Fund Performance

Royce Capital Fund–Small-Cap Portfolio gained 20.5% for the year-to-date period ended 6/30/26 versus a gain of 23.0% for its small-cap benchmark, the Russell 2000 Value Index, for the same period. The Fund’s average annual total return since inception (12/27/96) was 10.1%.

What Worked… And What Didn’t

Seven of the Fund’s eight equity sectors made positive contributions to performance in the first six months of 2026. Information Technology led by a wide margin, followed by Financials and Industrials, while Health Care was the only detractor. At the industry level, electronic equipment, instruments & components (Information Technology), banks (Financials), and oil, gas & consumable fuels (Energy) made the biggest positive contributions, and the biggest detractions came from pharmaceuticals (Health Care), professional services (Industrials), and health care providers & services (Health Care).

All but one of the Fund’s top five contributing stocks are benefiting from the vast amounts of money being invested in AI. The top contributor was TD SYNNEX, one of the world’s largest IT distributors and solutions aggregators. Rather than sell to consumers, the company focuses instead on being the middle party between major technology manufacturers and companies that resell, install, or manage those products for businesses. It has been benefiting from AI in several ways, including the distribution of AI hardware on a global scale; growing demand for Hyve Solutions, TD SYNNEX’s hyperscale infrastructure business; and assisting partners with the AI agents being offered by tech giants such as Microsoft and Alphabet. Flex is a contract electronics manufacturing services (“EMS”) business that designs, engineers, and manufactures products for leading technology, industrial, automotive, and healthcare companies that has been active in the AI infrastructure buildout—and is planning to divide itself into two separate publicly traded companies. Another EMS company, as well as a top contributor in both 2024 and 2025, Sanmina Corporation offers its services to a global customer base. Its 2025 acquisition of ZT Systems provided a lot of exposure to hyperscale AI servers and rack-scale systems, transforming Sanmina from a traditional EMS company into a manufacturer of AI data center hardware. Amkor Technology provides semiconductor packaging and test services. The stock outperformed the broader semiconductor industry in the first half of the year thanks in part to its expertise in advanced semiconductor packaging, which has been in high demand within the AI infrastructure area.

The primary business of top contributor Blue Bird is manufacturing school buses, including vehicles that run on electricity and propane. Its stock began to rise in February on fiscal 4Q25 results that exceeded analysts’ expectations along with an optimistic outlook for fiscal 2026, a trend that continued with strong results for fiscal 1Q26, driven in part by growth in Blue Bird’s EV backlog and the full acquisition of Micro Bird, a company that it previously had owned in a joint venture since 2009.

The Fund’s top detractor at the position level was Maximus, which provides program management and consulting services to state and local governments throughout the U.S. Its services are designed to make government operations more efficient and cost effective while also improving the quality of the services. Its stock underperformed during the first half of 2026 mostly due to a combination of sector-wide concerns and tepid investor expectations around its government services businesses, specifically with regard to a contract with the Veterans Administration, rather than any decline in its fundamentals. We added to our position through much of the year’s first half at what we thought were attractively cheap prices.

One of 2025’s top contributors, IBEX delivers tech-enabled customer-service solutions and business process outsourcing (“BPO”) for digital marketing, sales and support, and brand management. IBEX’s operating results were strong in the first six months of the year. Its shares likely fell due to fears that AI would begin to displace the BPO and call center industry. A top-ten position at the end of June, we added shares in the first half.

Molina Healthcare provides health insurance for people who receive government-sponsored healthcare benefits, focusing on low-income individuals and families through programs such as Medicaid. Its shares were pressured by large numbers of undocumented people in California skipping visits to the doctor, which caused their earnings to be contractually too high, and the state recaptured the excess. We sold the last of our shares in February.

Collegium Pharmaceutical is a specialty biopharmaceutical company that markets prescription treatments for chronic pain and ADHD. Collegium’s primary business is acquiring and developing approved or late-stage medicines where it has demonstrated commercial expertise. In March of 2026, Collegium announced it would acquire the ADHD medicine Azstarys for a high price that sent its shares downward.

CorMedix is a commercial-stage biopharmaceutical company that focuses on preventing the serious infections sometimes associated with central venous catheters, particularly for patients undergoing chronic hemodialysis. Its stock was down due to uncertainty around forward pricing on its main product, DefenCath.

The Fund’s disadvantage versus the Russell 2000 Value was attributable to stock selection in 2026’s first half—sector allocation decisions were additive. At the sector level, stock selection in Health Care hurt most, followed by our much higher weighting in Consumer Discretionary (which lagged within the index), and stock selection in Industrials. Conversely, the Fund’s lack of exposure to Utilities (the worst performing sector in the index), lower exposure to Materials, and stock selection in Energy helped relative performance the most.

Current Positioning and Outlook

Both the market and the economy are facing several risks and uncertainties. The biggest remains the war with Iran, and its day-to-day status is making global energy markets particularly volatile while also exacerbating lingering inflation. And if the war were to end relatively soon, the supply chain disruptions would take months to return to anything close to pre-war conditions. Against this backdrop, small-cap has had a massive rally for semiconductor and other AI-related stocks, which has rewarded companies regardless of their underlying quality, or lack thereof. In fact, there is a major case of FOMO around AI, with trillions being spent on AI-related CapEx, with no guarantee that there will be tangible economic or financial benefits in the months, or even years, ahead. In addition, China’s potential to offer lower-cost AI technology or services is a significant wild card. While the Fed looks likely to hold rates steady in the near term, it may raise them before the end of the year if inflation does not recede. With control of Congress at stake, the upcoming mid-term elections could be highly consequential, especially given our deeply divided electorate. Lower-income consumers continue to struggle to make ends meet, and employment is beginning to show cracks. All of this uncertainty has created several interesting opportunities within small-cap as the markets are moving around depending on the headlines. We have found discrete opportunities across several sectors and industries, including energy, professional services, retail, banks, and behavioral health as we wait for more clarity.

Average Annual Total Returns Through 06/30/26 (%)

Annual Operating Expenses: 1.18

¹ Not annualized.

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