Fund Performance

Royce Small-Cap Opportunity Fund increased 10.3% in 2024, beating the Russell 2000 Value Index, which was up 8.1% for the same period. The Fund also outperformed both the Russell 2000 Value and the Russell 2000 for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 12/31/24. The Fund’s average annual total return since inception was 11.8%.

What Worked… and What Didn’t

Eight of the portfolio’s 10 equity sectors had a positive effect on calendar year performance, with Industrials, Information Technology, and Energy making the largest positive contributions. Consumer Discretionary and Real Estate detracted while Consumer Staples made the smallest contribution. At the industry level, construction & engineering (Industrials), energy equipment & services (Energy), and aerospace & defense (Industrials) contributed most, while specialty retail (Consumer Discretionary), automobile components (Consumer Discretionary), and professional services (Industrials) were the biggest detractors.

The top contributor at the position level was Solaris Energy Infrastructure, which we initially bought when it was an oil field services company with one line of business, selling proppant management and sand loading systems to the oil and gas industry. The company then acquired Mobile Energy Rentals in July 2024 (MER) for a very attractive price. Mobile Energy Rentals sells mobile power systems for applications where reliability is required, such as for data centers and other industrial uses. This acquisition transformed the company, and as the year went on the market noticed as its shares nearly tripled in price.

Applied Optoelectronics manufactures optical products and components. Its stock rose high in 2023 on the back of a large contract win with Microsoft, which coincided with market enthusiasm for AI opportunities. The company should continue to benefit from the rapid adoption of Artificial Intelligence (AI), and the associated demand for data center build outs. Applied Optoelectronics has relationships with many of the hyperscale data center companies, which should drive strong demand in the intermediate term. In addition, about 30% of its business is associated with cable broadband networks, an area that has been depressed for the past few years. We see that business accelerating in the intermediate term, which should provide a second source of revenue and earnings growth.

Carpenter Technologies makes specialty nickel and titanium based alloys, which are primarily used by the aerospace & defense industry, as well as gas turbines for power generation and medical implants. Its stock has benefited from demand outpacing supply in the industry as well as Carpenter’s unique asset base, which makes it one of the few global suppliers that can provide the metal used in jet engines and gas fired turbines. While Carpenter is a supplier to Boeing and Airbus—which have been plagued with production problems for new aircraft—it also sells into the aftermarket, where demand has been high as older aircraft fly longer and thus need more maintenance and overhauls. We think that Carpenter’s unique specialty metal production assets and multi-year backlog may be setting the stage for record high future earnings.

Primoris Services offers specialty contracting and critical infrastructure services North America, providing a wide range of specialty construction services, including renewable energy production, electric & natural gas industrial engineering & construction services, and power generation services. Demand for these services has been robust, and the outlook looks promising for years to come. The company has exceeded earnings expectations throughout the year and its shares have reacted favorably.

American Superconductor supplies advanced technologies designed to enhance energy efficiency across power grids, wind power, and military applications. As the market has increasingly recognized the significant power needs associated with AI and EVs, it has come to see the company as a potentially significant supplier into that energy ecosystem. Increased demand for its products has driven sales to the point where the company is break even from a cash flow perspective. We see this as one of those micro-cap companies at the center of key macroeconomic trends around power efficiency, which should continue to benefit its shares.

Stoneridge designs and manufactures engineered electrical and electronic components, modules, and systems primarily for the automotive, medium and heavy duty truck, and agricultural vehicle markets. Its shares underperformed due to continued end market weakness in its core heavy truck transportation and agriculture end markets. However, Stoneridge continues to advance its new technology offerings to reduce cost, increase safety, and lower insurance costs for its customers, but end market recovery is likely necessary for the stock to move higher.

TTEC Holdings provides customer experience technology and services to large enterprises primarily in the U.S. We think TTEC suffers from investors’ perception that its business will be disintermediated by Artificial Intelligence, which hurt its valuation multiple, though we believe that it will be a beneficiary of AI and that it is in an advantaged position to help its customers adopt AI within their customer experience function. Because TTEC’s valuation did not seem to adequately reflect its long-term growth and margin opportunity, we used the volatility in its stock price to opportunistically add to our position at what we thought were very attractive prices through August 2024. In September 2024, TTEC received an offer to be taken private by its founder and CEO at which time we began exiting our position. (This is emblematic of what occasionally happens to stocks in our portfolio when they fall to a price that is too cheap relative to their long-term fundamentals.)

Beyond is an online retailer, once called Overstock.com, that is in the process of transforming itself after the company bought certain assets from Bed, Bath and Beyond when the latter was in bankruptcy. The company has a new, highly competent management team led by a well-regarded CEO. Market enthusiasm and expectations looked too high coming into 2024, and its shares sold off when it became apparent that the turnaround effort was going to take some time. We sold most of our position but have recently been slowly adding again as we feel its shares have been overly punished.

Commercial Vehicle Group provides cab and electrical systems, as well as after market systems for various heavy duty and medium duty trucks. A new management team is in the process of restructuring the business, but as is often the case, this is taking longer than initially expected and has been compounded by a downturn in the commercial vehicle market. While the company does have some debt, a recent restructuring effort gave us the confidence to maintain our position.

Hudson Technologies provides HVAC products and services, including refrigerants, chiller decontamination, and refrigerant recovery and system conversions. The industry is in the process of switching to new, more environmentally friendly refrigerants, which has historically been positive for the pricing of recycled products. However, there has proven to be more virgin inventory of the product in the process of being phased out, which has led to delays in the pricing environment that formed the basis of our investment case. We exited our position as we wait for the pricing dynamic of recycled refrigerants to improve.

The Fund’s advantage over the Russell 2000 Value was almost entirely the result of stock selection in 2024. At the sector level, stock selection helped most in Energy and Industrials (where our overweight was also additive, while in Information Technology our much larger exposure and stock selection gave us an edge. Conversely, stock selection and, to a much lower degree, our higher weighting in Consumer Discretionary hurt relative results, as did our substantially lower exposure to Financials and stock picking in Materials.

Current Positioning and Outlook

The market’s impressive gains in November were driven by the notion that President-elect Trump’s victory would usher in an “America First” era as well as fewer regulations on businesses. This rally then reversed course in December as the uncertainty of what can actually be accomplished in Washington, combined with Fed Chair Powell’s hawkish press conference, began to weigh on market sentiment. While the devil is in the details regarding tariffs, regulatory relief, and actual policy implementation, we remain optimistic because the economy is generally healthy and inflation continues to recede. While reduced expectations for Fed rate cuts and the rise in 10-year Treasury yields have also tamped down sentiment, we remain constructive on our portfolio holdings, particularly technology and industrial companies while also adding to our domestic energy exposure, especially as it relates to natural gas and power generation. While ample uncertainty remains as we await the new administration, management teams have generally been positive about potential growth in 2025. Less regulatory interference should lift deal making activity, and we would expect this to benefit our portfolio, which has often held M&A takeover targets. We also hold several companies benefiting from increased spending by both the government and private sector, driven by the ongoing need to maintain and grow U.S. infrastructure, boost our chip-making capabilities, and re-shore manufacturing across several industries. After a difficult year for many Health Care companies, we continue to find new ideas with company-specific catalysts in the value-based care sector, where technology enabled process improvements are driving better outcomes at lower cost, a trend we suspect has a multi-year tailwind. In summary, we find many reasons to be bullish on select small-cap stocks in 2025.

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

Annual Operating Expenses: 1.23

¹ Not annualized.

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