for the 3-, 5-, 15-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 12/31/21.

What Worked… And What Didn’t

All of the portfolio’s eight equity sectors made a positive impact on 2021’s performance, with the largest positive contributions coming from Industrials, Information Technology (its two largest weightings), and Consumer Discretionary while the smallest positive impacts came from Health Care, Materials, and Real Estate. Contributing most at the industry level were machinery in Industrials, electronic, instruments & components in Information Technology, and capital markets in Financials while the largest detractors were health care equipment & supplies in Health Care, software in Information Technology, and commercial services & supplies in Industrials.

Rogers Corporation (ROG, Financial) contributed most at the position level in 2021, due to DuPont’s announcement in November that it was acquiring the company. Rogers works with specialty engineered materials that enable high performance and high reliability in EV/HEV, wireless infrastructure, automotive safety, and portable electronics. Morningstar (MORN, Financial), which provides independent investment research to investors across the globe, was our next-best contributor. In October, the company announced a significant increase in organic revenue and an even bigger boost in operating income for its fiscal third quarter, leading its shares to climb. Inter Parfums (IPAR, Financial) is a global developer and designer of prestige fragrances, primarily under licenses of high-end brands such as Mont Blanc, Coach, Jimmy Choo, and Guess. After managing effectively through a very challenging 2020, its stock rose more than 60% in 2021, lifted by better-than-expected growth from improved store traffic and higher gross margins driven by improved sales for newer higher-margin products. The company reported in September that, excluding one-time gains, 2021 would be its best year ever for sales and earnings per share.

Blood and plasma supplies and services provider Haemonetics Corporation (HAE, Financial) detracted most at the position level. The company reported healthy revenues in November but also lowered guidance for the second half of fiscal 2022 due to ongoing plasma collection volatility due to the pandemic. We reduced our position, though we think it can engineer an eventual turnaround driven by the company’s long-term expertise in its niche. Upland Software (UPLD, Financial), which was the second biggest detractor, provides cloud-based enterprise work management software. Its shares fell on mixed revenue performance following outsized presidential election-related growth in 2020 and disappointing execution of the transition of its go-to-market strategy. Profit margins contracted as the company sustained elevated investments in advance of an improvement in revenue productivity. Although we still appreciate much about its strategic allocation of capital, these factors led us to exit our position in December. Headquartered in the U.K., Ashmore Group (LSE:ASHM, Financial) specializes in actively managed emerging markets strategies in equities, fixed income, and alternative investments. The company reported declines in profitability for the fiscal year and then in October announced declines in assets under management and negative investment performance for the third quarter as market sentiment for certain key strategies deteriorated.

The portfolio’s advantage over the Russell 2000 came mostly from sector allocation in 2021, with Health Care, Industrials, and Consumer Staples making the most significant positive impact versus the benchmark. In the first two sectors, our respective underweight and overweight drove relative results, while in the third, stock selection helped most. Conversely, Financials, Materials, and Energy detracted most from relative results. In the first two sectors, lackluster stock selection hurt. Having no weighting in the third sector also detracted since Energy was such a strong performer within the small-cap index.

Current Positioning and Outlook

We were very encouraged by the second-half performance of the Fund. After lagging by more than 700 basis points in the first half, the Fund outperformed the Russell 2000 by more than 850 basis points in the second half to beat its benchmark for the year. We also believe that high quality, as we define it, is just beginning an extended period of outperformance. Our rationale is based on high quality’s still relatively inexpensive valuation within small-cap, and the history this Fund has had of enjoying its best excess returns starting from periods of low high-yield spreads, similar to where we finished 2021. So, while our outlook for the small-cap asset class overall is for low to moderate returns, such return periods have historically been good for the Fund’s relative returns. We were pleased that the Fund benefitted from two takeovers in the fourth quarter—CMC Materials and Rogers Corporation—as strategic buyers recognized the same attributes that we had identified and paid significant premiums to acquire these companies. With M&A transactions expected to remain at high levels, we anticipate the Fund may continue to benefit from acquisitions in 2022.

Average Annual Total Returns Through 12/31/21 (%)

The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at December 31, 2021, 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 December 31, 2021 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.