Fund Performance

Our flagship Royce Small-Cap Fund advanced 23.8% for the year-to-date period ended 6/30/26, outperforming its small-cap benchmark, the Russell 2000 Index, which was up 22.6% for the same period. The Fund also beat the small-cap index for the 5-, 10-, 20-, 30-, 35-, 40-, and 45-year periods ended 06/30/26. The Fund’s average annual total return for the 50-year period ended 6/30/26 was 13.0%.

What Worked… And What Didn’t

Eight of the Fund’s 10 equity sectors finished the first half of 2026 in the black, led by Information Technology, Industrials, and Financials. Health Care and Real Estate made the only negative impacts. At the industry level, semiconductors & semiconductor equipment (Information Technology), machinery (Industrials), and electronic equipment, instruments & components (Information Technology) contributed most for the year-to-date period, while software (Information Technology), professional services (Industrials), and health care equipment & supplies (Health Care) were the largest detractors.

The Fund’s top contributor at the position level was Element Solutions, which produces specialty chemicals and serves the Electronics and Industrials end markets. The former is the company’s primary end market, accounting for more than two-thirds of revenues. Element’s chemicals are critical to the products they go into (e.g., printed circuit boards) but are a small fraction of the end product’s total cost. As such, the company has strong pricing power. Its revenues are generally driven by its customers plant utilization rates, which have been increasing. While Element is exposed to many growth drivers in the technology market, the biggest one of late has been AI. Strong growth, margin expansion, and an undemanding multiple to start 2026 have led the stock to robust returns so far this year. (In early July, Element announced it would combine with competitor Solstice in a cash and stock transaction, highlighting the value of its underlying specialty chemical franchise.

Onto Innovation is a semiconductor process-control company focused 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 stacking, 2.5D packaging, or gate-all-around transitions. The business is structurally exposed to rising process complexity rather than just wafer starts, making it one of the cleaner small/mid-cap ways to own the metrology and inspection intensity tied to AI computing. Onto’s share price strength showed that investors continued to capitalize on the first-quarter disclosure set, released in May: 2Q26 revenue acceleration, higher margin guide, Dragonfly G5/Atlas G6 customer traction, and the Rigaku strategic stake—while in June analyst initiations and target increases reinforced the AI process-control rerating. June’s performance also reflected the market’s conclusion that ONTO has moved from “semi recovery” to a higher-quality AI process-control compounder.

MKS is 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. MKS was a major contributor in June as investors continued to reprice the 1Q26 earnings beat and 2Q26 guide into a broader AI electronics and packaging inflection, while June-specific support came from analyst upgrades/target increases, the Penang Supercenter opening, and the $25 million Guangzhou Atotech expansion. This all 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.

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.

Arcosa supplies materials and structures for critical U.S. infrastructure. Our investment thesis held that management had done a stellar job transforming the company by exiting low return, more cyclical businesses—which includes the announced sale of its barge manufacturing division last winter—and reinvesting the proceeds and free cash flow to further scale its higher growth, higher return on invested capital (ROIC) Construction Products and Engineered Structures segments, which generate most of the company’s operating cash flow. Our confidence and high regard was apparently shared by Irish firm CRH, which announced in late June that it had entered into an agreement to acquire Arcosa for almost 15x operating cash flow. The move strengthens CRH’s position as the top infrastructure player in North America.

The top detractor at the position level was PAR Technology, 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.

ADMA Biologics develops, manufactures, and markets specialty biologics for the treatment of immunodeficient patients at risk of infection and patients at risk for certain infectious diseases. The company operates an FDA-licensed, plasma fractionation and purification facility and a network of FDA-licensed source plasma collection facilities, all in the U.S. ADMA markets three FDA-approved products: Asceniv, Bivigam, and Nabi-HB. Its shares have underperformed due to fears of the strain being put on the balance sheet by the ongoing launch of Asceniv and the commercial strategy behind this launch. Owing to growing concerns about its addressable market impacting competitive alternatives in the medium term, we exited the position during the second quarter of 2026.

Kyndryl Holdings is the world’s largest IT infrastructure services provider, offering mission-critical IT services to over 2,000 large-scale enterprises in 60 countries. Kyndryl was spun-off by IBM late in 2021, which enabled the newly independent company to pursue a profitable future by implementing a “AAA” strategy comprised of Accounts (restoring profitability to roughly 40% of accounts); Alliances (to enable customers access to the public clouds offered by Google, Microsoft, and Amazon; and Advanced Delivery (deploying automated tools to significantly improve service delivery/reduce costs), which made strategic sense. Our initial investment proved successful. We first bought shares in the summer of 2022 at an average cost of about $13 per share, and the stock appreciated to $43 by June 2025 as revenue, profits, and cash flow increased significantly despite an overall post-Covid slump in the IT industry.

During fiscal 1Q26 and 2Q26 (the quarters ended, respectively, in June and September 2025), Kyndryl reverted to revenue declines as contract signings slowed. The company then affirmed guidance for +1% revenue growth in fiscal 2026 in hopes of making up the revenue shortfall. In February 2026, however, Kyndryl reported results for fiscal 3Q26 in which revenue growth was flat, and fiscal 2026 guidance was lowered significantly. Management also reported that they would be unable to file their 10-Q on time—and that the CFO and General Counsel had departed while the Controller was reassigned amid a voluntary document request from the SEC regarding the company’s cash management practices. Kyndryl’s disclosures led us to believe that the company may have been boosting profitability and cash flow during certain periods by incentivizing vendors to delay submitting invoices. Our investment thesis looked at the appeal of the essential nature of Kyndryl’s products, its improving business fundamentals and execution, and an inexpensive valuation relative to $1 billion of projected free cash flow generation by fiscal 2028. The lessons learned from this investment are to exit a stock when the original thesis has played out while cracks seem to appear in execution.

TransMedics Group is a commercial-stage medical technology company transforming organ transplant therapy for end-stage organ failure patients across multiple disease states. In addition to its proprietary Organ Care System, a portable machine that allows donor organs to stay perfused with oxygenated blood, the company has also been building infrastructure around it including a fleet of 22 fixed-wing aircraft, coordination with ground transportation, and a clinical team that travels with each organ. While revenue has remained positive, earnings have not kept pace. In May, for example, 1Q26 earnings missed analyst expectations by more than 50%, sending its shares tumbling. Rising costs of sales and increased operating expenses tied to scaling its transplant technology and the aviation segment were the primary drivers of the decline in operating profits. Seeing more promising opportunities elsewhere in the market. We sold the last of our shares in June.

Maximus provides program management and consulting services to state and local governments throughout the U.S. Its services are designed to make government operations more efficient and cost effective while also improving the quality of the services. Its stock underperformed during the first half of 2026 mostly due to a combination of sector-wide concerns and tepid investor expectations around its government services businesses rather than any decline in its fundamentals. We added to our position through much of the year’s first half at what we thought were attractively cheap prices.

The Fund’s advantage over the Russell 2000 was attributable to both sector allocation decisions and stock selection, with the former making the bigger impact. At the sector level, stock selection and, to a lesser extent, the portfolio’s larger weighting in Information Technology made by far the biggest positive impact, followed by stock selection in Materials, and a lack of exposure to Utilities, which underperformed within the Russell 2000. Conversely, stock selection in Health Care, Financials, and Energy hurt relative performance most for the year-to-date period ended 6/30/26.

Current Positioning and Outlook

The Fund’s biggest sector weights at the end of June were Industrials, Financials, and Industrials, each also overweighted versus the Russell 2000. Despite the strong performance of small- and micro-cap stocks over the last year-plus, each asset class finished June with more attractively inexpensive valuations than their large-cap peers based on our preferred index valuation measure, EV/EBIT, or enterprise value over earnings before interest & taxes. This metric shows that valuations for the Russell 2000 were still close to their lowest levels versus the Russell 1000 in 25 years at the end of June, while the Russell Microcap Index also had markedly lower valuations than the Russell 1000 at the end of June. Of course, earnings growth ultimately drives long-term returns—and in that regard the news is also positive, with earnings fundamentals continuing to improve for many small- and micro-cap companies. To be sure, consensus estimates are pointing to faster earnings growth ahead (as they have for the last several months). Equally important, we are enjoying a sweet spot between owning holdings that are doing well while also finding what we think are excellent long-term opportunities in the wide and diverse selection universe of small- and micro-cap stocks. To this point, we think it’s important to note that, while much is made of the fact that more than 40% of the companies in the Russell 2000 have no earnings, the small- and micro-cap universe still has more profitable companies than the Russell 1000 or S&P 500 Indexes. This combination of relatively more attractive valuations and ongoing earnings strength bolsters our conviction that the current environment continues to offer many compelling opportunities for active, fundamentals-driven investors with a long-term horizon.

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

Annual Operating Expenses: 0.95

¹ Not annualized.

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