Fund Performance

Royce Micro-Cap Trust gained 0.3% on an NAV basis and fell -1.0% on a market price basis versus a -1.8% decline for its benchmark, the Russell 2000 Index, for the year-to-date period ended 6/30/25. The Fund also outperformed its benchmark on both an NAV and market price basis for the 1-, 3-, 5-, 10-, 15-, 20-, 25-, 30-year, and since inception (12/14/93) periods ended 6/30/25.

What Worked… and What Didn’t

Positive contributions came from five of the Fund’s 11 equity sectors in 2025’s first half, with the biggest coming from Industrials, Materials, and Financials. The biggest detractions came from Health Care, Information Technology, and Energy. At the industry level, the top contributors were construction & engineering (Industrials), metals & mining (Materials), and capital markets (Financials) while the top detractors were life sciences tools & services (Health Care), semiconductors & semiconductor equipment (Information Technology) and financial services (Financials).

The Fund’s top contributor at the position level was nLIGHT, which builds high-power semiconductor and fiber laser systems for industrial metal processing and, increasingly, directed energy weapons. First-quarter revenue grew 16% year-over-year while Aerospace & Defense sales jumped more than 150%, reflecting ramp ups on the U.S. Army’s HELSI/DE MSHORAD programs and a growing pipeline of high-energy laser components. Management guided to sequential Aerospace & Defense growth and better mix driven gross margins, and analysts highlighted the move as the “first clear proof point” that nLIGHT’s multiyear defense design wins are translating into volume shipments. With few pureplay directed energy suppliers listed, investors are paying up for nLIGHT’s unique exposure to Pentagon laser budgets and AI driven industrial automation, driving multiple expansion on top of improving fundamentals.

Headquartered in Canada, Sprott is a global alternative asset manager specializing in precious metals and real assets. The company operates a diversified platform of exchange-listed products, private equity funds, and lending strategies focused on gold, uranium, and energy transition metals. Sprott’s shares advanced in the first half of 2025 as gold prices broke out to record highs amid elevated geopolitical risk, central bank buying, and a weaker U.S. dollar. The company’s suite of physical bullion trusts and energy transition ETFs saw substantial inflows, driving strong growth in assets under management and recurring fee revenue. The firm also benefited from robust performance in its private strategies, particularly in uranium and critical minerals lending. Management continues to scale its global distribution, with new mandates secured across Europe and Asia. With strong operating leverage, a clean balance sheet, and secular tailwinds behind the resource transition, we believe Sprott remains well positioned to compound earnings across commodity cycles.

Sandstorm Gold is a precious metals royalty and streaming company that provides upfront financing primarily to gold, silver, and copper mining operators in exchange for rights to a percentage of production. Its shares benefited from increased gold prices and positive developments in Sandstorm’s mining projects, including a plan to double production by 2030. An example of the ‘urge to merge’ that is common for many micro-cap companies, the company agreed to be acquired by Royal Gold on July 7, 2025, at a premium that gave the company an enterprise value of approximately $3.6 billion.

FARO Technologies is a three-dimensional measurement, imaging, and realization solutions provider in the manufacturing, architecture, engineering and construction, operations and maintenance and public safety analytics markets. FARO delivers value to core operating processes from component and assembly inspection to surveying and large structure documentation. The company had an encouraging start to its fiscal first quarter, controlling expenses while delivering revenue within expectations. In early May, the company agreed to be acquired by AMETEK for $44 per share in cash, valuing the company at an enterprise value of approximately $920 million. We sold the last of our shares in June.

Shares of aerospace & defense supplier Astronics Corporation outperformed strongly year to date, driven by strong industry fundamentals and improvement in the company’s performance. Record new bookings, a backlog driven by tailwinds in demand for new aircraft in the commercial aerospace market, and increased defense spending globally have all set the stage for better-than-expected earnings growth at Astronics. The company’s turnaround efforts drove a significant increase in margins while earnings (and Wall Street’s) estimates have risen accordingly. Astronics remains undervalued relative to peers, and we believe the shares still offer favorable return potential despite recent strong share price performance. There have also been favorable developments in several outstanding legal challenges the company has faced, the final resolution of which would remove a significant overhang on the stock.

The Fund’s top detractor at the position level was Richardson Electronics, which designs and manufactures electronic components and engineered solutions, including power grid and microwave tubes, radiofrequency parts, green energy solutions, and customer displays for end-markets including alternative energy, communications, military, and semiconductors. The stock underperformed amid trade tension-related volatility and customer project delays that drove a sequential decline in backlog. However, Richardson grew revenues and gross profit in the fiscal third quarter while continuing to build its customer pipeline. We see the company benefiting for years to come from reshoring, reindustrialization, and the buildout of the energy grid as it increasingly delivers higher margin engineered solutions.

Open Lending is a leading provider of lending enablement and risk analytics to credit unions, regional banks, finance companies, and the captive finance companies of automotive manufacturers. With the company’s proprietary risk-based interest rate pricing models and real-time underwriting of automotive loan default insurance coverage from insurers, Open Lending enables more than 400 customers to lend to underserved near-prime and non-prime borrowers. Its shares underperformed in the first half of 2025 as the loan certification outlook worsened, and the company recognized a sizable profit share charge, factors that led to our decision to sell our position.

Ichor Holdings provides fluid delivery subsystems to semiconductor equipment manufacturers. The stock was negatively affected by the unexpectedly severe and capricious tariff announcements given its position in a cyclical industry that is at the forefront of some of the more contentious trade issues. We ultimately believe these tariff issues will be resolved in a manageable manner and see Ichor as well positioned to benefit from the ongoing need for semiconductors.

Repay Holdings enables integrated, vertical-specific payment solutions spanning ACH, credit, debit, virtual card, and other payment automation solutions to end markets including automotive finance, commercial lending, mortgage servicing, and personal lending. Its shares were down in the first half of 2025 as the company digested prior year customer losses, confronted elevated economic uncertainty in its consumer end markets, and concluded its strategic review without consummating a transaction. Instead, Repay began an organic growth investment cycle focused on enhanced direct selling resources, broadening independent software vendor relationships, and new payment monetization initiatives.

The Fund’s fifth-biggest detractor was Powerfleet, which provides fleet management services for logistics, industrial, and vehicle applications. The company has been seeing some weakness in sales associated with macroeconomic concerns. While its pipeline and backlog remain solid, the company has been seeing order push-ups and an extended sales cycle. Rooted in our conviction that the company’s 2024 merger with Mix Telematics has provided meaningful scale benefits that Powerfleet will harvest over the next several years, we maintained a position despite near-term tariff concerns.

The Fund’s relative advantage over the Russell 2000 was attributable to stock selection and sector allocation, with the former making a larger impact. At the sector level, a larger weighting and stock selection contributed the most in Industrials and Materials, followed by stock selection and a lower weighting in Consumer Discretionary. Conversely, stock selection in Health Care, stock selection and a higher weighting in Information Technology, and very low exposure and stock selection in Utilities hurt relative results most in the first half of 2025.

Current Positioning and Outlook

The first half of 2025 is perhaps best characterized by the Grateful Dead: What a long, strange trip it’s been. After spooking the markets around tariffs on the back of Liberation Day, cooler heads in the Trump Administration appear to have helped dial back the most onerous and capricious of these levies. While a lot of uncertainty remains, there at least appears to be increased rationality around what the tariff regime will ultimately entail. This increased level of certainty helped micro-cap stocks claw back most of the -28.7% drawdown from 11/25/24-4/8/25 to finish the first half with a small loss of -1.1%. Nevertheless, we expect much of the underlying uncertainty around the impact on economic growth, Fed policy, and the inflation associated with tariffs to remain in the near term, along with heightened levels of geopolitical uncertainty.

That said, more rationality around potential tariffs has allowed the market to focus on some of the more growth friendly aspects of the current administration’s policies, including tax cuts from recently passed federal legislation. We have also begun to see the early signs of a more favorable regulatory environment in an increased pace of M&A activity, both in terms of portfolio companies being acquired, as well as portfolio companies with strong capital positions making strategic acquisitions. We have been increasing our allocations to financial services and healthcare companies in anticipation that these two areas will broadly benefit from a lighter regulatory burden. Aside from the short-term volatility, we remain constructive that the thematic drivers underlying the portfolio will persist long after recent volatility subsides. Reindustrialization, electrification, and the benefits of artificial intelligence each remain at an early stage. We continue to see many businesses with attractive competitive positions and durable growth opportunities that are well positioned to navigate this turbulent environment. As the uncertainty persists, we are seeing an expanding landscape of idiosyncratic situations at undemanding valuations that may pave the way for promising long-term returns

Average Annual Total Returns Through 06/30/25 (%)

Annual Operating Expenses: N/A

¹ Not annualized.

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