How did Royce Pennsylvania Mutual Fund perform in 2Q22?

Chuck Royce While a negative return is obviously never our goal, we consistently attempt to position the Fund to weather downturns better than its small-cap benchmark, the Russell 2000 Index. In that respect, the Fund performed as we would expect, down 13.3% for 2Q22 while the benchmark declined 17.2% for the same period.

How was performance for 2022’s first half and over longer-term periods?

Andrew Palen The Fund maintained its long-term advantages over the Russell 2000, outpacing it for the one-, three-, five-, 20, 25-, 30-, 35-, and 40-year periods ended 6/30/22. Consistent with Chuck’s observation, an important element in that long-running outperformance record is the Fund’s historical record of beating the index during down markets. So, while we weren’t happy about the portfolio’s negative return for the year-to-date period ended 6/30/22, we were pleased that Penn lost less than its benchmark, down 21.2% versus a decline of 23.4% for the Russell 2000 for the first half.

Which portfolio sectors made the biggest impact on 2Q22’s performance?

Jay Kaplan Each of the portfolio’s 10 sectors had a negative impact on quarterly performance, with the largest detractions coming from Industrials, Information Technology, and Financials. The least negative impacts came from Consumer Staples, Energy, and Real Estate.

What happened at the industry level in 2Q22?

Miles Lewis Two areas in Information Technology—semiconductors & semiconductor equipment and electronic equipment, instruments & components—detracted most, followed by capital markets in Financials. In the positive side, auto components and diversified consumer services, which are both in Consumer Discretionary, were the top contributors, with the Health Care sector’s pharmaceuticals group coming next.

At the sector level, what factors made the biggest impact relative to the benchmark in 2Q22?

Lauren Romeo Our advantage over the benchmark came solely from stock selection in the quarter, with the Consumer Discretionary, Industrials, and Information Technology sectors making the most significant positive impacts due to savvy stock picking. Eight out of the 11 sectors in the Russell 2000 had positive results versus the benchmark. Only Utilities—where we had no exposure—and our lower weightings in both Consumer Staples and Energy detracted from relative quarterly results.

Turning to the first half, how did the Fund perform in the first six months of 2022?

Steven McBoyle Nine of the 10 equity sectors in which the Fund held investments detracted from Penn’s first-half performance, with the biggest negative impacts coming from Industrials, Information Technology, and Financials. Energy made a small positive contribution while the smallest detractions came from Consumer Staples and Real Estate.

What about at the industry level?

AP The same two areas in Information Technology—semiconductors & semiconductor equipment and electronic equipment, instruments & components—detracted most, followed by banks from Financials. Each was among the Fund’s four largest industry weightings for the year-to-date period ended 6/30/22—and the two industries from tech were also significantly overweight versus the Russell 2000. These sizable exposures indicate our high long-term confidence in spite of recent stock price declines.

ML On the plus side, Penn’s top-contributing industries were energy equipment & services, in Energy; containers & packaging from Materials; and as was the case in 2Q22 pharmaceuticals.

How did the Fund’s results compare with those of the Russell 2000?

JK Our relative advantage came entirely from stock selection in 2022’s first half. In another similarity to 2Q22, eight equity sectors contributed to outperformance. At the sector level, stock picks and our lower exposure to Health Care both made positive impacts while stock selection drove the Fund’s relative advantage in Consumer Discretionary. The portfolio’s cash position also helped versus the benchmark. Conversely, the portfolio’s relative results were hurt by our lower exposure to Energy, lack of exposure to Utilities, and a combination of stock picks and our lower weighting in Consumer Staples.

What’s your long-term outlook for the Fund?

CR We are currently in what we would call a “sum of all fears” environment. War, inflation, slower growth, and rising rates are all understandably frightening investors. Both consumer and investor sentiment are near historic lows. Perhaps counterintuitively, then, we have found that the most opportune times to invest are when fear is high and trailing returns are low. The annualized three-year return for the Russell 2000 at the end of June was 4.2% compared to its three-year monthly rolling average since inception of 10.9%. Subsequent returns from these levels have been attractive. Coming off a record negative first half during what appears to be a late stage of the bear market, the current period looks like a solid entry point for long-term small-cap returns going forward.

Important Disclosure Information