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Royce Funds Commentary - Drawing Parallels Between Company Quality and Economic Strength

August 09, 2014 | About:
Holly LaFon

Holly LaFon

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The strengthening economy, the possibility of higher interest rates, and ongoing tapering may benefit those with a quality-driven investment approach. Portfolio Manager Whitney George discusses why our disciplined approach has been out of sync over the past few years and the recent rebound for economically sensitive businesses—and the asset managers who invest in them.

View the video.

"We're very happy about the progress we've made this year. Certainly year-to-date numbers are looking a lot better relative to benchmarks than they have in a long time, and that's led into one-year results that are, I think, very satisfactory, and hopeful that it will continue into the longer term.

"It's been driven by a combination of things, one which we've highlighted for quite some time now that dates back more than a year is normalizing in the sort of interest-rate environment or expectations for interest rates.

"It goes back to when taper talk first began last May. Our style of investing in high-quality companies, strong balance sheets, high returns on capital was disadvantaged by the zero interest-rate environment of the last round of QE we went through. That round of QE really benefited lower-quality companies, companies that could take advantage of easy credit and low rates to remain in business, refinance, survive, and that was to the detriment of the kinds of companies that you would expect to see take market share and be able to advance relative to their competition in a difficult environment.

"In addition to that, we have been positioned for a long time in economically sensitive sectors of the market. Last year was the first year in many that we did not go through a recession scare at midpoint, which would drive investors into defensive stocks and out of economically sensitive stocks.

"Finally, we're seeing the benefits of that and have been for the last year as people have become more optimistic, more forward looking, have expectations now of economic growth in this country as opposed to, you know, looking over their shoulder for the next recession.

"So, areas in particular like Energy, Materials, Industrials, Information Technology have all performed nicely, particularly Energy in the first half of this year because we had a very harsh winter and natural gas prices obviously went up and really got investors to focus on some of the opportunities there."

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 (2% for Royce Global Value and International Smaller-Companies Funds). Redemption fees are not reflected in the performance shown above; if they were, 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 reflects results of the Fund's oldest share Class (Investment Class 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. 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, 2015 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 1.24% for the Service Class of Royce Special Equity Multi-Cap Fund, to no more than 1.49% for the Service Class of Royce Low-Priced Stock Fund, and to no more than 1.69% for the Service Class of Royce International Smaller-Companies Fund. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2024 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 1.99% for the Service Class of Royce International Smaller-Companies 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. 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 Index is an unmanaged, capitalization-weighted index of domestic small-cap stocks that 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. The Russell Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. The Russell Global ex-U.S. Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income. The Russell 1000 index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest 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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