Despite the highly volatile and challenging period that international small-caps faced in 2020's first half, the Fund outperformed its benchmark for the year-to-date, one-, three-, five-year, and since inception (12/31/10) periods ended 6/30/20.
Fund Performance
The first two quarters of 2020 were highly volatile and extreme periods for international small-caps, so we were particularly pleased that Royce International Premier Fund outperformed its benchmark, the MSCI ACWI ex-USA Small Cap Index, for the year-to-date, one-, three-, five-year, and since inception (12/31/10) periods ended 6/30/20. We were also pleased that the Fund held its value effectively during an overall negative first half of 2020. For the year-to-date period ended 6/30/20, the Fund outpaced its benchmark, down 7.4% versus a decline of 12.8%.
What Worked… And What Didn't
Six of the nine sectors in which the Fund held investments in 2020's first half detracted from performance. Industrials made the biggest negative impact by a considerable margin, followed by Energy and Communication Services. Modest positive contributions to first-half results came from Health Care, Information Technology, and Financials. Commercial services & supplies and professional services, both in Industrials, detracted most at the industry level while health care equipment & supplies (Health Care) and software (Information Technology) were the two areas that contributed most.
The leading detractor at the position level was Loomis (OSTO:LOOMIS, Financial), a Swedish company active in two primary and related areas: Cash in Transit (CIT)—the collection of cash from retailers and other businesses and its transportation to banks or, increasingly, to Loomis's own depots—and Cash Management Services (CMS)—the holding and processing of cash on behalf of banks. The economic lockdowns in Europe and North America made a material impact on both activities, which fell by around 25% in April before improving slightly in May and June. Although a number of near-term uncertainties linger, we remain attracted by Loomis's long-run prospects. The amount of bank notes in circulation continues to grow, contrary to popular belief, and the profitability of market participants is determined by relative share—and Loomis is a leading consolidator in the market. There is also considerable global growth in banks using CMS services. We chose to build our position in 2020's first half at what we believe were very attractive valuations. We did the same—and for the same reasons—with TGS-NOPEC Geophysical (OSL:TGS, Financial), a Norwegian business that provides geoscience data to oil and gas exploration and production companies worldwide. Its shares suffered a material decline in the first half as oil prices collapsed, with a markedly negative impact on the exploration budgets of TGS-NOPEC's customers. We have long been aware, of course, of the cyclical nature of its business. We have always sought to manage our position in an effort to take advantage of this cyclicality given the company's ability to rapidly flex up and down its operating and capital expenditures to continue generating cash in even the most severe downturns.
Japan's Daifuku (TSE:6383, Financial) made the biggest positive impact on first-half performance. The company develops, manufactures, and provides a wide range of automation and logistics solutions and services. We like its leading global positions in a diverse selection of attractive end markets that range from automated warehousing to semiconductor manufacturing, as well as its large and increasing share of after-market revenues. This supports enduring customer relationships that can generate 15-20 years of repeat revenues. We trimmed our position during the first half as its shares climbed. The next-best contributor was DiaSorin (MIL:DIA, Financial), an Italian company that develops in vitro diagnostic tests (IVDs). We have long been drawn to the IVD market's structural growth, DiaSorin's growing array of assays, and the inherently recurring nature of reagent sales. The stock benefited from the company's specialty in immunodiagnostic testing and the announcement in April that it was launching a test to detect COVID-19. We trimmed our stake when its shares powered to all-time highs based on a combination of valuation and concerns that its non-COVID-19 testing business could be temporarily constrained by disruptions to healthcare systems during the coronavirus pandemic.
Relative to the MSCI ACWI ex-USA Small Cap in the first half, the Fund benefited from both stock selection and sector allocation, with the latter having a larger positive effect. A stock-picking edge helped give Industrials and Financials the portfolio's largest relative advantage on a sector basis while stock selection hindered relative results in Materials. The portfolio's lack of exposure to Consumer Staples also hurt relative performance.
Top Contributors to PerformanceYear-to-Date Through 6/30/191 (%)
| TOTVS | 1.12 |
| Kardex | 1.11 |
| Spirax-Sarco Engineering | 0.92 |
| IMCD | 0.89 |
| Partners Group Holding | 0.83 |
1 Includes dividends
Top Detractors from PerformanceYear-to-Date Through 6/30/192 (%)
| TravelSky Technology | -0.40 |
| Consort Medical | -0.15 |
| SH Kelkar & Company | -0.15 |
| Burkhalter Holding | -0.04 |
| Croda International | -0.01 |
2 Net of dividends
Current Positioning and Outlook
With 2020's first half marked by so much volatility, so many market extremes, and ample economic uncertainty, we think it's important to state that our QARP ("Quality at a Reasonable Price") investment process remains unchanged in face of these challenges. Our approach does not shift with the market environment, and during the tumultuous first half we continued to invest in companies with high returns on invested capital and strong balance sheets. By actively following business developments and speaking with company management teams, we have in some instances been able to take advantage of temporary share price dislocations that we believe were unwarranted based on the quality attributes that we see—which we believe should help the Fund in both the uncertain near-term market and in an eventual economic recovery.
Average Annual Total Returns Through 06/30/19 (%)
| QTR1 | YTD1 | 1YR | 3YR | 5YR | SINCE INCEPT. | DATE | |
|---|---|---|---|---|---|---|---|
| International Premier | 6.99 | 21.38 | 9.26 | 13.28 | 8.64 | 7.84 | 12/31/10 |
Annual Operating Expenses: Gross 1.58 Net 1.44
1 Not annualized.
The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2020, 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 June 30, 2020 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 6/30/20, the percentage of Fund assets was as follows: Daifuku was 2.1%, DiaSorin was 1.1%, Fisher & Paykel Healthcare was 1.6%, VZ Holding was 2.1%, As One was 1.5%, Loomis Cl. B was 1.8%, TGS-NOPEC Geophysical was 1.5%, Restore was 1.7%, Hyve Group was 0.0%, Norma Group was 1.6
