Fund Performance

Royce Micro-Cap Fund advanced an impressive 45.4% versus a gain of 27.5% for its micro-cap benchmark, the Russell Microcap Index. The Fund also outperformed the micro-cap index for the 1-, 3-, 5-, 10-, and 25-year periods ended 6/30/26 while also beating the small-cap Russell 2000 Index for the year-to-date, 1-, 3-, 5-, 10-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/26. (Returns for the Russell Microcap go back to 6/30/00). In addition, the Fund rose 120.8% from 4/8/25-6/30/26 versus respective gains of 108.4% and 74.5% for the Russell Microcap and Russell 2000. The Fund’s average annual total return since inception was 11.7%.

What Worked… And What Didn’t

All of the Fund’s 10 equity sectors finished the first half of 2026 with positive contributions. Information Technology led by a wide margin, followed by Industrials (which also contributed meaningfully) and Consumer Discretionary. The smallest contributions came from the Fund’s three lowest portfolio weights, Real Estate, Consumer Staples, and Communication Services. At the industry level, three areas from Information Technology—semiconductors & semiconductor equipment, electronic equipment, instruments & components, and communications equipment—contributed most for the year-to-date period, while software (Information Technology), pharmaceuticals (Health Care), and health care equipment & supplies (Health Care) were the largest detractors.

The Fund’s top five contributors at the position level are all playing important roles in the Artificial Intelligence (AI) infrastructure buildout. At the top of the list is Ichor Holdings, which designs and manufactures gas and chemical delivery systems that are critical components in semiconductor manufacturing. As a result, Ichor has been benefiting from the rapid buildout of AI-related infrastructure. Company management has also been focused on driving vertical integration into its manufacturing processes to improve Ichor’s gross margin structure. While this effort entailed some typical growing pains, the effort now seems to be on track, driving upside to earnings expectations.

Ultra Clean Holdings develops and supplies critical subsystems, components, parts, and related services to the semiconductor industry. While near-term wafer fab equipment shipments remain constrained by cleanroom growth, the capacity cycle underway is providing unprecedented demand visibility in an environment of increased deposition (which adds material onto a chip wafer) and etch (which selectively removes material) share of capital spending and the buildout of new computing loads. We continue to believe Ultra Clean is a differentiated business model with attractive and durable reinvestment opportunities.

Optical semiconductor manufacturer Applied Optoelectronics has been a beneficiary of the buildout of AI Infrastructure thanks to its fast growing demand for optical components. The company has also benefited from its commitment to rapidly raising the technology curve by introducing more advanced high-end optical components, which is allowing it to gain market share with leading AI data center customers.

Vishay Precision Group provides advanced precision measuring and sensing technologies across a wide range of industries. Vishay’s technology finds itself at the intersection of numerous critical technological trends. As with many of the portfolio’s top performers in the year’s first half, the company’s resistors have applications in semiconductor manufacturing associated with the AI and fiber optic buildout. However, Vishay’s products also provide critical technology for military and space applications, as well as increasingly for advanced robotics.

Semiconductor test and measurement company Cohu is well positioned to benefit from testing demand associated with High Performance Computing that underlies AI infrastructure while also generating significant revenues from automotive and industrial applications. These last two areas appear to be recovering from something of a cyclical downturn. Growth has been reaccelerating, which we expect to lead to increasing purchases of test and handling equipment. Finally, Cohu has a high recurring revenue mix (test equipment uses disposable contactors in its process), and a pristine balance sheet that we think positions it well for future growth.

The Fund’s top detractor at the position level in 2026’s first half was Artivion, which produces medical equipment targeting cardiovascular procedures. Its most recent quarter was generally mixed. Management guided 2026 earnings lower, which is always challenging for higher multiple med-tech companies. The shortfall was primarily related to slower than expected regulatory approvals of a few new products, as well as the upfront costs associated with the rollout of other new products. Due to the fact that these are typical risks for smaller-cap med-tech companies, we expect them to be overcome in the intermediate term. Meanwhile, we believe Artivion has an exciting pipeline of new products, which we expect to drive growth for the foreseeable future.

PAR Technology is a pure-play restaurant technology provider offering unified, cloud-native solution for front- and back-of-house operations encompassing point-of-sale, loyalty management, digital ordering, and operations analytics. With these modern capabilities, the company has accumulated relationships with some of the largest players in the industry, namely McDonald’s, Yum! Brands, Burger King, and Dairy Queen, at the expense of legacy players like NCR and Oracle. But increasingly advanced penetration, deflation of development costs, and recent shocks to buying decisions have overcome PAR’s recent history of stable legacy replacement cycle demand. Due to increased investment requirements in a period of increasing risk of pricing deflation, we exited the position during the second quarter.

Forward Air provides transportations services across a broad range of the trucking industry. Unfortunately and unexpectedly, the company announced during the second quarter that a large customer representing 10% of its business would be leaving for another carrier. Given the company’s somewhat levered balance sheet, we decided to exit our position on the news and use the capital to pursue what we see as more promising long-term opportunities.

PowerFleet is a technology company that provides AI-powered fleet management and asset tracking software that helps businesses monitor and manage vehicles, drivers, trailers, forklifts, containers, and other mobile assets using connected sensors (IoT), GPS, cameras, and cloud software. Its shares have been declining, yet the company is continuing to execute on integrating prior transformational acquisitions. PowerFleet has also realized growth in revenues and ahead-of-plan cost savings. We attribute the decline to a still somewhat leveraged balance sheet, market skepticism around the sustainability of growth, and management guidance for fiscal 2027 revenue and earnings that we saw as conservative. This despite the fact that reported revenue, services mix, EBITDA (earnings before interest, taxes, depreciation & amortization), and contract wins have all improved. We have added to our position because we are confident that the company’s ongoing execution will demonstrate proof of sustainable organic growth, while also leading to free cash flow and deleveraging.

EVI Industries is a leading provider of laundry equipment and related services. Results for the past few quarters were negatively impacted by weather-related installation delays, which we view as a temporary situation, while also seeing a significant runway for long-term growth and therefore added to our position on weakness.

The Fund’s advantage over the Russell Microcap was mostly due to stock selection, though sector allocation decisions were also additive. At the sector level, the combination of stock selection and, to a lesser extent, a higher weighting in Information Technology had by far the biggest positive impact, followed by stock selection in Consumer Discretionary and Materials. Conversely, stock selection in Communication Services and Real Estate hurt relative results the most in the first half of 2026.

Current Positioning and Outlook

Our positioning remains broadly similar to prior quarters, and the Fund’s biggest sector weightings at the end of June were Information Technology, Industrials, and Financials, with the first two overweighted versus the Russell Microcap. On the positive side, we have seen a cooling of tensions in the Middle East, which has driven down the price of oil and helped alleviate some concern over underlying inflation trends. We did not react too strongly to the initial conflict as we expected it to be generally short lived. While the situation obviously remains quite fluid, we think a lowering of hostilities should reduce the intermediate-term risks of serious economic disruption. In any case, we do expect some variability in 2Q26 earnings results related to higher oil prices and supply chain disruptions around the Strait of Hormuz and would view these as potential buying opportunities. Importantly, recent tensions have reaffirmed in our minds that there will be meaningful changes in supply chains over the next several years. Whether via Covid disruptions or geopolitical tensions, it has become clear that companies and countries have underestimated the costs of very long supply chains. We think the shrinking of these networks and the resulting reshoring of manufacturing to the U.S. will meaningfully benefit domestically focused small- and micro-cap equities.

We also remain optimistic on the outlook for the AI buildout and the consequent improvements to economic productivity. However, the market has increasingly discounted these outcomes. As such, we have been slowly allocating capital from our technology winners into other areas of the market with more attractive valuations, including areas such as staffing companies and software that the market believes will be disintermediated by AI, but where we see opportunities for these companies to benefit. We also see cyclical opportunities in areas such as agriculture and commercial vehicles while recent medical technology valuations have also proven interesting. To some extent, we believe the market was somewhat de-risked during the second quarter. Somewhat lower geopolitical tensions were a big driver, but the market also seemed to come to terms with the expectation that interest rates might not come down as expected. Paradoxically, this expectation seems to be underpinned by a recognition that the U.S. economy remains fairly robust—which we see as a positive. That said, plenty of macro risks remain. We have a new Fed Chair with whom the market will have to become familiar, and the potential is looming for additional hostilities in the Middle East and elsewhere. Likewise, while we view AI as a key productivity enhancer, in the short term the infrastructure buildout is pressuring many commodity costs, and there remain concerns about the ultimate ROI of many data center projects. As always, we will look to take advantage of the opportunities the currently volatile environment provides.

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

Annual Operating Expenses: Gross 1.26 Net 1.24

¹ Not annualized.

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