FUND PERFORMANCE
Royce European Small-Cap Fund gained 12.8% in 2015, outperforming its benchmark, the Russell Europe Small Cap Index, which rose 9.4% for the same period. Th e Fund gained 11.5% for the year-to-date period ended June 30, 2015, outpacing its benchmark, which gained 10.0% for the same period. Th e Fund then held up fairly well in the correction that rocked markets in the third quarter, losing 3.0% versus a decline of 4.8% for its benchmark. In the year’s fi nal quarter, European Small-Cap advanced 4.4%, basically even with the 4.4% gain for the Russell Europe Small Cap. Th e Fund also outperformed its benchmark for the since inception (12/29/06) period ended December 31, 2015.
WHAT WORKED… AND WHAT DIDN’T
Seven of the Fund’s eight equity sectors fi nished 2015 in positive territory. Th e biggest net contributions came from Health Care and Information Technology, while Financials, Consumer Discretionary, and Industrials also posted notable net gains. Net losses at the sector level were decidedly modest and came only from Consumer Staples. At the industry level, health care equipment & supplies, software (Information Technology), capital markets (Financials), and electrical equipment (Industrials) were the leaders. Net losses came from aerospace & defense and trading companies & distributors (both groups also in Industrials). European Small-Cap’s leading detractor at the position level was the U.K.’s Brammer, Europe’s leading supplier of quality industrial maintenance, repair, and overhaul products. Steep losses, mostly the result of exposure to the energy industry, helped persuade us to sell our shares in November. Germany’s LPKF Laser & Electronics develops specialized mechanical engineering products for electronics production, the automotive industry, and in the manufacture of solar cells. After a disappointing 2014, its shares rallied briefl y in February only to begin falling again in March after a disappointing fi rst-quarter report led to a wave of selling. We decided to sell our shares in June.
The share price of Swiss fi nancial advisory business VZ Holding, the Fund’s top contributor by a wide margin, rose through most of the year. VZ exceeded earnings estimates twice in 2015, extending a record of profi table growth going back 14 years to its founding. Th e company’s ability to drive growth via recurring revenues and substantial barriers to entry—bundled in a highly profi table and relatively low-risk structure—exemplifi es the qualities we seek in all of our holdings. Shares of Finland’s high-end tire maker Nokian Renkaat climbed the proverbial wall of worry in 2015. While it has signifi cant exposure to Russia, its business is global, including a presence in the U.S. So while net sales were a bit off , the company benefi ted from improved profi tability supported by a strong product mix, savings on raw material costs, and productivity development.
Th e share price of London-based AVEVA Group shot upward in July, following a somewhat complicated deal with France’s Schneider Electric to purchase 54% of the company, which produces CADCAM software used in the production of large-scale infrastructure, via an asset swap. We exited our position after this announcement, as we thought Aveva’s shares were fully valued. In a similar vein, shares of Latchways, a smaller position and a leading provider of fall-protection equipment, advanced 50% in August following the announcement that it would be acquired. We sold our shares in September.
Top Contributors to Performance For 2015 (%)
- VZ Holding (VZN, Financial) 1.64%
- Nokian Renkaat (NREIV) 1.21%
- AVEVA Group (AVV, Financial) 1.17%
- Latchways (LTC, Financial) 1.02%
- HellermannTyton Group (HTY, Financial) 0.89%
Top Detractors from Performance For 2015 (%)
- Brammer (BRAM, Financial) -0.99%
- LPKF Laser & Electronics (LPK, Financial) -0.57%
- Joyou (JY8, Financial) -0.57%
- Senior -0.53%
- Gerry Weber International (GWI1, Financial) -0.47%
CURRENT POSITIONING AND OUTLOOK
We have high confi dence in our holdings given their prospects to grow a-cyclically, generate cash, self-fund, and maintain or improve market share. Further, the countries on which our strategy focuses—the U.K., Japan, Switzerland, and other European nations north of the Alps—have a high concentration of what we see as well-managed, high-quality businesses with ample room for growth. Valuations remain attractive to us in large part because many non-U.S. stocks underperformed over much of the last fi ve years. We also see currency as a positive. So while U.S. dollar strength has created a performance headwind, U.S. dollarbased investors have substantially more purchasing power than they did when we launched the Fund fi ve years ago because, unlike some of our peers, we do not hedge currency. At year-end we had greater relative exposure to the U.K., Switzerland, Germany, and France while at the sector level we had larger weightings in Industrials, Information Technology, and Health Care.
