How did the Small-Cap Premier Quality Strategy perform in 1Q21?
Chuck Royce (Trades, Portfolio) Royce Premier Fund, the mutual fund that we manage in this Strategy, advanced 10.5% for 1Q21. This was a strong quarterly result on an absolute basis, though it lagged its benchmark, the Russell 2000 Index, for the same period. However, we were pleased that the Fund still led its benchmark on the trailing five-, 15-, 20-year, and since inception (12/31/91) periods through the end of March 2021.
Steven McBoyle Quarterly results were admittedly somewhat frustrating because small-cap stocks with earnings, dividends, and higher profitability led after lagging in the fourth quarter—and those are fundamentals that we emphasize in our own holdings. However, we remain very confident about the long-term prospects for our companies, especially against the backdrop of a recovering global economy.
Which areas of the portfolio made the biggest positive impact on performance?
Lauren Romeo All eight of the equity sectors where we held investments made contributions to performance in the first quarter. Industrials and Information Technology—the portfolio's two largest sectors—as well as Materials, made the biggest positive impacts. 
Which industries and companies did well in 1Q21?
LR At the industry level, we saw strong contributions from machinery, which is in Industrials, and electronic equipment, instruments & components, which is part of Information Technology. These are regular areas of interest for us and were the Fund's two largest industry weightings at the end of March.
SM The portfolio's top-contributing position for the quarter was Coherent (COHR, Financial), a leading manufacturer of laser-based photonic products. Multiple companies engaged in a takeover battle for the company at progressively higher offering prices. Valmont (VMI, Financial) was another notable contributor. They provide various structures for utility companies, coating services for infrastructure, and irrigation equipment for farmers.
CR Both are companies that we've owned for the last several years. They each fit one of our more prominent quality themes: fundamentally strong companies that help other businesses innovate or automate, which are skills that have seen considerable acceleration through the pandemic and in our view will be sustainable as the economy expands.
What areas hurt 1Q21 performance?
LR All of our sectors were positive in the quarter, but the portfolio received pretty modest contributions from Health Care, Consumer Staples, and Financials. Health care equipment & supplies and commercial services & supplies, which is in the Industrials sector, were the largest industry detractors.
CR Electronic measurement instrument maker Mesa Laboratories (MLAB, Financial) was the position that detracted most. We still like its long-term prospects. Ritchie Brothers Auctioneers (RBA, Financial) also hindered results. It auctions off used industrial equipment, and its business model is usually pretty counter cyclical because more unused inventory tends to be put up for auction in economic slowdowns. With most investors understandably anticipating economic acceleration, there are concerns that the company's growth opportunities may be modest through the near term.
How did the Fund perform versus the Russell 2000 in the first quarter?
SM Our underperformance relative to the Russell 2000 came mostly from lackluster stock selection. Our sector allocation decisions made a positive impact. Several of our holdings in the capital markets industry declined in the quarter, which gave Financials the greatest negative effect versus the benchmark. Consumer Discretionary also hampered relative results due to both our underweight and lagging stock selection in what was a strongly performing sector within the Russell 2000.
LR The Fund also had no holdings in two of Consumer Discretionary's strongest rebounding industries—specialty retailing and hotels, restaurants & leisure—as we rarely find the kind of high-quality, asset light, durable business models that we like in these industries. However, we did benefit on a relative basis from the portfolio's underweight in the Health Care sector, which lagged within small cap. Savvy stock selection helped in Information Technology, though our larger exposure to the sector, which also trailed within the index, mitigated that relative advantage. 
What is your outlook for this Strategy?
CR Our long-term view is optimistic. We base this on the underlying qualities of our holdings as well as the history of small-cap bull cycles. If subsequent returns follow the pattern of the past two decades, the current market may be starting to shift in two important ways for the Fund's investors. First, while we think small caps as a whole will deliver positive returns over the next several years, these returns are likely to be lower than the high rates that small caps have compounded at over the past three- and five-year annualized periods—which were, respectively, 14.8% and 16.4%. Second, the second year of a market advance has historically seen stocks with higher ROEs begin to lead. And we feel confident that lower overall market returns with high-quality leadership should support attractive relative results for Premier Fund.
LR Based on what Chuck said, we've made some adjustments to better position the portfolio for the market environment we see unfolding. We've continued to invest in companies that help their customers raise their productivity. For example, we added a holding that provides a series of platforms which allow financial advisors, institutional investors, and asset managers to improve their productivity. We also increased our investment in a specialist technology provider to community banks.
SM In addition, we added to our holdings in two leading Consumer Discretionary companies based on the indicators we see of increased spending on both premium brands and certain leisure activities. We also sold down one of our holdings that received a takeover offer and trimmed a few positions in Information Technology whose valuations were running high positions in favor of the holdings Lauren and I described, which have lower valuations.
Mr. Royce's, Ms. Romeo's, and Mr. McBoyle's thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.
The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.
