Miles Lewis: Joe Hintz, Jag Sriram, and I recognize that the current market backdrop is creating significant volatility and uncertainty while simultaneously also creating potential opportunities, particularly for long-term investors like us in Royce Small-Cap Total Return Fund. While it’s difficult to invest in certain businesses given the wide range of outcomes tied to tariffs, there are two more general types of opportunities we are finding attractive right now. The first are companies that we believe will benefit from the proposed and/or higher tariffs, but whose stock prices are moving in the opposite direction. The second are companies that we already find attractive whose business models are largely – if not entirely – insulated from the current tariff risk.

Advance Auto Parts is the nation’s third-largest auto parts retailer. We believe that their business will, somewhat counterintuitively, benefit from the current tariff positioning. First, with prices of automobiles rising, U.S. consumers are likely to drive their existing cars longer. The average age of the U.S. car is already at an all-time high, and increasing prices on new cars will likely push that age higher. Relatedly, used cars will probably become more appealing versus new cars, and used vehicles are more apt to need repair and maintenance. The nature of the retail auto parts business is such that parts are almost always need-based purchases. People must fix their cars, even if prices for parts are rising, because they have no alternative. This has historically been the case during recessions, which is important to remember should we enter one in the U.S. In fact, Advance Auto Parts saw its same store sales accelerate meaningfully in 2008-09, which we believe speaks to the non-discretionary nature of its business model. Finally, we think the retail auto parts industry structure is a good one, with Advance Auto Parts primarily competing against two much larger, rational, and profitable companies: O’Reilly and AutoZone. As such, we believe the industry is likely to pass on higher input costs from tariffs directly to consumers, thus preserving, and perhaps benefiting, gross margins. Despite these compelling reasons to own it, the stock has meaningfully lagged the market since “Liberation Day,” even while O’Reilly and AutoZone have outperformed. We view this disconnect as an excellent long-term opportunity.

Healthcare Services Group (HSCG) is the largest provider of janitorial and dining services to Skilled Nursing Facilities (SNFs) in the U.S. Despite meaningful underperformance over the last couple of years, we think its business is improving. The health of its SNF customers has improved, and utilization rates at these facilities are moving higher, an improvement that will enable HSCG to begin growing its topline at an accelerated pace, one more in line with historical levels, after a post-pandemic spell of muted growth.

The stock is currently trading at its lowest multiple ever (using enterprise value over earnings before interest and taxes or EV/EBITDA), despite visible improvement in the company’s fundamentals. The downside appears limited, as HSCG has a strong, net cash balance sheet and has been returning capital to shareholders via share repurchases. While the Trump administration’s views on Medicaid could impact the company, we note that the first Trump administration looked favorably upon this industry. Perhaps more important, HSCG’s business model is largely immune to the current risks from tariffs, as well as to a potential recession, in our view. Demand for its services is driven by older Americans moving into and utilizing skilled nursing facilities. This is a demographic trend that moves independently of the economy and tariffs. While one could argue that tariffs create the potential for higher food prices and wages in the U.S., we’d respond that HSCG’s contracts typically permit the company to pass those costs through to their customers. In fact, the contractually recurring nature of the business is another reason we like the stock. Although HSCG has outperformed the market during this most recent swoon, the stock is still bouncing along the bottom, and we believe that, as investors come to appreciate the recent improvements in its core business—in addition to its relative insulation from the broader macro risks—the multiple will move higher over time, as will the company’s earnings and cash flows.

Lauren Romeo: The combined effects of DOGE initiatives—such as the cap on the amount of indirect costs NIH grants will cover—and tariff fears, particularly around China, have weighed on the life sciences tools and services space so far this year, creating what we think are opportunities in select companies with durable, high return on invested capital (ROIC) business models like those that Steven McBoyle, Andrew Palen, and I hold in Royce Premier Fund.

An example is Bio-Techne, a life sciences company that develops and produces high-quality proteins, antibodies, and other essential reagents, as well as analytical tests and instruments used by biopharma companies and academia for research and drug discovery, disease diagnostics, and bioprocessing. The company’s “R&D Systems” brand is the gold standard in reagents. The importance of high-quality and input consistency when replicating or advancing laboratory experiments allows Bio-Techne to set premium prices. The company also has a razor/razor blade model: instrument sales lead to multi-year streams of usage-driven consumables revenue and create an annuity-like stream. With 80% of Bio-Techne’s sales coming from consumables, this further drives more predictable revenue and cash flows.

Bio-Techne will not be immune from the near-term headwinds from spending reductions in U.S. academia (10% of sales) or from tariffs, since roughly 40% of its sales (including 9% to China) come from outside the U.S. However, 90% of its products are made in the U.S. With Bio-Techne’s stock down more than 30% year-to-date, it appears that not much weight is being given to potential mitigation actions from, for example, price pass-throughs and/or potential retaliatory tariff exemptions given the criticality of its products. The same can be said of the contrasting secular tailwinds that include the aging population in the U.S. and other developed countries, advances in disease treatment modalities (e.g., cell and gene therapy), increased automation in lab testing, and precision diagnostics. We think that near-term uncertainty is masking the attractive long-term earnings and cash flow power of a company that should return to delivering above-average organic growth at high profit margins over the long-run.

Charles Dreifus: In times of market dislocation where uncertainty reigns, Tim Hipskind, Steven McBoyle, and I look for stocks with absolute value, a perennial selection criterion that becomes even more critical during bear markets. In these environments, the hallmarks of the approach we use in Royce Small-Cap Special Equity Fund come to the fore. We focus on conservatively managed companies with transparent accounting that have a viable niche or franchise whose stock can be bought for less than our determination of its economic value. We emphasize companies with strong balance sheets, lengthy track records of profitability, positive cash flows, and sustainable returns on invested capital (among other attributes). Trying to manage downside risk is a paramount concern—and we’re pleased that the Fund outperformed the Russell 2000 Value Index during all seven previous downturns of 15% or more from the index’s prior historical high going back to the Fund’s inception on 5/1/98.

Standard Motor Products offers one example of how our process works. The company is a leader in the distribution and manufacture of automotive aftermarket parts, selling into the large national retailers on both a private label and co-branded basis. Its stock has been pressured over tariff concerns, in part due to the fact that 50% of the company’s labor hours are being sourced in Mexico. However, its products currently still fall under the USMCA (United States, Mexico, and Canada Agreement) exemption, and the latest hour of trade negotiations has left Mexico as a relative winner. Further, automotive aftermarket parts are used in non-discretionary repair and replacement. Finally, industry trends are typically countercyclical as drivers keep cars longer in an economic downturn. In an environment where tariffs will cause new cars to become even less affordable, this countercyclical trend may be even more pronounced.

Mark Fischer: Rising U.S. trade and geopolitical tensions are stoking volatility and macroeconomic uncertainty, forcing investors to rethink their positioning. While the outcome of the ongoing trade war is unclear, Mark Rayner and I believe recent events highlight the vulnerability of U.S. equities—large-caps in particular—and the relative value international markets are offering. U.S. equities have enjoyed multi-year dominance against international stocks that, combined with rising concentrations (e.g., U.S. equities comprise over 70% of the MSCI World Index, while U.S. indexes themselves remain concentrated among a small number of mega-cap stocks), created lofty expectations that, when unmet, may signal a regime change.

Our conviction in the long-term performance potential for non-U.S. stocks is underpinned by three observations: First, amid heightened uncertainties, investors are likely to reprioritize profitable companies with high returns on invested capital (ROIC). Second, international equities offer not only significant valuation discounts but also come with undervalued currencies. Many, like the Japanese Yen, are trading at multi-decade lows on purchasing power parity (PPP) implied exchange rates. While we believe currencies revert to their PPP-implied rates over the long term, rising protectionism and eroding confidence in the U.S. as a reliable trading partner could accelerate this process, lifting international equities. Third, even a modest reallocation from U.S. equities could meaningfully boost international small-caps—after all, the market capitalization of Apple alone accounts for 60% of our international small-cap benchmark, which is comprised of more than 4,000 companies and, needless to say, offers far greater diversification.

We believe the most compelling opportunities in the international small-cap space today are asset-light businesses that provide mission-critical and difficult-to-replicate products or services with high barriers to entry, or companies that are domestically oriented and therefore immune to the first order effects of tariffs. One example of a company we hold in Royce International Premier Fund that has minimal direct exposure to the U.S. is France’s Gaztransport Et Technigaz (GTT), the global monopoly provider of containment systems used to transport liquefied natural gas (LNG) on ship carriers. The company equips over 70% of all LNG carriers globally and plays a critical role in the energy value chain as its containment systems account for less than 5% of the total upfront cost of an LNG carrier while ensuring that LNG is transported safely at stable temperatures of -256o Fahrenheit. Failure to do so would result in asset impairment and lost revenues, or, worse, explosions. GTT is an asset light business; it does not manufacture the containment systems but rather designs them and receives license fees in exchange, resulting in high free cash flow (FCF) margins of over 40% and a rock-solid, net cash balance sheet.

A second example is Rightmove, the dominant online real estate platform in the U.K., with an 80% market share. Rightmove is the go-to destination for both real estate agents and homebuyers—it’s the fourth busiest website in the U.K.—and this two-sided network effect creates a moat that competitors struggle to replicate. Rightmove is a resilient business because real estate agents pay recurring subscription fees to list properties on the website. The company also enjoys strong pricing power as agents have little choice but to continue paying as Rightmove drives almost all their leads. As an asset-light business, Rightmove generates 50%-plus FCF margins, and management thoughtfully allocates excess cash across new growth initiatives, share buybacks, and dividends. As a domestic-oriented business, Rightmove is immune to the direct impact of tariffs, and while the possible but still uncertain second order effect of tariffs, such as a global recession, could pressure the U.K. housing market, we believe the company’s revenue model and pricing power can ensure high and resilient levels of profitability even in market slowdowns.

Important Disclosure Information