How did Royce Pennsylvania Mutual Fund perform in 2Q23 and the first half of 2023?

Lauren Romeo: We were really pleased with the way that Royce Pennsylvania Mutual Fund performed for the quarter and the first half. The Fund advanced 6.7% in 2Q23, ahead of its small-cap benchmark, the Russell 2000 Index, which was up 5.2%. The Fund also gained 15.4% for the year-to-date period ended 6/30/23, versus an increase of 8.1% for the Russell 2000.

How has the Fund done versus its benchmark over longer-term periods?

Miles Lewis: As pleased as we were with the Fund’s recent short-term results, we were even happier with its absolute and relative performance over longer-term periods. The Fund beat its benchmarks for the one-, three-, five-, 10-, 15-, 20-, 25-, 30-, 35-, and 40-year periods ended 6/30/23. In addition, the Fund’s average annual total return for the 50 years ended 6/30/23 was 12.9%—all of it under Chuck’s management.

What were the Fund’s results on a sector basis in 2Q23?

Jay Kaplan: Eight of the Fund’s 10 equity sectors made positive contributions to 2Q23 performance, led by Industrials, Information Technology, and Financials. Communication Services and Consumer Staples detracted while Real Estate made the smallest contribution.

What happened at the industry level during the quarter?

Steven McBoyle: Building products and machinery—both from Industrials— made the biggest positive contributions, along with banks from the Financials sector. The biggest detractors were interactive media & services from Communication Services; and technology hardware, storage & peripherals, which is in Information Technology, and airfreight & logistics in Industrials, and energy equipment & services from the Energy sector.

How did the Fund perform relative to the Russell 2000 on a sector basis in 2Q23?

Chuck Royce: The Fund’s advantage versus the small-cap index came mostly from our stock selection, though sector allocation decisions were also additive. Stock selection in Financials, our much higher weighting in Industrials, and lack of exposure to Utilities (which had a negative return in the index) did most to help relative performance. Conversely, both stock selection and our lower exposure to Health Care hurt relative results, as did stock picks in Communication Services and Consumer Staples.

How did the Fund perform at the sector level for the year-to-date period ended 6/30/23?

Andrew Palen: Nine of the Fund’s 10 equity sectors contributed to 2023’s first-half results, with Industrials, Information Technology, and Consumer Discretionary leading. Communication Services was the only detractor while Energy and health Care made the smallest contributions.

What were the biggest industry contributors and detractors in the first half of 2023?

Lauren Romeo: The industries that contributed most were semiconductors & semiconductor equipment, which is in Information Technology, followed by two groups in Industrials: machinery and building products. Interactive media & services from Communication Services was the biggest detracting industry, followed by biotechnology and pharmaceuticals from the Health Care sector.

How did performance stack up at the sector level versus the Russell 2000 for the year-to-date period ended 6/30/23?

Andrew Palen: As was the case in 2Q23, both stock selection and sector allocation decisions drove outperformance in the first half of the year. Our stock selection in Financials, stock picks and a much higher weighting in Industrials, and greater exposure to the resurgent Information Technology sector contributed most to relative results. Conversely, stock picks hurt in Health Care and Communication Services.

What is your outlook for the Fund?

Chuck Royce: We see an array of potential triggers that would jumpstart small-cap performance in the coming months. First, a soft landing looks more and more likely, and a recession—specifically the kind of deep and potentially lengthy contraction many have been anticipating since late 2021—looks less and less likely. We have already seen promising developments that suggest a nascently robust economy: durable goods orders rose for the fourth consecutive month in June—and hit a record high for nondefense capital goods (excluding aircraft or core capital goods, a proxy for business equipment investment)—while homebuilding rose by 21.7% in May, a record monthly surge that also defied expectations for a slowdown. Even more important in our view is the ongoing sense of cautious optimism we have been hearing from many management teams—which was reflected by generally solid earnings for many holdings for the second quarter. Amid the difficulties of bear markets and periods of economic uncertainty, we think it’s crucial to remind investors of the opportunity to build their small-cap allocation at attractively low prices. History shows the rewards that have accrued to investors who had the necessary patience and discipline to stay invested during periods of sluggish or negative performance. We continue to see the currently unsettled period as an opportune time to invest in select small caps for the long run.

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