We are very pleased to be celebrating the 20th anniversary of Royce Total Return Fund. The Fund invests in dividend-paying small-cap companies with market capitalizations up to $2.5 billion that Portfolio Managers Chuck Royce and Jay Kaplan select using a disciplined value approach.
We have always seen dividends and small-caps as two great things that work well together, kind of like chocolate and peanut butter. In fact, our experience with dividend-paying small-caps stretches back to the 1970s, when we regularly purchased them in Royce Pennsylvania Mutual Fund’s portfolio. We had also introduced an institutional product in 1979 that used an investment strategy similar to Royce Total Return Fund. (There is no guarantee that companies that pay a dividend will continue to do so in the future.)
Portfolio HistoryWhen we introduced Royce Total Return Fund in December 1993, there were those who questioned the wisdom of a small-cap fund that sought dividend-paying companies. Others went so far as to claim that the small-cap marketplace did not hold enough dividend-payers to make up a portfolio, at least not one capable of generating strong absolute returns.
Our own previous experience led us to a different conclusion. So we ignored the choir of criticism, followed our own counsel, and hoped that the new Fund’s performance would ultimately say more than any other defense of its merits would.
As the Fund matured, it began to establish a discernible performance pattern, one consistent with what we had anticipated when we introduced it. While the Fund has generally lagged a bit during dynamic up-market periods, it has also historically done well in down- or flat-market periods. The pattern makes sense to us because investors sometimes flock to dividend-paying companies during difficult or underwhelming markets. This explains in part why we view dividends as a gauge of company quality.
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 its investments in mutual funds, hedge funds, private equity funds, and other investment companies.
Dividends, Quality, and VolatilityOne of our goals with Total Return has been to find well-run small companies that pay dividends owing to our confidence that sooner or later the market will recognize our estimate of their true worth. For us, quality generally consists of a suite of attributes that includes a strong balance sheet, high returns on invested capital, and the ability to generate free cash flow. In addition, a dividend-paying company is telling its investors that it believes in a principle of corporate governance by which they are willing to share the wealth the business is creating.
In addition to being, in our estimation, an excellent measure of a company’s underlying quality, it also seems clear to us that including dividend-paying companies in an equity portfolio offers a potential cushion against market volatility.
Important Disclosure Information
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. The 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 Foreign Securities" in theprospectus.) 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. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.