Fund Performance

Royce Premier Fund advanced 1.0% for the year-to-date period ended 6/30/24, lagging its small-cap benchmark, the Russell 2000 Index, which was up 1.7% for the same period. The Fund’s longer-term relative advantages remained in place, however, as Premier beat the benchmark for the 3-, 5-, 10-, 20-, 25-, 30-year, and since inception (12/31/91) periods ended 6/30/24.

What Worked... and What Didn’t

Four of the Fund’s nine equity sectors contributed to 2024’s first-half performance, with Information Technology leading by a wide margin, followed by Financials and Consumer Discretionary. The biggest detractors at the sector level were Real Estate, Health Care, and Consumer Staples. At the industry level, semiconductors and semiconductor equipment from Information Technology, capital markets in Financials, and textiles, apparel & luxury goods from Consumer Discretionary made the biggest contributions while real estate management & development in Real Estate, chemicals from Materials, and machinery in Industrials detracted most.

At the position level, FormFactor was the Fund’s top contributor—and its 16th biggest position at the end of June. A leader in semiconductor testing and measurement, FormFactor produces probe cards and related components to help chip manufacturers with the yield management of chip production. The company has been benefiting from the trend toward increased test intensity—and more specifically from tests for the high bandwidth memory chips used in Artificial Intelligence applications. Top-10 position Cirrus Logic is a fabless semiconductor supplier that specializes in analog, mixed-signal, and audio DSP integrated circuits. Its audio processors and converters are used in consumer entertainment products like smartphones, tablets, digital headsets, automotive entertainment systems, and home-theater receivers, as well as in smart home application speakers. Cirrus has reaped rewards from product content gains with its largest customer while moving into high performance mixed signal applications in both smartphones and laptops. Cirrus has been gaining momentum in the laptop market and winning with new product designs for smartphones. The company remains cash rich, debt free, and on a runway where their markets are expanding via new applications and content gains.

Other top contributors include the Fund’s largest holding at the end of June, MKS Instruments, which provides critical components and subsystems to semiconductor capital equipment and semiconductor manufacturers. MKS also has leading positions in the chemicals and equipment used to manufacture advanced electronics, including specialty plating chemicals. Its shares rallied as both the company and industry datapoints indicate that the slump in the semiconductor memory sector has bottomed and is poised to rebound in the second half of 2024, setting the stage for an uptick in new equipment purchases. We expect MKS to emerge from this recent down cycle in an even stronger position, given its investments in world class optics and the broadening of its addressable markets in lithography, metrology, and inspection applications. The move to advanced packaging of leading edge chips also plays to MKS’s expertise in laser drilling, plating equipment, and its number one share in plating chemistries for packaged substrates.

Ralph Lauren is a premium apparel and lifestyle company with an iconic, globally recognized brand. We see the brand as virtually timeless and like that management has further elevated it through skillful optimization of the business on several fronts, including brand, channel, geography, and pricing strategies. These efforts have been notable, particularly compared to its peers, as sales, average unit retail, and margins have exceeded market expectations for some time. While Ralph Lauren remains a largely North American brand, management has begun to aggressively expand its presence in developing markets as well as the important, under-penetrated market of China. The company reported strong first-quarter results, with European sales up more than 10% and consolidated average unit retail prices continuing to increase. Overall, the company’s many initiatives, including a quality of sales strategy, recapturing younger consumers, and optimizing business operations while addressing faster, more profitable channels in direct-to-consumer, continued to drive market-beating results.

Woodward designs and manufactures fluid, air, combustion, and motion control products for aerospace & defense and industrial applications. Its products win by providing superior performance and durability in heavy use applications for products such as airplane engines, industrial gas turbines, and trucks. Once designed into these useful and long-lived products, Woodward generates additional revenue from the dollar content on each new order its original equipment manufacturer customers receive, as well as from supplying its aftermarket products to the installed base. Its stock has risen on high demand for new commercial airplanes as global air passenger miles return to pre-Covid levels. Robust defense spending in light of global conflicts, new U.S. aerospace programs, and healthy demand from its power generation and oil & gas customers have also helped. A much higher-than-anticipated and more sustained rebound in the volatile market for natural gas-fueled heavy duty trucks in China provided an additional boost to recent results. The company’s new CEO, who took the helm at the beginning of 2023, has done an impressive job refocusing Woodward on consistent performance, operational excellence, and improved price management given the high switching costs and value-add of its products.

The Fund’s top detractor was Quaker Houghton, which 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. Forrester Research is a subscription-based information technology research company geared toward helping businesses understand, determine their needs, and maximize the utilization of emerging technologies and their key vendors. While we like the company’s asset light, high contribution margin model, management’s execution has admittedly been inconsistent in recent years. The decline in IT spending in 2023, as well as Forrester’s ongoing change to its go-to-market strategy, which includes culling smaller clients and retraining its existing salesforce, are weighing on contract value and sales growth in 2024. Although the pace of progress is testing investor patience, we chose to hold our position.

Brunswick holds the dominant position in recreational boat engines, is a leader in boat parts, accessories, and technology systems, and manufactures select boat brands. Its shares fell by 24% in the first half of the year, reflecting the likelihood that Brunswick will reduce its full year earnings estimates as the peak boat selling season has gotten off to a sluggish start and will probably lead to cautious ordering for the upcoming model year given dealers’ excess inventory. This is an industry wide issue, and while Brunswick is by no means immune, it should fare better than its peers because about one-third of its profit comes from parts & accessories—driven by boat usage rather than new boat sales. Kennedy-Wilson Holdings invests directly in commercial real estate, primarily apartment buildings, while also deriving fee income from its growing investment management platform. Its stock fell 29% in the first quarter, in part due to the company incurring another significant downward fair value adjustment for properties in its investment management vehicles, which investors extrapolated to its on-balance sheet holdings. The fair value adjustment is non-cash, however, and we believe, based on our discussions with management, it largely reflects higher assumed cap rates due to the rise in interest rates as opposed to any deterioration in property-level cash flows. The company has already made solid progress on its plan to reduce costs by $15-$20 million and generate at least $500 million in cash from non-core asset sales over the next 18 months. Its shares rebounded 15% as the company continued to make progress on its non-core asset sales plan and reduced its high dividend, both consistent goals in reducing debt. The company also reemphasized its pivot to growing its Investment Management segment. As the latter scales, we believe the shift to an asset light, more predictable income stream and higher return model should cause the company’s overall valuation multiple to re-rate upward.

Enovis Corporation is an orthopedic-focused medical technology company with leading a global market share in its Prevention & Recovery segment, which includes braces and rehabilitation products, as well as a growing Reconstruction segment that includes surgical implants for extremities. Its stock has been under pressure since Enovis closed its largest acquisition earlier this year, including a 28% drop in 2Q24. The strategic fit and valuation of the deal make sense to us, but near-term integration is always a risky process, especially with new leadership in Enovis’s Reconstruction segment. Investors appear to be waiting for evidence that product line rationalization, salesforce integration, cost synergies, and, ultimately, revenue growth from cross-selling the combined company’s product are materializing consistent with management’s expectations.

The Fund’s disadvantage vis-?-vis the Russell 2000 was due to stock selection—our sector allocation decisions were additive in 2024’s first half. Stock selection hurt most in Industrials, Real Estate, and Consumer Staples. Conversely, stock selection was most additive in Information Technology, Financials, and Consumer Discretionary. In addition, the portfolio’s top-five contributors and detractors were in similar positions relative to the Russell 2000.

Current Positioning and Outlook

The Fund’s biggest sector weights at the end of June were Industrials—which was substantially overweight compared to the benchmark—Information Technology, and Materials, with the last of these also having a significantly higher weighting than the Russell 2000. With the Fund’s long-term relative outperformance edge in place, negative near-term economic sentiment does not alter our conviction that Premier is a portfolio of businesses that boast durable competitive advantages, low leverage, and consistent free cash flow generation. Many holdings also appear well positioned to benefit from several secular demand tailwinds. These fundamental factors have historically allowed portfolio companies to not just weather economic headwinds, but have also given holdings the ability to reinvest in their businesses and take market share during challenging periods, enabling them to emerge even stronger. These same quality business attributes, along with the differentiated products and services that fortify their strong positions, should allow them to also drive favorable long-term growth, outpacing their markets and compounding shareholder value at attractive rates well into the future. Historically, such value creation has been reflected in the companies’ stock market valuations over time, which in turn has enabled Premier to deliver compelling long-term returns with less volatility than the Russell 2000.

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

Annual Operating Expenses: 1.19

¹ Not annualized.

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