Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT SERVICE CLASS

Transcription

1 FINANCIAL PROFESSIONALS ONLY Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT SERVICE CLASS September 30, 2017

2 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 2 Performance Performance and Expenses (%) Average Annual Total Return Through 9/30/17 RLP RUSSELL 2000 Third Quarter 2017 ¹ Year-to-Date ¹ One-Year Three-Year Five-Year Year Year Year Since Inception (12/15/93) ANNUAL EXPENSE RATIO (%) Gross Operating Expenses 1.62 Net Operating Expenses 1.59 ¹ Not Annualized 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 All performance information reflects Service Class results. Shares of the Fund s R Class bear an annual distribution expense that is higher than that borne by the Service Class. Gross operating expenses reflect gross total annual operating expenses for the Service Class and include management fees, 12b-1 distribution and service fees, other expenses, and acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Service Class s net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business), at or below 1.49% through April 30, Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds and other investment companies. The Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see Primary Risks for Fund Investors in the prospectus.) The Fund s broadly diversified portfolio does not ensure a profit or guarantee against loss. The Fund may invest up to 25% of its net assets (measured at the time of investment) in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see Investing in Foreign Securities in the prospectus.) The thoughts concerning recent market movements and future prospects for smaller-company stocks are solely those of Royce & Associates and, of course, there can be no assurance with regard to future market movements. 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. Distributor: Royce Fund Services, LLC

3 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 3 Fund Information as of 9/30/17 Calendar Year Total Returns (%) YEAR RLP RUSSELL Above Average Volatility 1 5-Year Relative Standard Deviation vs. all Small-Cap Funds tracked by Morningstar LOW HIGH Russell 2000 Portfolio Diagnostics RLP RUSSELL 2000 Average Market Cap 2 $732M $1,756M Active Share 3 95% Weighted Average 1.9x 2.3x P/B Ratio 4 Weighted Average 11.2% 12.6% ROIC 5 Non-U.S. Investments (% of Net Assets) RLP 15.1% Top 10 Positions % of Net Assets (Subject to Change) CryoLife 1.0 Zealand Pharma 0.9 Shoe Carnival 0.9 Newpark Resources 0.9 Guess? 0.9 FormFactor 0.9 Korn/Ferry International 0.9 Orbotech 0.9 Clarkson 0.9 Ardmore Shipping 0.9 Portfolio Sector Breakdown % of Net Assets (Subject to Change) RUSSELL RLP 2000 Information Technology Industrials Consumer Discretionary Financials Energy Health Care Materials Consumer Staples Telecommunication Services Real Estate Utilities 3.6 Cash and Cash Equivalents Above Average Volatility. The Fund was in the second-highest volatility quintile compared with all funds in Morningstar s Small Growth, Small Blend, and Small Value Categories with at least five years of history, a total of 523 funds as of 9/30/17. The universe consists of each fund s oldest share class only. Volatility quintiles are based on the average five-year standard deviation for each of the last four calendar quarters. Higher volatility is usually associated with higher risk. 2 Geometric Average. This weighted calculation uses each portfolio holding s market cap in a way designed to not skew the effect of very large or small holdings; instead, it aims to better identify the portfolio s center, which Royce believes offers a more accurate measure of average market cap than a simple mean or median. 3 Active Share is the sum of the absolute values of the different weightings of each holding in the Fund versus each holding in the benchmark, divided by two. 4 Harmonic Average. This weighted calculation evaluates a portfolio as if it were a single stock and measures it overall. It compares the total market value of the portfolio to the portfolio s share in the earnings or book value, as the case may be, of its underlying stocks. ⁵ Return on Invested Capital is calculated by dividing a company s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock). The portfolio calculation is a simple weighted average that excludes cash, all non-equity securities, investment companies, and securities in the Financials sector with the exceptions of the asset management & custody banks and insurance brokers sub-industries. The portfolio calculation also eliminates outliers by applying the inter-quartile method of outlier removal.

4 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 4 Third Quarter 2017 Market Highlights The Small-Cap Story: Growth and Defensives Stayed Strong Until the End of 3Q17 The Russell 2000 Growth Index climbed 6.2% versus 5.1% for the Russell 2000 Value Index with the 5.7% gain for the Russell 2000 Index masking the strong move for value late in the quarter. In contrast, cyclical sectors nosed ahead of defensives in September and narrowly outperformed in 3Q17. A key insight emerged when we examined the intersection of style and sector results. As the heat map with YTD results through 9/30/17 shows, the disparity between cyclical and defensive sector returns was especially pronounced within the two SMALL-CAP HEAT MAP R2K YTD RETURNS AS OF 9/30/17 (%) R2K VAL R2K GRO small-cap style indexes. Many smallcap investors may not be aware of the considerable YTD gap between cyclical value stocks and defensive growth stocks. As evidenced by cyclicals strength late in the quarter, we think that this gap may be closing. As small-cap specialists, we think this is the most interesting current story for the asset class. CYC DEF Was There a Small-Cap Shift in September? The idea that this performance gap may be closing is also consistent with a related, and very intriguing, development that began early last month. From 9/7/17-9/30/17, small-cap value convincingly beat growth, cyclicals outperformed defensives, and small-cap nosed ahead of large-cap. In fact, looking at the returns for value and growth over three periods during the last year shows what we think are fascinating contrasts. R2K VAL GRO RETURN SPREAD 10.5% YTD TO 2.4% 9/7/17 Q416 9/7/17-9/30/ % At this same time, and not coincidentally, the 10-year Treasury yield rebounded off its YTD low of 2.05% on September 7th, climbing through the end of the month. We have previously discussed our view that many investors do not appreciate the duration senstivity of growth stocks, and this latest move provided another reminder. More important, this may indicate a longer-term move toward higher rates, which has broader implications for asset allocators beyond small-cap investing. As for the implications for small-caps, we believe that this shift may mark a resumption in leadership for those areas that led in 2016 small-cap, value, and cyclicals before they began to lag in Divergent Sectors, Active Opportunities We often find that important insights risk being overlooked unless aggregate asset class returns are more closely parsed. For example, some insist that stocks are about to experience an imminent decline without understanding that we have already experienced significant downturns via rolling sector and industry corrections over the last few years. TOP 2 BOTTOM CONS ENERGY STAPLES HEALTH INFO CARE TECH R2K SECTOR RETURNS YTD Healthcare corrected in 2016 while banks, energy, and many consumer staples stocks have been doing the same YTD in Meanwhile, retail stocks have been struggling over much of the last three years. This pattern of rolling corrections can be seen as a consolidation phase, which has often been followed by renewed advance for the declining group. If this pattern were to persist, it would continue to create potential buying opportunities for disciplined, valuationsensitive stock pickers such as ourselves.

5 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 5 Third Quarter 2017 Market Highlights (continued) Are Defensives Disconnected? With growth s leadership still in place nearly three-quarters of the way through 2017, we are beginning to see the current U.S. stock market as disconnected from what s happening both in our companies and the economy. SECTOR VALUATIONS R2K MEDIAN EV/EBIT 1 AS OF 9/30/ x CYC 26.9x DEF Stock and bond investors alike appear to be pessimistic. The yield on the 10-year Treasury was tumbling into early September, which typically (though not always) is a sign of concern about economic growth, just as equity investors preferences for higher yield and other noncyclical investments is evidence of caution. Of course, valuations are historically high for many stocks across the market cap and small-cap style spectrums. However, high valuations are not evenly spread, which you can see by looking at the average of EV/EBIT for the Russell 2000 Index by separating the metric into cyclical and defensive sectors. The average valuation for cyclicals is more attractive than the average valuation for defensives which are significantly higher. Also worth noting are the pockets of opportunity that currently exist in the small-cap universe. Of the stocks in the Russell 2000, 712 were down YTD through 9/30/17. To be sure, not all of these would make attractive investments but some undoubtedly are, and we ve been looking carefully. Why Go Global With Small-Cap? Equally important is the improving global economic picture. The reach of the expansion is notable each of the 35 countries in the OECD has positive GDP, and 65% of them are expanding. What does this mean for small-caps? In contrast to the conventional notion that all small-caps derive the vast bulk of their revenue from domestic sources, many smallcap companies have a healthy percentage that comes from outside the U.S. So while the average company in the Russell 2000 derived only 20.3% of its sales from outside the U.S. at the end of September, the percentage of international sales varies widely by sector and industry. In fact, 415 companies in the small-cap index derived a third % COMPANIES IN R2K DERIVED REVENUE FROM OUTSIDE THE U.S. or more of their revenues from outside the U.S. In this light, we suspect that even modest global economic expansion can spur solid earnings growth, which should fuel greater relative advances for certain small-cap cyclicals. Our Outlook To be sure, it remains to be seen if the September Shift back to value, cyclicals, and small-cap accompanied by rising rates will last or prove to be a short-term phenomenon. From a market cycle standpoint, we remain convinced that the previous small-cap peak in June 2015 marked a new small-cap cycle. Without trying to pin a specific date as to when a leadership resumption takes a more lasting hold, we believe that this cycle will continue to be led by value (as it was from 6/23/15-9/30/17) and cyclical stocks. So while we recognize the causes for uncertainty, we also see more than enough reasons to be cheerful about economic prospects especially on the global level. We believe that solid-to-strong prospects for the global economy combined with relatively more attractive valuations should mean positive outcomes for a certain kind of small-cap company. From our perspective, small-caps in cyclical industries with modest valuations and global exposure look poised to lead and we are happy to be holding many. 1 Last twelve months enterprise value/earnings before interest and taxes excluding negative EBIT Cyclical and Defensive are defined as follows: Cyclical: Consumer Discretionary, Energy, Financials, Industrials, Information Technology, and Materials; Defensive: Consumer Staples, Health Care, Real Estate, Telecommunication Services, and Utilities. Enterprise Value (EV) is calculated by adding a company s market capitalization, long term debt, preferred stock, and minority interest, then subtracting cash. EBIT is earnings before interest and tax. EV/EBIT is a harmonic weighted average. The thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce & Associates, LP, and, of course, there can be no assurances with respect to future small-cap market performance.

6 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 6 Third Quarter Impact Report ¹ Top Five Contributors by Security For Quarter Ended 9/30/17 SECURITY NAME (%) QuinStreet 0.50 Electro Scientific Industries 0.38 IXYS Corporation 0.30 Profire Energy 0.30 Vishay Precision Group 0.28 Top Five Detractors by Security For Quarter Ended 9/30/17 SECURITY NAME (%) American Outdoor Brands BioAmber LSI Industries Harmonic ipass Top Five Contributors by Industry For Quarter Ended 9/30/17 INDUSTRY NAME Semiconductors & Semiconductor Equipment Electronic Equipment, Instruments & Components Energy Equipment & Services (%) Capital Markets 0.45 Specialty Retail 0.42 Top Five Detractors by Industry For Quarter Ended 9/30/17 INDUSTRY NAME (%) Communications Equipment Leisure Products Electrical Equipment Professional Services Technology Hardware, Storage & Peripherals Sector Net Gains and Losses (%) For Quarter Ended 9/30/17 TOTAL SECTOR NAME WEIGHT RETURN Information Technology Energy Financials Industrials Health Care Materials Consumer Discretionary Real Estate Consumer Staples Telecommunication Services Cash Total 6.28 Net Cumulative Total Return 5.90 Expense Impact 0.39 Gross Cumulative Total Return 6.29 Residual² 0.01 ¹ Represents estimated net realized and unrealized gains and losses, including dividends, during the three-month period ended 9/30/17. The sum of all contributions to and detractions from performance for all securities would equal the Fund s gross cumulative total return for the third quarter of ² The Residual is the total return variance caused by intraday transactions.

7 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 7 Third Quarter Performance Attribution Analysis For the Three Months Ended September 30, 2017 (%) RLP Russell 2000 Variance Attribution Analysis GICS SECTORS ALLOCATION EFFECT¹ SELECTION EFFECT² TOTAL EFFECT Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecommunication Services Utilities Cash Unclassified Total Net Cumulative Total Return Expense Impact Gross Cumulative Total Return Residual³ ¹ The Allocation Effect is the excess return attributable to the Fund s choice of sector weighting that differed from those of the Russell 2000 Index. ² Selection Effect represents the sum of the portfolio s excess return attributable to security selection within each sector and the portion of its excess return attributable to combining the weighting decision with its relative performance. ³ The Residual is the total return variance caused by intraday transactions. Important Information Past performance is no guarantee of future results. The Fund is actively managed and does not seek to replicate its benchmark in portfolio construction. Holdings and sector weightings are subject to change. Source: Royce & Associates, LP, based in part on data provided by FactSet. The attribution figures above are based on the Fund s holdings as of the close of business of each day during the period ended 9/30/17 and reflect estimated fees and expenses of the Fund. These figures are for analytical purposes only. This information should not be construed as investment advice or recommendations with respect to the sectors listed. Sector weightings may not be representative of the portfolio managers current or future investments and are subject to change at any time. The sum of all contributions to and detractions from performance for all securities would equal the Fund s gross cumulative total return for the third quarter of 2017.

8 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 8 Year-To-Date Impact Report ¹ Top Five Contributors by Security Year-to-Date Ended 9/30/17 SECURITY NAME (%) Kirkland Lake Gold 0.62 QuinStreet 0.59 IXYS Corporation 0.57 Novanta 0.54 Electro Scientific Industries 0.54 Top Five Detractors by Security Year-to-Date Ended 9/30/17 SECURITY NAME (%) BioAmber Stein Mart Ascena Retail Group Cato Corporation (The) Cl. A Unique Fabricating Top Five Contributors by Industry Year-to-Date Ended 9/30/17 INDUSTRY NAME Semiconductors & Semiconductor Equipment Electronic Equipment, Instruments & Components (%) Machinery 1.05 Health Care Equipment & Supplies 0.99 Pharmaceuticals 0.82 Top Five Detractors by Industry Year-to-Date Ended 9/30/17 INDUSTRY NAME (%) Specialty Retail Professional Services Chemicals Multiline Retail Food Products Sector Net Gains and Losses (%) Year-to-Date Ended 9/30/17 TOTAL SECTOR NAME WEIGHT RETURN Information Technology Health Care Industrials Financials Energy Materials Utilities Telecommunication Services Real Estate Consumer Staples Consumer Discretionary Cash Total 7.94 Net Cumulative Total Return 6.93 Expense Impact 1.19 Gross Cumulative Total Return 8.12 Residual² 0.18 ¹ Represents estimated net realized and unrealized gains and losses, including dividends, during the year-to-date period ended 9/30/17. The sum of all contributions to and detractions from performance for all securities would equal the Fund s gross cumulative total return for the year-to-date period ended 9/30/17. ² The Residual is the total return variance caused by intraday transactions.

9 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 9 Year-To-Date Performance Attribution Analysis For the Year-to-Date Ended September 30, 2017 (%) RLP Russell 2000 Variance Attribution Analysis GICS SECTORS ALLOCATION EFFECT¹ SELECTION EFFECT² TOTAL EFFECT Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecommunication Services Utilities Cash Unclassified Total Net Cumulative Total Return Expense Impact Gross Cumulative Total Return Residual³ ¹ The Allocation Effect is the excess return attributable to the Fund s choice of sector weighting that differed from those of the Russell 2000 Index. ² Selection Effect represents the sum of the portfolio s excess return attributable to security selection within each sector and the portion of its excess return attributable to combining the weighting decision with its relative performance. ³ The Residual is the total return variance caused by intraday transactions. Important Information Past performance is no guarantee of future results. The Fund is actively managed and does not seek to replicate its benchmark in portfolio construction. Holdings and sector weightings are subject to change. Source: Royce & Associates, LP, based in part on data provided by FactSet. The attribution figures above are based on the Fund s holdings as of the close of business of each day during the period ended 9/30/17 and reflect estimated fees and expenses of the Fund. These figures are for analytical purposes only. This information should not be construed as investment advice or recommendations with respect to the sectors listed. Sector weightings may not be representative of the portfolio managers current or future investments and are subject to change at any time. The sum of all contributions to and detractions from performance for all securities would equal the Fund s gross cumulative total return for the year-to-date period ended 9/30/17.

10 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 10 One-Year Impact Report ¹ Top Five Contributors by Security One-Year Ended 9/30/17 SECURITY NAME (%) QuinStreet 0.76 Novanta 0.72 Brooks Automation 0.66 Korn/Ferry International 0.59 Electro Scientific Industries 0.57 Top Five Detractors by Security One-Year Ended 9/30/17 SECURITY NAME (%) Stein Mart Nobilis Health BioAmber LSI Industries Cato Corporation (The) Cl. A Top Five Contributors by Industry One-Year Ended 9/30/17 INDUSTRY NAME Semiconductors & Semiconductor Equipment Electronic Equipment, Instruments & Components (%) Machinery 1.41 Health Care Equipment & Supplies Energy Equipment & Services Top Five Detractors by Industry One-Year Ended 9/30/17 INDUSTRY NAME (%) Specialty Retail Health Care Providers & Services Distributors Multiline Retail Textiles, Apparel & Luxury Goods Sector Net Gains and Losses (%) One-Year Ended 9/30/17 TOTAL SECTOR NAME WEIGHT RETURN Information Technology Industrials Financials Health Care Energy Materials Utilities Real Estate Telecommunication Services Consumer Staples Consumer Discretionary Cash Unclassified Total Net Cumulative Total Return Expense Impact 1.73 Gross Cumulative Total Return Residual² 0.10 ¹ Represents estimated net realized and unrealized gains and losses, including dividends, during the one-year period ended 9/30/17. The sum of all contributions to and detractions from performance for all securities would equal the Fund s gross cumulative total return for the one-year period ended 9/30/17. ² The Residual is the total return variance caused by intraday transactions.

11 Royce Low-Priced Stock Fund IMPACT AND ATTRIBUTION REPORT 11 One-Year Performance Attribution Analysis For the One-Year Ended September 30, 2017 (%) RLP Russell 2000 Variance Attribution Analysis GICS SECTORS ALLOCATION EFFECT¹ SELECTION EFFECT² TOTAL EFFECT Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecommunication Services Utilities Cash Unclassified Total Net Cumulative Total Return Expense Impact Gross Cumulative Total Return Residual³ ¹ The Allocation Effect is the excess return attributable to the Fund s choice of sector weighting that differed from those of the Russell 2000 Index. ² Selection Effect represents the sum of the portfolio s excess return attributable to security selection within each sector and the portion of its excess return attributable to combining the weighting decision with its relative performance. ³ The Residual is the total return variance caused by intraday transactions. Important Information Past performance is no guarantee of future results. The Fund is actively managed and does not seek to replicate its benchmark in portfolio construction. Holdings and sector weightings are subject to change. Source: Royce & Associates, LP, based in part on data provided by FactSet. The attribution figures above are based on the Fund s holdings as of the close of business of each day during the period ended 9/30/17 and reflect estimated fees and expenses of the Fund. These figures are for analytical purposes only. This information should not be construed as investment advice or recommendations with respect to the sectors listed. Sector weightings may not be representative of the portfolio managers current or future investments and are subject to change at any time. The sum of all contributions to and detractions from performance for all securities would equal the Fund s gross cumulative total return for the one-year period ended 9/30/17.

12 Notes, Performance and Risk Disclosure Frank 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. Frank Russell Company is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. This is a presentation of Royce. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination, or redistribution is strictly prohibited. Frank Russell Company is not responsible for the formatting or configuration of this material or for any inaccuracy in Royce s presentation thereof. All indexes referenced are unmanaged and capitalization weighted. Each index s returns include net reinvested dividends and/or interest income. The Russell 2000 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 indices consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor s based on market size, liquidity, and industry grouping, among other factors. The Nasdaq composite is an Index of more than 3,000 common equities listed on the Nasdaq stock exchange. The Russell 1000 index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. Index returns include net reinvested dividends and/or interest income. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Sector and industry 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. Distributor: Royce Fund Services, LLC Member FINRA, SIPC. Any information, statements and opinions set forth herein are general in nature, are not directed to or based on the financial situation or needs of any particular investor, and do not constitute, and should not be construed as, investment advice, a forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional. 745 Fifth Avenue New York, NY P (800) Client Services Group P (800) 33-ROYCE ( ) RLP-QIA-0917