Fund Performance

Royce Small-Cap Total Return Fund rose 10.0% in 2024, outpacing the Russell 2000 Value Index, which was up 8.1% for the same period. The Fund also beat 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 outperforming the Russell 2000 Index for each of these periods other than the 1- and 15-year spans. The Fund’s average annual total return since inception was 10.3%. We remain very pleased with the Fund’s results—and especially since Joe Hintz and Jag Sriram joined the team.

What Worked… And What Didn’t

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. 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).

The Fund’s top contributor at the position level 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.

FTAI Aviation provides maintenance, repair, and exchange of CFM56 and V2500 aircraft engines, the workhorses of the global aircraft fleet, to smaller airlines globally. FTAI also leases used aircraft and spare engines to airlines. Key aspects of FTAI’s business model have been its ability to deliver a better mousetrap (lease/sale/exchange; faster repairs; no negative surprises), have lower costs than its competitors, and operate in an asset-light manner through partnerships with Lockheed Martin, Chrome Alloy, AAR, Pratt & Whitney, et al. Contributing to its notable performance in 2024 were the market’s recognition of the tight supply of aircraft engines, FTAI’s growth runway as it closed deals with Latam Airlines and Pratt & Whitney, a burgeoning cost advantage after FTAI purchased its management fee agreement and a key maintenance facility in Montreal, and FAA approval for critical aftermarket engine parts.

Coherent is an engineered materials and laser technology company. While its offerings cover many different types of products and end markets, we see as producers of the foundational technologies that enable many technology growth trends, including electric vehicles, accelerating broadband speeds and capacity, autonomous driving, advanced display technologies, and semiconductor capital equipment, among others. One area that has been driving the company’s most recent positive financial results is its datacom transceivers offering, essentially selling the lasers that send optical communications across fiber channels. The datacom networking space has been experiencing unprecedented demand due to AI computer power driving massive expansion of bandwidth requirements. While this was the main contributor to the stock’s outperformance in 2024, the market also started to price in the future potential of many exciting strategic initiatives announced by Coherent’s new CEO, which should drive fundamental growth in addition to the overall end market growth.

Kyndryl Holdings is the world’s largest IT infrastructure services provider, which involves keeping the mission-critical IT systems, data centers, and IT networks of large enterprises such as banks, airlines, and retailers, up and running in a secure manner on a 24x7 basis. Throughout most of its history, Kyndryl was operated as a loss-making cost center that existed to sell IBM hardware and/or software. Since being spun off from IBM in November 2021, however, Kyndryl has adroitly balanced its legacy IBM business while offering customers more advanced technology through partnerships with Google, Amazon Web Services, and Microsoft. Its shares were helped in 2024 by stable demand across geographies and effective execution on new products and automation tools, and the renegotiation of loss-making contracts). Kyndyl also benefited from execution issues at key competitors DXC and Atos, sell-side visibility into Kyndryl’s medium-term free cash flow generation, and the initiation of a $300 million share buyback in November.

Tel Aviv Stock Exchange operates Israel’s only stock exchange and provides trading services for stocks, mutual funds, corporate and government bonds, short-term T-bills, and index and currency options. A key element of TASE’s business model is that trading commissions only account for 38% of revenue, with the remainder coming from listing fees and annual levies (21%), clearing/custodial fees (19%), and data distribution fees (21%). Despite Israel’s war against Hamas and Lebanon and a weak environment for IPOs/secondary equity offerings, the stock delivered strong returns in 2024 due to robust demand for Treasury Bills, corporate bonds, and government bond issuance, as well as from the exchange’s derivatives business, which benefited from increased volatility, and the securing of regulatory approval for bringing pricing in line with global peers.

The top detractor was Teradata Corporation, a leading data warehouse company that sells within the larger database software ecosystem. Starting in 2020, new executive leadership at the firm had helped to dramatically shift the trajectory of the company, pivoting R&D dollars into the much needed area of cloud software development and away from its legacy foothold in on-premise data centers. This shift ultimately led the company to dramatic growth in its cloud-based SaaS (software as a service) revenues in the ensuing years. Unfortunately, however, cloud growth decelerated dramatically in 2024, and both short- and long-term guidance from the company was massively reduced. It also appears that Teradata has been having trouble changing the market perception of its product, which has led to reduced selling effectiveness. This change in operational execution led the shares to underperform in 2024, and was extreme enough to cause us to exit our position.

Helen of Troy is a consumer company that owns and operates a variety of consumer durable brands ranging from HydroFlask to Osprey backpacks to Oxo kitchen goods. A major beneficiary of the pandemic across most of its product categories, the company then experienced a post-Covid “hangover,” which weighed on results and stock price. We felt the business would normalize, which has generally proved to be correct. However, the pandemic masked an underinvestment in the brands, which, when we realized it, broke our thesis and led to us exit the position.

OneWater Marine is a marine retailer with 96 dealership locations in the Southeast, Gulf Coast, Mid-Atlantic and Northeast U.S., as well as a distributor of marine-related parts and accessories. As a seller of a highly discretionary product, albeit one targeted at higher-end consumers, the company is exposed to macroeconomic factors and consumer sentiment, which have been choppy over the past three quarters. In addition, buyers typically finance more than 75% of new boat purchases, which makes OneWater sensitive to interest rate changes. Its business was adversely impacted by Hurricanes Helene and Milton given their significant store footprint in the Gulf Coast region, which led management to slash earnings per share guidance for fiscal 2025 by 45% and in turn caused its stock to underperform in 2024. In response to these developments, OneWater has taken cost actions and continues to maintain a conservative inventory position as it navigates through this challenging market.

Shutterstock is a leading online marketplace for stock content across multiple media, from photos to videos, from 3D content to audio. The advent of Generative AI (“Gen AI”) has brought ample disruption, both positive and negative, to this particular industry in the past two years. The company has enjoyed success in sizable data deals with the creators of the large language models that power Gen AI, with Shutterstock selling content data in an ethical manner that compensates content creators, with the ultimate customers being large tech companies. However, the traditional content marketplace business has seen weakness extend throughout 2024, while the market had been hoping for a rebound in that business. The ongoing slump in its content business fueled concerns that Gen AI will undermine demand over the long run, which in turn caused the shares to underperform in 2024.

Valley National Bancorp is a regional bank headquartered in New Jersey, with significant operations in Florida. The company was in the crosshairs of the market’s ire in 2024 owing to their large concentration in the still troubled commercial real estate market. At the time Valley National’s stock was weak, many other bank stocks were, as well. We believed that we could find business models with comparable quality Valley National, but with less risk, even if only headline risk. As such, the team exited our position, using it as a source of funds to purchase other bank holdings in 2024.

In 2024, both stock selection and sector allocation decisions contributed to the Fund’s performance edge over the Russell 2000 Value, 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.

Current Positioning and Outlook

The Fund finished 2024 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 market peak on 11/8/21 to the trough on 10/27/23, Total Return was down -14.2% versus a decline of -25.6% for the Russell 2000 Value—a downside capture ratio of 55.5%. Going back to 1998, Total 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 that our portfolio of high-quality businesses trading at undemanding valuations is capable of generating solid returns, regardless of the macroeconomic backdrop.

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

Annual Operating Expenses: 1.26

¹ Not annualized.

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