Fund Performance

Royce International Premier Fund was down -7.4% in 2024, lagging the MSCI ACWI ex USA Small Cap Index, which was up 3.4% for the same period.

What Worked… and What Didn’t

Six of the portfolio’s nine equity sectors made a negative impact on calendar year period performance, with the biggest negative impacts coming from Health Care, Industrials, and Materials while Communication Services, Real Estate, and Financials made the largest positive contributions. At the industry level, health care providers & services (Health Care), software (Information Technology), and chemicals (Materials) detracted most in 2024, while electronic equipment, instruments & components (Information Technology), interactive media & services (Communication Services), and commercial services & supplies (Industrials) were the biggest contributors. Looking at the impacts by country, Australia, Canada, and France detracted most for the calendar-year period, and Sweden, Poland, and South Korea made the largest positive contributions.

The portfolio’s top detractor at the position level for the calendar year period was U.K.-listed CVS Group, a leading provider of veterinary healthcare in the UK. Its more than 450 vet practices offer high-quality, primary care and, to a lesser degree, more advanced specialist treatments. The company also operates an online retail store, diagnostic laboratories and crematoria, offering a ‘cradle to grave’ value proposition to its customers. CVS has long been a consolidator, and with corporate ownership of the U.K. vet industry having increased from under 20% in 2009 to 60% today, CVS has set its sights on the rest of the world; it recently expanded into Australia, another sizeable market where corporate ownership is still just 15%. CVS’s stock has been under pressure since September 2023, when the U.K. Competition Markets Authority (CMA) began investigating the veterinary industry’s persistent price hikes, as well as the view that competition is inadequate in certain regions. This investigation has led to greater consumer scrutiny around pricing coupled with greater reluctance by clinicians to recommend higher-priced treatments, which has depressed current growth organic growth rates. Despite these industry-level headwinds, CVS continues to generate solid operating performance. The company’s fiscal 2024 results, released in late September, featured 10% year-over-year revenue growth driven by progress in the Australian market. The company then released a trading update for the four-month period to 10/31/24 in which the company reiterated confidence in meeting consensus expectations for fiscal 2025. While the CMA investigation will likely remain an overhang on the share price for the next couple of quarters, we believe that CVS’s current valuation understates its long-term value creation and believe the risk/reward is therefore skewed to the positive.

Johns Lyng Group (“JLG”) is a leading integrated building services group listed in Australia. JLG offers disaster recovery services, responding promptly to damage from weather, fire, floods, and other events to repair and restore buildings and their contents. It also provides recurring essential services, such as the inspection of smoke alarms, electrical and gas systems, and property management. Because JLG provides its services through an extensive network of over 14,000 subcontractors, its business is both asset-light and highly scalable. JLG’s engagement with insurance companies is governed by panels to which it is appointed for 3-5-year periods, and the company has had a near 100% renewal rate on such panels. Moreover, JLG’s revenues are largely de-coupled from the economic cycle because it depends on damage events and natural disasters and on average responds to more than 135,000 cases annually, 80% of which are considered recurring ‘Business as Usual’ (“BaU”) events such as dishwasher leaks. The company’s strong customer relationships also translate into attractive operating economics, characterized by nearly 25% returns on invested capital (“ROIC”), a net cash balance sheet, and 5-year compound annual sales growth of 35%. Longer-term, JLG benefits from the increasing prevalence of natural disasters as a result of climate change. JLG estimates it is more than ten times larger than its closest peer in Australia but has a less than 10% market share. JLG also has ambitions to continue using its blueprint in the U.S. market, which is fifty times larger than Australia’s and now accounts for nearly 30% of revenues. In late August, JLG reported 10% growth in BaU revenues and 18% growth in BaU EBITDA. In this same report, however, guidance for the coming fiscal year (ending in June 2025) called for 7% growth in BaU EBITDA and a significant reduction in the smaller, more volatile, and weather-dependent CAT (Catastrophic Events) segment, which in recent years has seen abnormally high activity. Management only forecasts CAT revenues based on already contracted work, so it consistently overdelivers relative to initial forecasts. In addition, the strata management industry, which accounts for less than 7% of JLG’s sales, has been in the spotlight due to a report pointing to a lack of transparency and conflicts of interest. However, we believe this reflects the relative lack of professional operators in the broader strata management industry, and JLG has credibly argued that it’s positioned to benefit as the kind of professional operator the industry needs. We increased our position in the company as a result.

Also listed in Australia, IPH is the leading intellectual property (“IP”) services provider in Australia, Singapore, and Canada. The company’s services span the entire patent and trademark lifecycle, from pre-filing advice, application filing, to renewal, and it currently files 48,000 patents and trademarks per year across 26 jurisdictions for over 10,000 customers operating in a diverse range of industries with low concentration. The company in our view generates inherently defensive revenues as patent applications tend to exhibit relatively low volatility through economic cycles, plus IPH receives ongoing fees from customers to regularly renew patents over their lifetimes, often up to 20 years. This results in predictable revenue streams which coupled with IPH’s asset-light model allows it to consistently generate high levels of free cash flow. Following a positive share price reaction to IPH’s fourth Canadian acquisition a couple of months earlier, investor attention then returned to the company’s organic growth, which has been somewhat subdued due to what we believe is a temporary reduction by some U.S. clients in Asian IP filings. We see IPH as a beneficiary of intellectual property innovation, which should allow it to sustain mid-single organic growth, in addition to ongoing acquisition-led growth in new markets.

Headquartered in Brazil, TOTVS focuses on small to medium size enterprises (“SMEs”), providing Enterprise Resource Planning (“ERP”) software that integrates and facilitates communication across different departments, including sales, finance, inventory, and human resources. TOTVS’s solutions are sold predominantly into the operating budgets of a large and diversified customer base exceeding 40,000 and is considered a low-cost but mission-critical expense. Contracts are indexed to inflation and adjusted annually, while close to 80% of revenues are recurring, derived from monthly subscription and maintenance fees with 99% renewal rates. TOTVS has also completed acquisitions into new business segments, most notably the facilitation of credit and marketing automation software that increases cross-selling opportunities across its existing ERP customer base and expands the company’s total addressable market more than sevenfold. Mixed performance across different business segments drove TOTVS’s share price weakness in 2024. While the core ERP business—which accounted for 86% of revenue and 97% of operating profits during the first nine months of fiscal 2024—continued to grow by 15%, other segments saw profitability pressured from both structural and operational factors. There were also questions about TOTVS’s M&A strategy stemming from TOTVS’s bid to acquire Linx, a software business owned by StoneCo that focuses on selling ERP and point-of-sale software to the Brazilian retail sector. The bidding process seems to be highly competitive with Reuters reporting 20 potential acquirers engaged in discussions, including TOTVS and Canada’s Constellation Software. We are always wary of large and transformative acquisitions, especially those done under highly competitive circumstances, as more often than not they end up destroying shareholder value. While there are certain mitigating factors—for instance, Linx is a highly complementary business, key executives at TOTVS have also worked at Linx, and TOTVS’s CEO has reiterated that management will maintain valuation and capital discipline—we were skeptical about the size of the deal and will monitor developments closely over the coming months.

Enghouse Systems is a Canadian company that provides call center and videoconferencing software that helps companies interact with their own customers across all channels including voice, email, SMS, social media, and web chat. The company also provides business and operations support software used by telcos and utilities to handle everything from billing, workforce management, to fleet routing. Enghouse also has a debt free balance sheet and ample cash that it supplements with significant free cash flow generation to acquire companies that share similar characteristics—mission critical software in niche markets with high barriers to entry. Enghouse announced fourth quarter results in mid-December that came in below expectations, with EBITDA falling 6% year over year. However, we believe much of the decline can be attributed to revenue normalization at LifeSize, a business acquired out of bankruptcy in late 2023. Although the LifeSize business has declined, the investment is tracking to a cash-on-cash payback of just 2-3 years, ahead of management’s target of 5-6 years, which we think showcases Enghouse’s skill as a prudent capital allocator and its ability to extract value from underperforming assets. Moreover, the company grew its free cash flow in 4Q24 by 11% year over year while net cash hit a record high. We believe Enghouse’s strong net cash/no debt balance sheet, recurring revenue profile, and attractive valuation provide ample downside protection.

The top contributor was U.K.-based Marlowe, a B2B company that provides a range of critical safety and compliance services, including fire safety and security, water treatment, air testing and other environmental services. These services are not only essential for operational safety but are also mandated by law, providing a predictable stream of recurring revenues (75% of total) for the company. Marlowe is also a leading consolidator of its large and fragmented addressable markets: despite being a top three player in each of its segments, Marlowe still has only 3-4% market share, providing ample long-term runway for growth. Its stock rallied in the first half of the year following the conclusion of its strategic review. In February, Marlowe announced that a private equity buyer had agreed to acquire its Governance, Risk & Compliance (“GRC”) segment, which accounted for approximately 40% of Group EBITDA. In September, Marlowe’s share price further benefited from the announcement that Marlowe planned to demerge and separately list its Occupational Health division, trading as Optima Health, a move that will allow both businesses to focus on their respective end-markets. The move is also expected to crystallize shareholder value because Marlowe is now a pure testing, inspection, and certification business that is more directly comparable to publicly listed global peers who trade at significant valuation premiums. With enhanced focus and a net cash balance sheet, we believe that Marlowe remains well-positioned to generate attractive returns.

Maruwa manufactures niche ceramic packaging materials found inside various high-end electronics like EVs, data center servers, and 5G base stations. Manufacturers rely on Maruwa’s high-performance ceramics to transfer away the heat emitted from semiconductor chips as a byproduct of normal operation. Maruwa provides the enduring benefit of ensuring that its end-customers’ products can function without the risk of power failure. The product is a low cost, mission critical component where customers do not prioritize being price aggressive. Once adopted, Maruwa can expect to generate revenue for the entirety of product life, as its products are designed into the customers’ product. Maruwa’s long-term secular growth opportunities are supported by broad electrification trends, which will increasingly require bespoke solutions to manage the thermal energy released as more and more power semiconductor chips get packed into a wide range of products that operate on higher voltage, from EVs, data centers, wind turbines, and industrial motors. Its shares rose some 60% during the period of our ownership in 2024, a performance likely explained by the wider market increasingly valuing Maruwa as a high-quality business exposed to multiple growth drivers such as AI servers and EV. Over the past 10 years to fiscal year March 2023-24, Maruwa’s return on net operating assets expanded from 13% to 35%, driven by an expansion in EBIT margins from 11% to 32%. During this period, revenue grew by a 6%+ compound annual growth rate (“CAGR”) and operating profits grew by 18%+ CAGR. The company’s balance sheet remains rock solid, with tangible equity accounting for 89% of its assets. We believe the growth runway for the business remains highly attractive.

Listed in Sweden, Karnov Group is the “Bloomberg of legal information services,” providing data in the areas of legal, tax, and accounting to law firms, tax and accounting firms, corporates, and the public sector. The company generates 85% recurring revenues from ongoing subscription fees, and, due to the low-cost but mission-critical nature of its data, Karnov enjoys very low customer churn of just 3% annually. After having gained more than 30% in local currency terms in May, when the company was subject to a takeover bid by a consortium of investors at a 28% premium to the prevailing price, Karnov’s shares gave up some of these gains in mid-June when the deal fell through. While we trimmed our position in May, we continue to have conviction in the long-term prospects for Karnov and thus remain happy shareholders in the business.

Listed in Poland, Asseco Poland one of Europe’s leading providers of proprietary IT software and services, with a focus on Central & Eastern Europe (CEE), where it serves major financial institutions, public administration, and telco/utilities customers. Asseco Poland also owns a stake in Formula Systems, an Israeli Nasdaq-listed holding company which in turn owns three listed software businesses, including Sapiens, a leading global provider of IT for the insurance industry. Asseco’s shares initially benefited from continued business resilience and earnings growth in 2024. Most recently, its shares rose on results reported in late November that saw operating profits for the first three quarters of the year grow by 11% on a constant currency basis, with a significant margin uptick in the latest quarter that came from a better sales mix and improved cost planning for new projects. Moreover, the company noted that it expected to finish the year strong, underpinned by a healthy order backlog. Asseco continues to supplement organic growth through disciplined acquisitions, having made 11 acquisitions in 2024. It is also monitoring additional market opportunities, including the potential acquisition of part of Comarch, one of its key competitors in Poland.

Based in Switzerland, VZ Holding is a leading private wealth manager for high-net-worth individuals close to retirement. VZ Holding serves individuals who have complicated financial and estate planning needs through a comprehensive set of services ranging from portfolio management, banking, mortgages to insurance coverage. We were initially attracted to VZ Holding as it sells its services to a diversified base of 75,000 clients via a technical sales relationship where its consultants create tailor-made financial plans and build longstanding relationships that usually end only when the client passes away. Both its shares and earnings multiple re-rated sharply in 2024, reflecting continued earnings growth. In August, the company reported better-than-expected results for the first half of 2024, which included 18% year-over-year growth in EBIT, providing additional comfort around the market’s expectations that the company can continue to post double-digit growth for at least the next 7-10 years. VZ’s reputation as a reliably growing and low-risk business has also attracted greater attention from the sell-side, with a notable pan-European broker initiating coverage during the year. While we retain conviction in VZ as a long-term compounder, we reduced our position in 2024 in response to the company’s more demanding valuation.

The portfolio’s disadvantage versus the MSCI ACWI Small Cap was attributable to stock selection in 2024. At the sector level, stock selection hurt most in the Industrials, Health Care, and Financials sectors. In the third sector, the portfolio’s lower weighting also hindered relative results. Conversely, our much lower exposure and, to a lesser extent, stock selection helped in Real Estate, as did stock selection in Communication Services and our much lower weighting in Consumer Discretionary.

Current Outlook and Positioning

Performance challenges notwithstanding, we were pleased with the operational results delivered by our companies, in particular during 4Q24, which we believe underscore their underlying business quality and resilience, including returns on invested capital that are in aggregate nearly 40% higher than that of the benchmark, near-zero net debt balance sheets, and 10%+ annualized revenue growth. The fourth quarter also marked the ninth consecutive quarter of take-private activity in the Fund, with financial and strategic buyers continuing to recognize the significant valuation dislocations in the portfolio. The number of holdings involved in take-private activity over the past nine quarters surpasses the total number from the previous decade, representing roughly one-fifth of the current number of holdings. Looking ahead to 2025, the case for international small caps has, in our view, never been stronger. The prevailing sentiment that U.S. stocks are the “only assets worth owning” is reflected in their dominance—comprising approximately two-thirds of the MSCI AC World Index—alongside record-high valuations and rising concentration in a handful of mega-cap U.S. companies. These factors create lofty expectations that, when unmet, often signal a regime change, with the next big opportunity emerging elsewhere. Undoubtedly, there remain various uncertainties, ranging from Fed policy to geopolitical developments to the impact President Trump will have on global trade. However, we believe a quality strategy is best suited to navigate such an environment.

Average Annual Total Returns Through 12/31/24 (%)

Annual Operating Expenses: Gross 1.61 Net 1.44

¹ Not annualized.

Important Performance and Disclosure Information