Fund Performance

Royce Premier Fund advanced 23.5% for the year-to-date period ended 6/30/26, outpacing its small-cap benchmark, the Russell 2000 Index, which was up 22.6% for the same period. The Fund also beat its benchmark for the 5-, 10-, 20-, 25-, 30-year, and since inception periods ended 6/30/26. The Fund’s average annual total return since inception was 11.3%.

What Worked… And What Didn’t

Six of the Fund’s eight equity sectors finished the first half of 2026 in the black. Information Technology and Industrials made the biggest positive contributions by a wide margin, followed by Materials. Real Estate and Financials were the sectors that detracted. At the industry level, the top contributors were semiconductors & semiconductor equipment (Information Technology), machinery (Industrials), and electronic equipment, instruments & components (Information Technology), while real estate management & development (Real Estate), professional services (Industrials), and capital markets (Financials) were the biggest detractors.

The Fund’s top contributor at the position level was MKS, a mission-critical process-control and subsystems supplier to semiconductor, electronics and specialty industrial customers, with a portfolio spanning vacuum, power, plasma, lasers, optics, motion, gas delivery, process control, and Atotech specialty chemistry. Its moat is built on engineering depth, long qualification cycles, and embedded customer recipes: once MKS’s components or chemistry are designed into etch, deposition, advanced PCB, packaging, or precision manufacturing workflows, switching costs are high and performance failure risk is costly. The company remains cyclical, but the broader portfolio gives it multiple ways to monetize AI-led complexity across wafer-fab equipment, advanced packaging, high-end PCBs, and industrial electronics. Investors continued to reprice the 1Q26 earnings beat and 2Q26 guidance into a broader AI electronics and packaging inflection, while in June specific support came from analyst upgrades and target increases, the Penang Supercenter opening, and the $25 million Guangzhou Atotech expansion, all of which supported the thesis that growth is no longer just a wafer-fab recovery debate, but a higher throughput AI electronics/packaging cycle with operating leverage, while balance sheet risk is easing through refinancing, a larger revolver, and ongoing deleveraging.

Littelfuse is a diversified circuit-protection, power-control, and sensing company whose products protect and control electrical systems across transportation, industrial, electronics, renewables, grid, data-center, and appliance markets. Its moat is built around application engineering, reliability, safety certifications, broad SKU coverage, customer design-ins, and distribution reach. Fuses, relays, sensors, protection devices, and power semiconductors are low-cost components relative to the systems they protect—but failure can be expensive or dangerous. The company’s model is cyclical, but its content-per-application growth is tied to long-duration themes such as electrification, high-voltage DC architectures, renewable power, charging infrastructure, data centers and grid modernization.

Littelfuse was a significant contributor as the market rewarded a strong first quarter earnings beat and a clearer path toward higher-growth electrical content. The quarter improved the revenue-growth debate because the beat was not simply acquisition driven. Organic growth, margin expansion, and cash conversion all moved in the same direction. Investor-day messaging also helped as with management targeted a 2030 framework of revenue growth toward $4.5 billion supported by electrification, high-voltage DC, data-center, and grid-infrastructure demand. The stock move reflected confidence that Littelfuse is moving out of cyclical destocking and into a multi-year content-growth cycle, though the debate remains around whether organic growth is sustainable throughout the remainder of 2026 as electronics and industrial customers begin to normalize inventories.

ESCO Technologies is a niche, engineered-products platform with exposure to utility test and monitoring, aerospace & defense, filtration and fluid control, and radio frequency shielding and test solutions. The moat is built around mission-critical performance, long product qualification cycles, regulatory and reliability requirements, and deep customer relationships in utilities, aerospace, defense, and industrial applications. The portfolio is not high velocity but has a strong installed-base and replacement/testing angle, and management has historically compounded through bolt-on acquisitions while maintaining disciplined margins and cash generation. During the first half, investors appeared to reward the company’s consistent earnings execution plus a larger strategic repositioning. The forward guidance raise was important because it was earnings specific rather than being based on a broad revenue reset, suggesting better margin and operating execution rather than a step-change in end-market demand.

The strategic catalyst was the announced acquisition of Megger, which is expected to become ESCO’s Utility Solutions segment and significantly expands the company’s position in electrical testing, diagnostics, and grid reliability. That M&A matters because it fills a strategic gap around utility asset-health testing and deepens exposure to electrification / grid modernization, rather than simply adding unrelated inorganic revenue. The stock also benefited from continued portfolio cleanup, including divestiture activity around Aclara, reinforcing the perception that management is actively upgrading the asset base. The remaining show-me issue is integration: the multiple now embeds confidence that Megger can broaden the utility platform without diluting the margin and ROIC profile.

Onto Innovation is a semiconductor process-control company that focuses on optical metrology, macro-defect inspection, wafer-quality systems, lithography, and advanced analytics for leading-edge logic, memory, and advanced packaging. Its moat is the yield-critical nature of its tools: customers use Onto’s systems to measure and control process windows where small deviations can impair wafer yield, HBM (High Bandwidth Memory) stacking, 2.5D packaging or gate-all-around transitions. The business is structurally exposed to rising process complexity rather than just wafer starts, making Onto one of the cleaner small- and/or mid-cap ways to own the metrology and inspection intensity tied to AI compute. During the first half, investors were increasingly drawn to the company’s AI packaging and advanced-node exposure. The first quarter print was strong and forward guidance was particularly robust, implying a meaningful sequential revenue and margin step-up. Management also disclosed that its Dragonfly G5 has qualified for new and existing applications at a leading 2.5D logic customer and an HBM customer. The quarter clearly reinforced the prior AI-packaging thesis and moved Onto from “semi recovery” toward higher-quality AI process-control compounder in many investors’ minds.

RBC Bearings supplies highly engineered bearings and precision components supplier serving aerospace, defense, and industrial markets, with products used in aircraft controls, engines, landing gear, rotorcraft, naval systems, industrial machinery, and specialized fluid-control applications. The moat is built around mission-critical tolerances, certification, platform qualification, long program lives, and customer reluctance to switch once components are designed into safety-critical systems. RBC’s 2021 Dodge acquisition broadened its industrial power-transmission platform, while its 2025 acquisition of VACCO adds aerospace & defense fluid-control depth while increasing exposure to higher-growth defense and space applications. The market rewarded RBC’s strong fiscal fourth quarter and a large backlog step-up. This backlog was a particular highlight, reaching $2.3 billion helped by aerospace, defense, and VACCO demand. The quarter also supported the thesis that RBC’s aerospace & defense exposure and backlog visibility can offset industrial cyclicality, while the VACCO purchase appears strategic rather than purely inorganic. The main debate is valuation after the rerating and whether margins can compound as the backlog converts.

The Fund’s biggest detractor at the position level was Colliers International Group, a global professional services and investment management platform spanning Commercial Real Estate, Engineering, and Investment Management. The business is structurally higher quality than a pure brokerage model because recurring and resilient services such as engineering, outsourcing, property management, valuation, loan servicing, and investment management reduce reliance on transaction volumes. That said, the company still has meaningful exposure to leasing, capital markets, development activity, utilization, and fundraising cycles—and its M&A-driven business model requires consistent integration and working-capital discipline.

The stock fell as investors discounted weak profit conversion and balance-sheet/acquisition complexity despite headline growth. Although first quarter revenue grew by 7% in local currency (Colliers is headquartered in Toronto), adjusted EBITDA (earnings before interest, taxes, depreciation & amortization) lagged revenue growth, and free cash flow was slightly below target. Management emphasized that more than 70% of earnings come from resilient businesses, but that did not offset investor concerns around Engineering utilization, Investment Management investment and integration costs, and financing for the pending Ayesa acquisition. The stock remains in “show me” territory until Colliers can convert mid-teens revenue growth into commensurate EBITDA and free cash flow growth.

Morningstar is the well-known global investment data, research, ratings, and software platform whose businesses including Morningstar Data, Morningstar Direct, PitchBook, and other investment-management services. The business is built around proprietary data, independent research, ratings credibility, embedded workflows, brand trust, and high switching costs in advisor, asset manager, institutional, and private market workflows. The company has attractive intangible assets, but its multiple depends on consistent organic growth from PitchBook, Direct, Credit and Indexes, plus evidence that acquisitions and buybacks are creating shareholder value.

Exponent is a science and engineering consulting firm that provides failure analysis, litigation support, product safety, regulatory, environmental, health, and risk-management consulting. Its moat is built around deep technical expertise, expert-witness credibility, multidisciplinary teams, reputation, and client trust in high-stakes disputes or technical problems where the cost of an incorrect answer is far greater than the consulting fee. The model is asset-light and cash generative but sensitive to consultant utilization, project timing, litigation cycles and client discretionary spend. Although revenue increased and EBITDA (earnings before interest, taxes, depreciation & amortization) grew by more than 25%, the stock struggled as management maintained full-year guidance for high-single-digit revenue growth. We note that capital return was strong, with close to $80 million in share repurchases in the 2Q26, and another $50 million added to the authorization, but that did not offset multiple compression. The stock remains in “show-me” territory: Exponent is executing, but investors are not paying the same premium for a consulting model with modest growth, limited guide revision, and some segment imbalance.

TMX Group is Canada’s core exchange, clearing, market-data and capital-markets infrastructure operator, spanning TSX, TSXV, Montréal Exchange derivatives, CDS, Trayport, TMX Datalinx, Alpha, and other index and data assets. The moat is built around market infrastructure, regulatory positioning, liquidity networks, clearing and settlement criticality, exchange brand value, and data distribution. We think the model has attractive operating leverage and recurring data and analytics revenue, but the stock can still be sensitive to valuation, acquisition execution, and investor concerns around capital deployment. First quarter revenue came in at record levels and adjusted earnings per share grew by more than 30%. Trading activity remained healthy, though investors appeared to discount the fact that the first quarter’s earnings were helped by dispute/litigation-related items and that the company is deploying significant capital into M&A rather than only harvesting the exchange franchise. The second quarter supported the attractiveness of TMX’s strategic data and global-index expansion thesis but did not prevent a first-half derating.

ESAB Corporation is a global welding, cutting, and fabrication-technology company with a recurring consumables base and a growing portfolio of equipment, gas-control, automation, inspection, and digital solutions. We like its global distribution, process know-how, welder productivity, consumables qualification, installed equipment base, and the ESAB Business Excellence operating system. Since separating from Colfax in 2021, the bull case for ESAB has been margin compounding, emerging-market strength, bolt-on M&A, and a mix shift toward higher-value equipment, automation, and digital solutions. During the first half of 2026, investors appeared to look through headline revenue growth to focus on organic softness, margin dilution, and unchanged guidance. Management reiterated its 2026 outlook rather than raising it, which mattered because the stock had been priced for continued margin execution and sustained organic momentum. Strategically, acquisitions remain central: EWM and Aktiv grew by double digits, and the June completion of the Eddyfi acquisition adds nondestructive-testing and inspection technology that broadens ESAB’s higher-value portfolio. The issue is whether M&A is filling a strategic automation and inspection gap or masking slower core welding growth. It seems that investors need to see organic growth return while acquisition dilution fades and margins resume expansion.

The Fund’s advantage over the Russell 2000 in the first half was due to sector allocation. At the sector level, stock selection in Information Technology had an outsized positive impact, followed by a much lower exposure to Health Care and a lack of exposure to Utilities, both of which underperformed within the index. Conversely, stock selection in Real Estate, Financials, and Industrials detracted the most from relative results.

Current Positioning and Outlook

After 14 years of relative underperformance compared to large-caps, U.S. small-caps may finally be in the early stages of reversion to the mean. Since its April 8, 2025 trough, the Russell 2000 has risen 74.5%, besting the Russell 1000 (which also hit a trough on that date) by over 22 percentage points. While good news for the asset class overall, it hasn’t been great for quality-centric strategies such as Premier’s, as the small-cap recovery has thus far been dominated by more speculative, low-quality companies. The good news is that this pattern of low-quality leadership in the first four to six quarters of a small-cap rebound off the bottom is not unusual—and has often been followed by a rotation into and sustained outperformance from higher quality small-cap companies. As legendary value investor Benjamin Graham noted, “In the short run the market is a voting machine, in the long run it is a weighing machine.” While near-term market movements are often driven by sentiment and a herd mentality, business fundamentals and the proven ability to consistently compound value is what is most rewarded over the long term, either by outperformance of these companies’ stocks or by strategic or financial buyers stepping in to arbitrage the gap between market and intrinsic value. We have been and will continue to take advantage of these attractive valuations in quality small-caps by adding new companies that have unique competitive advantages, which are the foundation of durable, cash-generative business models and attractive reinvestment opportunities. Premier’s portfolio of companies has an average ROIC of 16.5% (vs. 6.9% for the Russell 2000), which is higher than when the small-cap rally began in early April of 2025, yet the aggregate valuation multiple (as measured by cap rate) is essentially unchanged. We believe this sets up an attractive risk/reward profile for the Strategy going forward.

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

Annual Operating Expenses: 1.22

¹ Not annualized.

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