Fund Performance

Royce Dividend Value Fund gained 6.5% for the year-to-date period ended 6/30/24, outperforming its benchmark, the Russell 2500 Index, which was up 2.3% for the same period. The portfolio also beat the benchmark for the 1-, 3-, and 5-year periods ended 6/30/24.

What Worked... and What Didn’t

Five of the portfolio’s eight sectors made a positive impact on year-to-date performance, led by Industrials, Financials, and Materials while the largest negative impacts came from Consumer Discretionary, Real Estate, and Information Technology. At the industry level, trading companies & distributors, construction & engineering (both in Industrials), and capital markets (Financials) contributed most, while machinery (Industrials), chemicals (Materials), and specialty retail (Consumer Discretionary) were the largest detractors in 2024’s first half.

The portfolio’s top contributor at the position level for the year-to-date period was Comfort Systems USA, which provides heating, ventilation, and air conditioning system installation, maintenance, repair, and replacement services. Its services have been in demand thanks to increased activity in data centers, life science, food and other manufacturing centers. FTAI Aviation is an aircraft engine lessor that also offers a cost-effective engine maintenance, repair, and exchange program that is eagerly sought by smaller airlines. FTAI’s shares rose largely because of strong industry fundamentals—the company beat earnings estimates for 1Q24 and announced large multi-year deals for its workhorse V2500 engines with LATAM Airlines Chile and International Aero Engines—increased earnings power from the internalization of a management agreement, and the purchase of a key manufacturing facility from Lockheed Martin.

HEICO Corporation is an aviation, aerospace, defense and electronics company that focuses on niche markets. In February, the company reported a hefty increase in net income, operating income, and net sales, thanks in large part to the strength of its commercial aerospace segment, which boasts fourteen consecutive quarters of sequential growth in net sales. Investment banking company Evercore reported strong net revenues, advised on five of the fifteen largest global transactions, such as acquisitions and spinoffs, and saw momentum in its underwriting business, which enjoyed its highest quarterly revenues since the fourth quarter of 2021 as the equity markets experienced stronger activity levels, particularly in IPOs. Private equity specialist KKR announced strong first-quarter results in May, with double-digit growth in fee-related earnings, total operating earnings, and adjusted net income. It also grew assets under management by 13% and entered into a strategic joint venture with Healthcare Realty, a healthcare real estate investment trust, to jointly own and invest in medical outpatient facilities.

The top detractor at the position level was B3-Brasil, Bolsa, Balcao, which operates regional stock exchanges in Brazil. Trading volumes have trended downward since late 2023. That, and the fact that many investors appear to have sold or ignored the stock in the current “higher for longer” interest rate environment, help explain the poor performance of its shares. Headquartered in the U.K., Spirax Group provides thermal energy and fluid technology solutions. The company operates three related businesses: Steam Thermal Solutions, Electric Thermal Solutions, and Watson-Marlow Fluid Technology Solutions—which seeks to optimize the efficient use of resources and supports innovations in healthcare. Its business slowed in the first half as global industrial production slackened in key markets, including the U.S., Germany, and South America. One of 2023’s top contributors, Worthington Enterprises makes building products and offers heating and cooling solutions, specialized construction products, water systems, ceiling solutions, and versatile metal framing options. While its business remained solid, the company reported in December 2023 that its Consumer Products and Sustainable Energy Solutions segments had declined year-over-year. Then in March 2024, recoveries for these segments were offset by ongoing weakness in Europe and its Sustainable Energy Solutions business.

Quaker Houghton produces, develops, and markets industrial chemical products, including heat treatment, metal forming, forging, and tin plating fluids, as well as cleaners, casting lubricants, greases, ground control agents, and metal rolling oils. We see Quaker as an attractive asset light business, with recurring revenues and strong customer loyalty. Its stock performed well in 2023, rising roughly 29% as global volumes stabilized while the company was highly successful in its pricing strategies, which was most evident in its European markets. Equally important, Quaker de-leveraged further following its successful acquisition of Houghton and is now operating close to its targeted leverage model, opening up further consolidation opportunities. We therefore suspect that its stock’s underwhelming first-half of 2024 performance mostly reflects profit taking, particularly with the company facing more difficult sales growth comparisons this year in light of 2023’s successful pricing initiatives, as well as recent headwinds for the chemicals industry. USS is a Japanese company that manages used car auction facilities throughout Japan while also conducting auto auctions through satellites and providing used car information online. The market seems to have reacted negatively to a widespread stall in new car sales even as USS continues to execute and operate effectively.

The portfolio’s advantage over its benchmark was attributable to stock selection in the first half of 2024. At the sector level, stock selection, along with a smaller boost from our larger weight, helped in Industrials, while stock picking also helped meaningfully in Financials and Materials. Conversely, our significantly lower weight and, to a lesser extent, stock selection hurt relative performance in Information Technology, as did stock selection in Consumer Discretionary and a combination of much lower exposure and stock selection in Energy.

Current Positioning and Outlook

We anticipate that active managers who focus on earnings growth remain best positioned for strong performance going forward. Our outlook is rooted first in the fact that the Russell 2000 ended June with a near-record number of companies with no earnings. Second, earnings acceleration is expected to be higher for smaller companies than for large-cap businesses through the end of 2024. This encouraging earnings picture is buttressed by a growing U.S. economy that in the coming months will see more and more tangible benefits from reshoring, the CHIPS Act, and infrastructure improvements. Along with increasing recognition for the small-cap companies that are providing the ‘picks and shovels’ for AI applications, these activities should foster advantages for active small-cap managers who focus on profitable companies and other fundamental measures of financial and operational strength. Needless to say, we think our flagship Fund is very well positioned to continue outperforming the overall small- and mid-cap market in this kind of environment.

Average Annual Total Returns Through 06/30/24 (%)

Annual Operating Expenses: Gross 1.61 Net 1.34

¹ Not annualized.

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