How did Royce Small-Cap Total Return Fund perform in 4Q24 and over longer-term periods?

Miles Lewis: The Fund, which is part of Royce’s Quality Value Strategy, advanced 4.1% for the quarter, outperforming its benchmark, Russell 2000 Value Index, which was down -1.1% for the same period. The Fund also beat its benchmark in 2024, advancing 10.0% versus 8.1%.In addition, Small-Cap Total Return outperformed the Russell 2000 Value for the 3-, 5-, 10-, 15-, 20-, 25-, 30-year, and since inception (12/15/93) periods ended 12/31/24 while also beating the Russell 2000 Index for each of these periods other than the 1- and 15-year spans. We’re very pleased with the Fund’s results—and especially since Joe and Jag joined the team.

How did performance shake out at the sector and industry level in 4Q24?

Joe Hintz: Six of the portfolio’s nine equity sectors made a positive impact on quarterly performance. Financials and Information Technology made outsized positive contributions, followed by Communication Services, while the biggest detractors were Health Care, Real Estate, and Energy.

Jag Sriram: At the industry level, IT services, insurance, and capital markets (both from Financials) made the biggest positive impact while the largest detractors were health care providers & services (Health Care), software (Information Technology), and building products (Industrials).

Which holding contributed and detracted most in 4Q24?

ML: The Fund’s top contributor in 4Q24 was Kyndryl Holdings. Jag discussed our thesis on the company in a podcast in October: it’s an IT infrastructure company that was spun out of IBM three years ago that’s demonstrated steady progress towards its operational goals, strengthening the case for meeting their financial targets for 2024. Its consulting business has also been growing faster than many people were expecting, ourselves included, which provided incremental upside to our initial fundamental analysis.

Which holding detracted most in the first quarter?

JH: The top detractor was PACS Group, which operates skilled nursing facilities along with ancillary and support services. Its share price declined precipitously in November when a short-seller research group published a highly critical report on the company. While we’ve so far been pleased with management’s response, the situation remains fluid, and we’re monitoring the company closely.

How did the Fund perform versus its benchmark?

JS: Our advantage over the Russell 2000 Value came almost equally from stock selection and sector allocation decisions in the quarter. At the sector level, stock selection was especially additive in Financials, Information Technology—where our overweight helped even more—and Consumer Discretionary. Conversely, stock selection worked against relative results in Health Care, as did our lack of exposure to Consumer Staples.

Turning to the calendar year, which were the top contributors and detractors at the sector and industry levels?

JH: Although only four of the Fund’s nine equity sectors made positive contributions in 2024, Financials made an enormous positive contribution, followed by significant impacts from Information Technology and Industrials. Consumer Discretionary was the largest detractor, followed by Communication Services and Energy.

ML: At the industry level, the biggest positive impacts came from insurance (Financials), trading companies & distributors (Industrials), and capital markets (Financials) while interactive media & services (Communication Services), specialty retail, and household durables (both from Consumer Discretionary).

What were the positions that contributed and detracted most in 2024?

JS: Our top contributor in 2024 was International General Insurance Holdings, a specialist commercial insurer and reinsurer with a global portfolio that includes energy, property, construction & engineering, ports & terminals, financial institutions, and casualty, among others. The company continued to execute effectively, posting strong performance with solid underwriting margins and a hefty increase in net income compared to 2023 in its fiscal third quarter.

JH: The top detractor was Teradata Corporation, a cloud data analytics company. While we like the company’s technology, its migration from an on-premises perpetual license business to a recurring cloud subscription model has been rockier than we were anticipating, which led us to exit our position in August.

What drove the portfolio’s advantage versus the Russell 2000 Value in 2024?

ML: Both stock selection and sector allocation decisions contributed, with the latter making the bigger impact. On a sector basis, stock selection and our higher weighting in Financials helped most, followed by the same combination in Information Technology and Industrials. Conversely, stock selection impeded relative results in Consumer Discretionary, Communication Services, and Real Estate.

What is your outlook for the Fund?

ML: In the Fund’s 3Q24 commentary, we wrote that we felt the quarter was anomalous and expressed optimism about the future. Fortunately, that optimism was warranted, and we finished the year on a high note, thus enjoying another solid year of performance. We have now generated positive relative performance in each of the last three years—with less volatility than peers and the benchmark. While pleased with these results, we believe we can and will continue to improve. Amid changes to the portfolio, team, and process, we are elated to have preserved Total Return’s history of providing strong downside protection: from the previous small-cap market peak on 11/8/21 to the trough on 10/27/23, the Fund was down -14.2% versus a decline of -25.6% for the Russell 2000 Value, resulting in a downside capture ratio of 55.5%. Going back to 1998, the Fund Return has provided downside protection in each of the seven market downturns of 15% or more, with the most recent having the widest spread of the seven in the Fund’s favor. While we share to some degree the optimistic consensus view for 2025, we are equally conscious of the many risks that could arise next year or later. The yield curve has recently un-inverted, which on the surface would appear to be a positive signal. However, history suggests that recessions typically follow shortly thereafter. For now, the U.S. economy is strong, but recessions often result from unexpected events. We therefore think a measure of conservatism is warranted heading into the new year. Our investment approach remains unchanged: we will continue to build the portfolio from the bottom-up by investing in what we think are high-quality businesses experiencing some sort of transitory or cyclical issue, many of which have idiosyncratic drivers that create less dependence on the macro to produce positive results. We believe our portfolio of high-quality businesses trading at undemanding valuations can generate solid returns, regardless of the macroeconomic backdrop.

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