Effective at the close of business on 9/30/24, Co-Chief Investment Officer Francis Gannon joined the Fund’s portfolio management team of Portfolio Managers Lauren Romeo, Steven McBoyle, Miles Lewis, Jay Kaplan, and Andrew Palen.

How did Royce Small-Cap Fund perform in 3Q24?

Lauren Romeo: The Fund advanced 4.4% for the quarter, lagging its benchmark, Russell 2000 Index, which was up 9.3% for the same period.

How was performance for 2022 and over longer-term periods?

Jay Kaplan: Although the portfolio also lagged the Russell 2000 for the year-to-date period ended 9/30/24, up 9.0% versus 11.2%, it had long-term advantages, beating the benchmark for the 3-, 5-, 10-, 20-, 25-, 30-, 35-, 40-year, 45-year periods ended 9/30/24.

Which portfolio sectors made the biggest impact on 3Q24’s performance?

Andrew Palen: Eight of the Fund’s 10 equity sectors made a positive impact on quarterly performance, led by Industrials, Financials and Consumer Discretionary. The only negative impacts came from Information Technology and Energy.

What happened at the industry level in 3Q24?

Lauren Romeo: The biggest contributors were banks, machinery, and capital markets. The first and third of those industries are in Financials while machinery is in Industrials. The biggest detractors in the quarter were two groups in Information Technology—semiconductors & semiconductor equipment and software—followed by energy equipment & services from the Energy sector.

At the sector level, what factors made the biggest impact relative to the benchmark in 3Q24?

Miles Lewis: Our disadvantage versus the benchmark was primarily attributable to stock selection in the quarter. Stock selection hurt most in Information Technology, where our much larger weighting also detracted, Financials, and Communication Services. Conversely, both stock selection and our lower exposure helped in Energy as did stock selection in Consumer Staples.

How did the Fund’s sectors perform for the year-to-date period ended 9/30/24?

Steven McBoyle: Eight of the portfolio’s 10 equity sectors made a positive impact on year-to-date performance, led by Industrials, Financials, and Information Technology. The only negative impacts came from Communication Services and Energy.

What about at the industry level?

ML: Semiconductors & semiconductor equipment in Information Technology, followed by capital markets and insurance, which are both in Financials, contributed most for the year-to-date period, while interactive media & services from Communication Services, hotels, restaurants & leisure from Consumer Discretionary, and diversified telecommunication services, which is also from Communication Services, were the largest detractors.

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

AP: Our relative disadvantage versus the benchmark was attributable to stock selection in the year-to-date period. At the sector level, stock selection hurt most in Communication Services, Information Technology, and Health Care. Conversely, stock selection boosted relative performance in Financials, as did our higher weighting in Industrials and our lower exposure to Energy.

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

Francis Gannon: Small-cap has an advantage over large-cap in terms of estimated earnings growth for 2025. Looking at our preferred index valuation metric of enterprise value over earnings before interest & taxes shows that relative valuations for the Russell 2000 versus the Russell 1000 finished September near their lowest level in 25 years. Bolstering the absolute and relative attractiveness of small-caps is the state of the Russell 2000’s price-to-earnings ratio, which was below its 25-year weighted harmonic average at the end of 3Q24. We think this adds up to a favorable portrait that gives us confidence in the long-term prospects for active management in small-cap.

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