Fund Performance
Royce Premier Fund posted an attractive absolute, though disappointing relative, performance in 2021’s first half, increasing 10.4% versus a gain of 17.5% for its small-cap benchmark, the Russell 2000 Index, for the same period. The Fund did, however, retain its leadership over its benchmark for longer-term periods, beating the Russell 2000 for the 15-, 20-, 25-year, and since inception (12/31/91) periods ended 6/30/21.
What Worked… And What Didn’t
Seven of the Fund’s eight equity sectors finished the first half in the black, led by its two largest, Industrials and Information Technology. Health Care was the sole detractor, while Real Estate, our second-lowest weighting, made the smallest contribution. The Fund held sizable weights in its two top contributing industries: machinery (Industrials) and electronic equipment, instruments & components (Information Technology). Health care equipment & supplies (Health Care) was the largest industry detractor, followed by commercial services & supplies (Industrials).
Coherent (COHR, Financial), which makes laser-based photonic products, was the largest contributing position as the stock benefited from a takeover battle that resulted in its shares appreciating more than 70% for the year-to-date period. Manhattan Associates (MANH, Financial) was the second top contributing position in 2021’s first half. The company develops and provides technology-based supply chain software solutions that help companies manage the effectiveness and efficiency of supply chains. Manhattan reported 1Q21 results in late April that included record first-quarter revenue, robust demand for its cloud-based solutions, and increased guidance for the remainder of 2021. The company also believes it can benefit from several secular tailwinds, such as the digitalization of businesses, the shift to more flexible multi-function facilities for brick-and-mortar stores, innovative inventory management solutions, and shorter fulfillment timelines. All of these trends are helping to spur demand for its products. It exemplifies a key theme in Premier’s portfolio: a business that proved its durability during the recession and has so far emerged with greater earnings and cash flow power as the economy recovers.
Haemonetics Corporation (HAE, Financial) designs and manufactures automated systems for the collection, processing, and surgical salvage of donor and patient blood while also offering related information services and data management software. It was the largest detractor for the year-to-date period as its shares suffered a significant decline in April with the departure of a large customer in plasma distribution. Confident in the company’s expertise in its niche, we held shares at the end of June. The next top detractor at the position level was GCM Grosvenor (GCMG, Financial), an investment management company focused on private equity, infrastructure investments, real estate, credit finance, and absolute return. Its shares fell after the company reported fiscal first-quarter results in mid-May that showed better-than-expected revenues but earnings that seemed to fall short of other investors’ expectations. We added a meaningful amount of shares in January before slightly trimming our position in May as part of a portfolio-wide effort to raise cash.
The Fund’s relative disadvantage for the year-to-date period was due largely to ineffective stock selection, though sector allocation also detracted slightly from relative performance. Consumer Discretionary was the largest relative detractor on a sector basis due to weak stock selection as well as our underweight in this outperforming sector for the benchmark. Having no exposure to two strong industry performers—specialty retail and (to a lesser extent) hotels, restaurants & leisure—accounted for most of the performance shortfall. Financials was the second largest sector detractor due exclusively to lagging stock selection, largely in capital markets. Perhaps surprisingly, Health Care was the biggest relative contributor in the first half of 2021, thanks to our underweight in this underperforming sector. The Fund’s lack of exposure to the lagging biotechnology industry was particularly additive to relative performance. Utilities was the second largest relative contributor for a similar reason—the Fund had no holdings in this underperforming sector.
Top Contributors to PerformanceYear-to-Date Through 6/30/211 (%)
| Coherent | 1.06 |
| Manhattan Associates | 0.78 |
| Bio-Techne | 0.75 |
| Valmont Industries | 0.75 |
| Lindsay Corporation | 0.68 |
1 Includes dividends
Top Detractors from PerformanceYear-to-Date Through 6/30/212 (%)
| Haemonetics Corporation | -0.90 |
| GCM Grosvenor Cl. A | -0.32 |
| Ritchie Bros. Auctioneers | -0.26 |
| Ashmore Group | -0.14 |
| ESCO Technologies | -0.12 |
2 Net of dividends
Current Positioning and Outlook
The first half was a challenging relative performance period as low profitability and high leverage small caps did best, the opposite of the attributes that we seek. Corporate high yield spreads also contracted, which, while historically supportive for the Fund’s absolute returns, has also whipped up headwinds for its relative results. However, from the starting point of low high yield spreads, the Fund’s relative results have been very attractive throughout its nearly three decades of history. The Fund has also produced its greatest excess relative return in five-year periods with single digit returns, which is our expected range for the small cap index over the intermediate term. From a portfolio positioning standpoint, we raised cash throughout the second quarter. Sales have largely been focused on reducing weightings in some of our highest valuation holdings, which may be more vulnerable to price declines, and in companies where we still have long-term conviction—but where the near-term price appreciation seems a bit excessive. We are actively researching potential holdings and are prepared if market volatility gives us the opportunity to build existing holdings at more attractive prices.
Average Annual Total Returns Through 06/30/21 (%)
| QTR1 | YTD1 | 1YR | 3YR | 5YR | 10YR | 15YR | 20YR | SINCE INCEPT. | DATE | |
|---|---|---|---|---|---|---|---|---|---|---|
| Premier | -0.07 | 10.38 | 41.91 | 12.97 | 16.15 | 10.06 | 9.70 | 10.84 | 11.92 | 12/31/91 |
| Russell 2000 | 4.29 | 17.54 | 62.03 | 13.52 | 16.47 | 12.34 | 9.51 | 9.26 | 10.34 | N/A |
Annual Operating Expenses: 1.21
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, 2021, 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, 2021 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.
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