Royce Premier Fund 4th-Quarter Manager Commentary

Fund Performance

Royce Premier Fund, which looks for high-quality small-cap stocks, advanced 34.1% in 2019, marking its fourth consecutive year of outperformance as it significantly outpaced its small-cap benchmark, the Russell 2000 Index, which was up 25.5% for the same period. Premier’s recent run of outperformance helped it to beat its benchmark for the three-, five-, 15-, 20-, 25-year, and since inception (12/31/91) periods ended 12/31/19.

What Worked… And What Didn’t

Each of the nine equity sectors in which the portfolio held investments made a positive contribution to performance in 2019. The biggest by far came from Industrials, the Fund’s largest sector weighting, with notable positive impacts also coming from Information Technology and Financials—its next two largest sector weights. The smallest contributions came from Energy, Consumer Staples, and Real Estate, three areas to which the Fund has little exposure (though its weighting in Energy was higher than the benchmark’s at year-end). At the industry level, machinery (Industrials) dominated with an outsized positive contribution, thanks to strong results from CIRCOR International (CIR, Financial), Woodward (WWD, Financial), and John Bean Technologies (JBT, Financial). Industrial conglomerates (Industrials) was the only industry that detracted, due to a disappointing year for Raven Industries (RAVN, Financial), a U.S. manufacturer of precision agriculture products, high-altitude balloons, plastic film and sheeting, and radar systems.

The Fund’s top contributor overall was Ares Management (ARES, Financial), an asset manager that focuses on tradable credit, direct lending, private equity, and real estate. Investors became more optimistic about the company’s ability to sustain mid-teens, high margin earnings growth for an extended period. The company also converted to C-corp. status, which broadened ownership, supporting an increase in its valuation. Fair Isaac (FICO, Financial) continued to reap the rewards of recent initiatives that have reaccelerated revenue growth in its core, high-margin credit score business—the ubiquitous, industry-standard FICO score. Fair Isaac has also been broadening its addressable market, which is aimed at assessing the creditworthiness of borrowers with little or no credit history, while growing its financial software business. These efforts paid off in the form of double-digit revenue and EPS growth in 2019.

Canadian company Pason Systems (TSX:PSI, Financial), the Fund’s top detractor, provides instrumentation and data management systems for drilling rigs. The company saw its near-term outlook weaken in 2019 as North American drilling activity declined through the year on supply/demand concerns exacerbated by slumping oil and natural gas prices as well as the slower global economy. We think the market has more than fully discounted the negative impact of these developments on Pason’s near-term fundamentals while also seeming not to recognize the attributes that look obvious to us: a durable, high-ROIC business model, an innovative and robust technology pipeline, and a debt-free balance sheet. We felt less sure about the prospects for nLIGHT (LASR, Financial), which designs and manufactures semiconductor laser products. Declining revenues and gross margins, in particular during an otherwise vibrant year for the electrical equipment industry, prompted us to sell our shares in Premier’s portfolio.

The Fund’s outperformance in 2019 came primarily from superior stock selection, though sector allocation was also positive. Industrials led, with both stock selection and, to a lesser degree, sector allocation contributing. Machinery was the sector’s largest relative industry contributor. Financials was another source of relative outperformance, largely due to savvy stock selection, most notably in the capital markets industry. There were few sources of underperformance on a sector and industry basis, leaving cash as the largest relative detractor (as is often the case in high-return years for the index). Materials followed as stock selection in both the chemicals and paper & forest products industries proved ineffective. Quaker Chemical (KWR, Financial), a global leader in process fluids and lubricant solutions for a diverse set of industries, predominantly steel and metalworking, was the sector’s largest relative detractor. Quaker finally closed its long-delayed merger with Houghton in July and subsequently announced quarterly results that fell below expectations and provided pro forma guidance for 2021 that disappointed many investors.

Top Contributors to Performance 2019 1 (%)

1 Includes dividends

Top Detractors from Performance 2019 2 (%)

2 Net of dividends

Current Positioning and Outlook

The backdrop looks quite favorable to us for solid to strong small-cap performance overall. We have previously cited four favorable factors in the current market environment—low inflation, modest valuations, moderate growth, and ample access to capital. Each of these remains present and suggests that small-cap returns can go higher. We see a global economy that’s showing signs of renewed life, an ISM Manufacturing Index that’s been incrementally rising (despite December’s setback), and, most important, valuations that range from reasonable to attractive among the many small-cap cyclical areas that we typically like best. We believe that the market is starting to pivot from rewarding those areas that have succeeded to those that have lagged, so our focus has been on those areas that either didn’t participate in 2019’s upswing or trailed significantly. More specifically, we added several cyclical stocks at the larger end of the micro-cap universe, an area that lagged meaningfully prior to 2019’s fourth quarter.

Average Annual Total Returns Through 12/31/19 (%)

Annual Operating Expenses: 1.17

1 Not annualized.

Important Performance and Disclosure Information

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 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 at www.royceinvest.com. 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 and other expenses.

Current month-end performance may be obtained at our Prices and Performance page.

Notes to Performance and Other Important Information

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, 2019, 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, 2019 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.

As of 12/31/19, the percentage of Fund assets was as follows: Ares Management Cl. A was 2.5%, Fair Isaac was 2.4%, Air Lease Cl. A was 3.2%, Manhattan Associates was 1.9%, MKS Instruments was 2.9%, Pason Systems was 1.7%, nLIGHT was 0.0%, Dorman Products was 1.0%, Virtu Financial Cl. A was 1.3%, National Instruments was 2.1%

Sector weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI.

All indexes referred to are unmanaged and capitalization weighted. Each index’s returns include net reinvested dividends and/or interest income. Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The Russell 2000 Index is an 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 Russell 2000 Value and Growth Indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell 2500 is an unmanaged, capitalization-weighted index of the 2,500 smallest publicly traded U.S. companies in the Russell 3000 index. The returns for the Russell 2500-Financial Sector represent those of the financial services companies within the Russell 2500 index. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI ACWI Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks.The MSCI ACWI ex USA Small Cap Index is an index of global small-cap stocks, excluding the United States.The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information.

This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to:

-the Funds’ future operating results,

-the prospects of the Funds’ portfolio companies,

-the impact of investments that the Funds have made or may make, the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and

-the ability of the Funds’ portfolio companies to achieve their objectives.

This discussion uses words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason.

The Royce Funds have based the forward-looking statements included in this commentary on information available to us on the date of the commentary, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports.

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. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see ""Primary Risks for Fund Investors"" in the prospectus.)