Fund Performance

Royce Small-Cap Equity Fund was up 21.7% for the year-to-date period ended 6/30/26 versus a gain of 23.0% for its benchmark, the Russell 2000 Value Index for the same period.

What Worked… And What Didn’t

Six of the portfolio’s nine equity sectors made positive impacts on year-to-date period performance, led by Information Technology, Consumer Discretionary, and Industrials while the largest negative impacts came from Materials, Health Care, and Real Estate. At the industry level, electronic equipment, instruments & components (Information Technology), textiles, apparel & luxury goods (Consumer Discretionary), and semiconductors & semiconductor equipment (Information Technology) contributed the most, while paper & forest products (Materials), health care equipment & supplies (Health Care), and real estate management & development (Real Estate) were the largest detractors.

The portfolio’s top contributor at the position level for the year-to-date period was Vishay Intertechnology, which is one of the world’s largest manufacturers of discrete semiconductors and passive electronic components. Its shares benefited from both materially better operating results and a powerful rally in semiconductor and AI-related power companies. First-quarter revenue rose 17% year over year, orders substantially exceeded shipments, and backlog increased to 5.7 months as demand strengthened across industrial, aerospace & defense, automotive, and AI data-center applications. These applications require increasingly sophisticated power-management components, including the MOSFETs (custom semiconductor switches), diodes, capacitors, resistors, and magnetics supplied by Vishay. The company’s recent capacity investments also allowed it to respond more reliably to customers and capture market share as the industry recovered. Some order strength reflected inventory replenishment and customers seeking greater supply assurance, but improving distributor sell-through and guidance for additional sequential revenue and gross-margin growth suggested that the recovery extended beyond restocking alone.

Movado Group, which designs and distributes watches under its own brand and licensed brand names, rebounded sharply as renewed interest in traditional fashion watches, particularly among younger consumers, combined with stronger execution. Fiscal 1Q26 sales rose 8%, with growth across the Movado brand, licensed brands, company stores, and online channels. U.S. wholesale customers also replenished inventories as retail demand proved healthier than expected. Favorable product and channel mix and more full-price selling lifted gross margins by 320 basis points, allowing operating income to increase substantially. This operating leverage follows the company’s recent period of elevated brand investment and tariff uncertainty. Movado’s debt-free balance sheet and dividend increase further supported investor confidence.

Shares of NVE Corporation, a manufacturer of spintronic sensors and isolators, advanced as optimism increased for potential applications in high growth end markets. Specifically, the benefits of NVE’s products could have applications in data centers, robotics, satellites, and a next generation memory technology (MRAM). Additionally, operating performance improved as fiscal fourth-quarter revenue rose 5% and net income increased 27%, led by a 34% increase in non-defense product sales. That improvement was important because volatile defense procurement and an unfavorable product mix had weighed on earlier results. The company also completed a major capacity expansion, positioning it to support potential growth in markets that are very sensitive to product size and power consumption.

Ingles Markets Cl. A is a regional supermarket chain that operates grocery stores primarily in the southeastern U.S. Its stock advanced sharply in late January and early February, benefiting from investor interest in Consumer Staples businesses as geopolitical concerns heightened, and investors favored more defensive areas of the market. Positive company-specific results also supported the move. Hurricane Helene had damaged Ingles stores and its distribution center in September 2024, interrupting operations and depressing prior-year sales and profitability; three of those stores remained closed at the end of the latest quarter. Against that backdrop, the company’s financial performance continues to confirm a recovery from the storm-related disruption.

The stock of Oil-Dri Corporation of America, which produces sorbent mineral products for pet care, agriculture, fluids purification, and industrial markets, advanced after reporting record fiscal third-quarter sales and strong earnings growth. Revenue rose 9%, operating income increased 23%, and net income gained 25% year-over-year. Cat litter was the principal growth driver, with strength in lightweight and co-packaged products and record crystal-litter sales, while agriculture and animal health returned to growth as the company expanded existing accounts and partially recovered business it had lost earlier in the year. These results illustrated the benefit of Oil-Dri’s diverse product portfolio and its vertically integrated mineral reserves. Strong cash generation, a 10% dividend increase, and a new share-repurchase authorization further supported the shares. Gross margin declined because of higher material, labor, packaging, transportation, and depreciation costs, making continued pricing and manufacturing productivity efforts important to sustaining the earnings momentum.

The top detractor at the position level in the first half of 2026 was Sylvamo Corporation, a global producer of uncoated paper. Its shares slipped after first-quarter profitability and free cash flow fell sharply during a complicated North American manufacturing transition. The expiration of a supply agreement with its former parent company, along with preparations for an extended outage and strategic upgrades at another key mill, required Sylvamo to build inventory and use higher-cost supply. At the same time, lower volumes and an unfavorable geographic mix pressured earnings, while reliability problems at mills in Europe and Brazil added approximately $9 million of costs. Announced price increases, improving North American supply-demand conditions, and more favorable Brazil-to-U.S. sourcing economics offered partial offsets, but investors remained focused on transition risk and continued weakness in Europe. The key tests are second-half price realization, operating reliability, and execution of large mill improvements, where the benefits should become more visible in 2027.

Commercial Metals, which manufactures steel and related products primarily for construction markets, detracted even as end market demand and pricing remained generally healthy. North American steel shipments fell short of expectations as severe weather, planned outages at several mills, temporary inventory constraints, and a value over volume commercial approach limited production and deliveries. Higher scrap costs also compressed metal margins sequentially, although they remained well above the prior year level. Results from the company’s recently acquired precast operations and in Europe helped offset these pressures, while demand indicators remained constructive across infrastructure, data centers, energy projects, and other nonresidential construction. The shares nevertheless lagged as investors remain focused on the risk of potential supply and demand mismatches in the core rebar market.

GAMCO Investors Cl. A, an asset management firm, modestly detracted despite higher assets under management and advisory revenues. The former rose by 13% year over year in the first quarter, and revenue increased 15%, benefiting from market appreciation.

Kewaunee Scientific, a manufacturer of laboratory, health-care, and technical furniture and equipment, detracted after two earnings reports raised concerns about the durability of its order book. Fiscal fourth-quarter sales declined 8% and earnings fell from the prior year, while total backlog decreased 23%. International backlog nearly halved, reflecting project timing and two cancellations in India. Gross margin recovered sequentially, debt declined, and the integration of acquired laboratory-equipment manufacturer Nu Aire continued to progress. However, these positives were insufficient to offset concerns about lower manufacturing volumes, fixed-cost absorption, and the volatility of international project awards.

Marcus & Millichap, which provides commercial real estate investment-sales, financing, and advisory services, was a modest detractor from absolute return. The company’s operating backdrop improved during the period: first-quarter revenue increased 18%, sales volume rose 19%, financing-fee revenue grew 48%, and its net loss narrowed from the prior year. Although the shares finished the period higher, the Fund had substantially reduced its investment before the shares’ later advance, which resulted in a small negative contribution to first-half returns.

The portfolio’s disadvantage versus the Russell 2000 Value was primarily attributable to sector allocation in the year-to-date period. At the sector level, stock selection and, to a lesser extent, our larger weighting in Materials, stock selection in Industrials and Health Care hurt relative results the most—as did the Fund’s cash holdings. Conversely, stock selection in Information Technology, Consumer Staples, and Consumer Discretionary contributed most to relative performance in the first half of 2026.

Current Positioning and Outlook

Despite all the geopolitical uncertainty and domestic partisan strife, the U.S. economy currently looks solid and healthy, though risks for the market are plentiful. As is often the case when markets have been running hot, greed is more prevalent than fear right now. The announced IPO’s and consequent enthusiasm for the SpaceX have historically been associated with market tops. Equity issuances advanced in 1999 and peaked in the first quarter of 2000 just as the large-cap indexes reached dotcom high. The same scenario occurred in the fourth quarter of 2007 just as the index neared its peak prior to the Great Financial Crisis. Likely there are too few investors these days who know that in the 30 plus month decline from March 24, 2000 to October 9, 2002, the S&P 500 declined by -49.1% from top to bottom. The return on the S&P 500 took over 10 years to turn positive. Beyond the headlines, the rotation into small-caps and equal weighted products resulted in both reaching all-time highs in June. The rotation, for now, is favoring recently neglected asset classes. Small-caps are also less dependent on foreign revenue than large- and mid-caps. Investors have started to question the frothy valuations in tech and are increasingly concerned about the justification for all the AI spending. It’s self-serving—we plead guilty—but we think that Special Equity looks like a good place to be. One fact is indisputable: rate of return is a function of entry level.

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

Annual Operating Expenses: Gross 1.25 Net 1.24

¹ Not annualized.

Important Performance, Expense and Disclosure Information