Fund Performance

Royce SMid-Cap Total Return Fund was up 4.0% in 2025 versus a gain of 11.9% for its benchmark, Russell 2500 Index, for the same period. Relative results over longer periods were better as the Fund outperformed its benchmark for the 3-, and 5-year periods ended 12/31/25.

What Worked… and What Didn’t

Five of the portfolio’s nine equity sectors made a positive impact on calendar year performance. The sectors making the largest positive contributions were Industrials, Information Technology, and Financials while the largest negative impacts came from Materials, Consumer Discretionary, and Energy. At the industry level, trading companies & distributors (Industrials), software (Information Technology), and electronic equipment, instruments & components (Information Technology) contributed most, while specialty retail (Consumer Discretionary), containers & packaging (Materials), and life sciences tools & services (Health Care) were the biggest detractors.

FTAI Aviation is an aircraft leasing and aerospace engine maintenance and repair organization (MRO) specializing in the CFM56 engine, the workhorse powering the global aircraft fleet. In the post-Covid era, airlines have seen a significant resurgence in passenger demand, which engine OEMs (original equipment manufacturers) have struggled to meet amid quality issues with new engine families such as the LEAP and GTF. As a result, airlines are running older aircraft with legacy engines, creating significantly higher demand for aircraft engine maintenance. FTAI has benefited even more than traditional MROs, because it saves small- and mid-sized airlines significant time and money by offering a choice of buying, leasing, or exchanging engines. Importantly, FTAI has a significant cost advantage both in engine sourcing and repair, including the use of salvaged parts and cheaper after-market engine components.

FTAI shares significantly outperformed in 2025 due to robust demand for passenger flights and more importantly from strengthening its moat by acquiring a new repair facility in Rome, developing new repair capabilities, and benefiting from the FAA approval of a long-awaited critical part. FTAI also expanded its Strategic Capital Initiative (“SCI”), a joint venture with third-party investors to operate hundreds of aircraft while retaining the maintenance contract on the engines, which is allowing FTAI to build a highly predictable recurring revenue stream at wide margins in an asset-light manner. Looking ahead, FTAI’s revenues and margin look likely to expand thanks to robust underlying demand for aircraft engine maintenance, further expansion of the SCI program, and a recently announced initiative to convert old CFM-56 engines into highly sought after industrial gas turbines that are used to run large language models at data centers.

Sapiens International provides software for the core operating system of insurance companies. The company operates in a very attractive end market with strong secular growth tailwinds as insurance companies update into modern software move away from quite antiquated legacy systems. Sapiens also has idiosyncratic opportunities to drive growth and profitability through new geographies, expanding the product suite into adjacent areas, and scaling up existing operations. While these secular and idiosyncratic opportunities formed the basis of our investment in the company, we were also cognizant of the disparity between private market and public market valuations in its industry, as several competitors had been taken private at significant premiums to their trading multiples. This indeed was the ultimate outcome for Sapiens as the company was taken private at a 64% premium in December.

Coherent Corporation is an engineered materials science company that essentially makes the foundational technology that drives many secular growth trends, from OLED displays to laser cutting tools to autonomous driving (among many others). The shares outperformed in 2025 due to Coherent’s optical networking products that provide the highway on which the increased data traffic for AI flows. The company has seen unprecedented demand for their high-end optical components due to this long-term secular trend that is enabling the AI buildout. While we think that the market is largely appreciating the optical business at this point, we also think investors are overlooking the remainder of Coherent’s business that we also think has a long-term secular growth outlook and profitability. The non-networking portion of the business is currently in a trough part of the cycle, but we think there will be considerable sentiment impact when the trends in those other end-markets begin to heat up.

AerCap Holdings is the world’s largest global lessor of commercial aircraft, aircraft engines, and helicopters to commercial airlines. Early in 2025, the company reported robust demand for widebody aircraft and leasing services, driving higher lease rates and credit quality, and AerCap expects these favorable conditions to continue indefinitely. In addition, AerCap does not expect to be significantly affected by tariffs given its fixed price escalation caps with Boeing and Airbus. Instead, tariffs could serve as a potential tailwind if demand shifts towards older or less expensive aircraft. AerCap also reported strong demand for aircraft engines and boosted capital deployment for engines and helicopters. Lastly, AerCap benefited from a $1 billion recovery from insurers related to its $2.7 billon Russia-related charge, bringing total recoveries to $2.5 billion. The combination of strong underlying fundamentals and predictable long-term cash flows enables AerCap to add shareholder value through intelligent capital allocation while its shares look undervalued. AerCap also expects to repurchase $500 million worth of its shares in 2025 and $800m in 2026.

The business of futures commission merchant, Marex Group got a boost from heightened volatility in many of the world’s capital markets and economies as uncertainty has been creating a greater need for clients to keep hedging and trading volumes high. This uncertainty has mainly been driven by U.S. tariffs, which resulted in the VIX (volatility index) reaching 5-year highs earlier this year. Marex is also a big inorganic grower, and the more favorable M&A environment has created opportunities for the company to do highly accretive deals. In addition, the company has benefited from elevated interest rates, as Marex invests a large amount of client cash in U.S. Treasuries and other fixed income assets. Finally, an oversubscribed April follow-on offering heavily increased the free float of the shares while private equity investors continue to exit the name, which ultimately removes another overhang.

Home and personal care products provider Bath & Body Works has stores across the U.S. as well as a growing international presence. An unexpected CEO transition has been weighing on the shares, while concerns around consumer spending—particularly the middle-income consumers that the company targets—have also hurt the stock. We note that Bath & Body Works could be a tariff winner, as most of its products are sourced and made in the U.S. However, we began trimming our stake in the third quarter. In August, the company reported a significant year-over-year quarterly earnings miss that was followed by lowered earning guidance in November’s earnings report, due largely to ongoing sluggish demand among middle-income consumers.

Graphic Packaging Holding Company offers paperboard packaging solutions to multinational beverage and consumer products companies, including folding cartons for frozen and non-frozen food and beverage products. Its stock continues to experience muted, though not bad, fundamentals owing to a weaker spending environment at the consumer level, specifically for packaged foods and beer, which has led to several guidance cuts. There has also been turnover at the CEO and CFO level. Given the changes in the c-suite and continued soft demand, we began reducing our position in September.

Kyndryl Holdings is the world’s largest IT infrastructure services provider, involved in 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. The company endured a raft of bad news in 2025, including a few missed revenue expectations, inconsistent top-line growth (even as profitability improved), mixed guidance, and more cautious analyst views, all of which drove investors to sell.

KBR has two businesses, government services and technology solutions. Negative sentiment surrounding DOGE, despite the fact that DOGE did not ultimately impact the underlying demand for KBR’s services, hurt the stock’s performance in 2025. This same segment lost a large and highly visible contract in 2025, though it was a contract at significantly lower-than-company-average margins. In other words, the loss dented KBR’s track record but did not have a significant effect on profitability. The technology solutions business, which has significant energy exposure in both green and legacy forms, also saw slower growth in 2025. We remain optimistic, however, about the company’s ability to execute despite some missteps in 2025 and are encouraged by the announcement that KBR will be splitting these two segments into separate firms, a move that we think will allow the market to more appropriately value the high quality of the technology business.

AptarGroup designs, manufactures, and markets pumps, dispensing closures, and aerosol valves used for fragrance and cosmetics, personal care, pharmaceuticals, household and industrial, and food products. The stock was weak on difficult comparisons due to a highly profitable product in the healthcare space seeing a normalization in demand patterns. This normalization also weighed on the company’s outlook, but we view it as a temporary issue. We see AptarGroup’s healthcare packaging business as a gem with a bright future over the medium- to long-term, and thus our conviction in AptarGroup remains high.

The Fund’s disadvantage versus the Russell 2500 in 2025 came from stock selection. At the sector level, stock selection in Materials hurt most by far, mostly due to the share price struggles for Graphic Packaging Holdings and AptarGroup. Both stock selection and a much lower weighting in Health Care also hurt, largely due to our lack of exposure to the index’s top-performing biotechnology industry, while stock selection in Consumer Discretionary also detracted meaningfully. Conversely, stock selection and our lower weighting in Consumer Staples (the worst performer in the Russell 2500) helped the most, followed by stock selection in Industrials and our substantially lower exposure to Real Estate.

Current Positioning and Outlook

We believe that both SMid-cap quality and value are poised for meaningful rebounds in 2026. 2025’s returns, particularly off the April lows, were driven primarily by lower quality, speculative stocks, along with anything with an obvious connection to the AI boom. Low quality cycles tend to average about 12 months, suggesting that a regime shift is likely. Additionally, more “traditional” businesses models—those that have healthy margins, generate free cash flow, grow modestly, and have strong, self-funding balance sheets that also trade at attractive valuations (i.e., quality value stocks)—should recapture the interest of investors as the junk rally fizzles. We see businesses in sectors such as Consumer Staples and in industries like packaging, business services, and insurance doing well while also seeing the AI theme broadening from (mostly) CapEx related models to benefit companies that can commercialize AI applications to grow their businesses and/or companies that will see margin improvement by leveraging AI tools. The long, dark winter of SMid-Cap underperformance has been exhaustively documented. However, we think 2026 could be the year that SMid-Caps reassert themselves. We think the most likely path to outperformance is one in which economic growth accelerates, in part driven by stimulus coming from Washington that could benefit both businesses and consumers, particularly those in the lower half of the income distribution. Should this occur, we’d likely see more widespread economic growth, benefiting a broader array of industries from banks (thanks to loan growth and healthy credit) to select areas in Industrials (due to onshoring and solid general growth) and Consumer Discretionary. The earnings growth of SMid-Caps, already expected to beat large-caps in 2026, would likely accelerate further. A related broadening of U.S. equity market returns also seems likely, in stark contrast to the unprecedented narrow market leadership of the last few years. Historically, when this happens, SMid-Caps have beaten large-caps most of the time and have done so by healthy margins. Of course, narratives, as well as fundamentals, can shift quickly and unexpectedly--and we are prepared to capitalize on opportunities regardless of the macroeconomic backdrop.

Average Annual Total Returns Through 12/31/25 (%)

Annual Operating Expenses: Gross 1.56 Net 1.34

¹ Not annualized.

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