Fund Performance

Royce Small-Cap Total Return Fund rose 13.7% for the year-to-date period ended 6/30/26 versus a gain of 23.0% for its small-cap benchmark, the Russell 2000 Value Index, for the same period. The Fund’s average annual total return since inception (12/15/93) was 10.3%.

What Worked… And What Didn’t

Seven of the Fund’s nine equity sectors finished the first half of 2026 in the black. Industrials and Financials had the biggest positive effects by a wide margin followed by Materials. Information Technology and Communication Services detracted, though the losses were comparatiVely marginal. At the industry level, semiconductors & semiconductor equipment (Information Technology), banks (capital markets), and chemicals (Materials) contributed the most while the top detractors were IT services (Information Technology), hotels, restaurants & leisure (Consumer Discretionary), and electronic equipment, instruments & components (Information Technology).

The Fund’s top contributor at the position level was Kulicke & Soffa, which has a majority share in the ball bonder equipment that’s used in the back-end packaging portion of semiconductor manufacturing. This market had been in an extended cyclical trough for several years, and we began to see substantive signs of a new upcycle that drove Kulicke’s shares meaningfully higher in the first half of 2026. Although the ball bonder market mostly serves the lower-priced, high volume end of the semiconductor market, the company is making great strides into developing new products for the advanced packaging market, and management has said that they are beginning to gain serious traction with customers in this new area, which both provides exposure to more secular growth areas and gets them more closely involved in the AI ecosystem. This success was another driver of the strong performance in the shares.

Advance Auto Parts is an aftermarket auto parts retailer that serves both professional installers and do-it-yourself customers with 4,300 stores in the U.S. and Canada. The company has benefited from two major automotive trends: with new car prices being close to $50,000, consumers are holding onto older cars—the average age is currently at an all-time-high of 13 years, and cars are growing significantly more complex, which drives demand for professional repair (“pro”) versus do-it-yourself (“DIY”). These trends were both evident in Advance’s fundamentals in the last quarter, with comparable store sales and operating margin significantly exceeding consensus estimates despite low-end consumers being pressured by higher gas prices. Importantly, Advance’s strong performance in the critical pro channel offered tangible evidence that the company’s turnaround is progressing, while 2026 operating margin guidance of 3.8% to 4.5% represents year-over-year improvement and incremental progress toward the 7.0% goal by 2028.

Element Solutions 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.

The Timken Company is a diversified industrial business that makes highly engineered bearings and industrial motion systems. Timken is benefiting from a recovery in the U.S. industrial cycle, with three consecutive quarters of organic revenue growth, as well as idiosyncratic self-help margin improvements. In addition, the company held an Investor Day during the second quarter of 2026 which outlined attractive longer-term financial targets that were well received by the market.

MSC Industrial Direct Cl. A is an industrial distributor that has developed a specialty around metalworking tools and is therefore more heavily exposed to heavy manufacturing. MSC has long enjoyed a strong reputation for expertise in the metalworking space and have consistently provided good value to customers through that expertise. However, the company had also struggled to consistently drive strong returns on capital from the value it creates for clients. Under a new CEO, MSC has been going through significant and wide-ranging changes that span from their go-to-market strategy all the way to implementing distribution center best practices. As a result of these efforts, the company is starting to demonstrate tangible, positive benefits. Coupled with green shoots pointing to an upturn in the industrial cycle, the shares outperformed in the year’s first half.

The Hackett Group, an IT services company that provides a broad range of offerings, from research advisory to implementation services, was the position that detracted most in the first half of 2026. In addition to having strong consulting type services, the company has also been able to develop a unique data set that is based on their years of experience doing benchmarking and performance studies for the Global 2000. The company is going through a pivotal moment where they are turning this data set into a differentiated offering that helps both customers and internal consultants identify and implement agentic AI workflows. The weakness in the shares has been driven by some weakness in their traditional consulting practices, but mostly by the market’s perception that HCKT will be negatively disrupted by AI. The weakness in shares have been mostly driven by multiple compression, rather than any meaningful change to the fundamental outlook of the financials. We think that the market is getting this completely wrong, as we think that the company is uniquely positioned to understand complete end-to-end business process work flows, and can turn that knowledge into agentic AI implementation revenues.

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.

CBIZ is a professional services firm that offers accounting and tax advisory services. The company has a long history of successfully rolling up the industry, acquiring sub-scale players and using that to build out its capabilities and expand its geographic reach. In late 2024 CBIZ did a much more sizeable acquisition of a competitor, Marcum, which catapulted the combined entity into the top-10 accounting firm ranks. The move gives them essential scale and resources to invest in technology and subject matter expertise. Starting in February of 2026, the market took the view that AI would decimate all professional services business models, essentially betting that the technology would soon be able to complete nearly all white collar work—which drove the weakness in CBIZ’s shares. Through our own extensive research of the ecosystem, we take the opposite view and think that the company’s ability to invest in these areas should allow them to thrive and take share in the AI era.

Brightstar Lottery is the number one technology provider for land-based or retail lottery systems. Brightstar also offers instant scratch-off ticket printing and digital lottery solutions for both draw-based games like Pick3, Keno, Powerball, Mega Millions, and instant games. Brightstar is the systems provider for 26 out of 46 lottery jurisdictions in the U.S., and seven of the world’s 10 largest lotteries. The company also operates the Italian Lotto and instant games (one of the world’s largest lotteries). The lottery business is modestly cyclical since it is viewed as an inexpensive form of entertainment woven into many people’s daily routines and is an important source of revenue for governments. Its shares have underperformed so far in 2026 due to market fears around slowed consumer spending, weak performance of multi-state jackpots, and subdued free cash flow generation until 2028 (due to upfront contract payments). We have reduced our position size to reflect the near-term negative free cash flow and the back-end loaded 2026 guidance.

Vontier Corporation is an industrial company that primarily serves the convenience store (“C-store”) industry, with products that range from gasoline dispensers to underground sensors that monitor the tanks to software inside the store whose capabilities include helping with managing inventory, marketing, and loyalty programs. Its share price performance was somewhat puzzling, as the company reported a solid first quarter, as well as solid full year guidance. 2026 EPS estimates from the end of 1Q26 through the end of June were essentially flat (down -0.6%). Thus, the stock’s underperformance during the quarter was entirely a function of multiple contraction, as the P/E multiple went from 10x to roughly 8.5x, a contraction of -15%. Our long-term views on Vontier remain bullish, and we see the current valuation as compelling both on an absolute basis and relative to the quality of the business and to its peers that trade at meaningfully higher multiples despite significant overlap in the underlying businesses.

The Fund’s disadvantage versus the Russell 2000 Value in the year’s first half was mostly attributable to stock selection. At the sector level, stock selection and, to a lesser extent, our overweight in Information Technology hurt relative results the most, in large part because we had far more limited exposure to the AI-related stocks that led the index’s advance. Four of the top 10 contributing industries in the Russell 2000 Value were in Information Technology. We were underweight in semiconductors & semiconductor equipment and electronic equipment, instruments & components and had no exposure to software or communications equipment. The combination of stock selection and portfolio overweights detracted in Consumer Staples and Financials. Conversely, stock selection in Materials and a lack of exposure to Utilities and Real Estate (both of which underperformed in the index) helped relative results the most.

Current Positioning and Outlook

Starting in early June, the market narrative on AI, including semiconductors, memory, data centers, etc., began to shift, with our relative performance following almost in lockstep. The once unyieldingly positive story of the AI secular wave started to show cracks, along with doubts about the models’ costs and efficacy. Coupled with extraordinary results in the year’s first half, some of these leaders began to experience weakness. More importantly for the Fund, the market began to broaden. For example, our insurance stocks, which had seemingly been left for dead for over a year (despite solid fundamentals), were up 9.5% in June. Put simply, we saw a rotation out of high beta tech into unsexy but profitable and cash generative businesses trading at attractive multiples (our sweet spot as quality focused value investors). We have been on the other side of this market regime since the April 2025 bottom, so we welcomed this shift. While our contrarian bias is to believe that we are in some type of bubble—be it in stocks and/or in the amount of CapEx dollars being spent with returns that are unlikely to justify the investment—we will only know for sure with the benefit of hindsight. We liken this environment to a game of tug of war, with the AI tech trade and the old economy cash generative businesses each pulling in opposite directions. We do not believe there will be a smooth handoff from the former to the latter. However, we also believe that we are getting a preview of what will happen if and when the old economy stocks begin to outperform. Our disciplined process has repeatedly taken us to parts of the market that have lagged and are largely outside the AI ecosystem—and our relative performance has suffered greatly as a result. However, we will continue to follow this process, as we know that capital spending cycles of this magnitude are rare (occurring perhaps once every 25 years or so). We believe that when the cycle turns, our discipline will once again be rewarded.

We have been trying to think of a metaphor that might best describe what’s happening. Think of small-caps as a tree that bears fruit, has been growing for some time, and is beginning to bear fruit (small-caps are handily beating large-caps, the Nasdaq and the Magnificent 7 over the last 12+ months). During this period, there was ample low-hanging fruit, and even quite a bit that fell to the ground. This describes the rally from April of 2025 to the end of June 2026, or, said differently, beta. From our vantage point, there isn’t much of this fruit left. But further up the tree, there remains an abundance of juicy, ripe, high-quality fruit. The small-cap leadership cycle is far from over, in our opinion. However, to get to that fruit, one must know how to adeptly climb the tree, using strong branches for support and avoiding the weaker branches. Active managers tend to be good at climbing trees. We think that our team can climb this tree; we have done it many times and have a process for doing so. We also possess deep knowledge of the tree that we believe we can allow us to provide fruit (alpha) to our investors that can allow them to continue to benefit from an emerging small-cap cycle. We believe the years ahead should handsomely reward active managers who can maintain their discipline. In fact, despite the small-cap indexes hovering around all-time highs, we continue to see an abundance of opportunity—which is unusual when markets are making new highs. This fruitful opportunity set (pun very much intended), coupled with the recent shifts that have occurred in the market regime, gives us great optimism about the years ahead.

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

Annual Operating Expenses: 1.23

¹ Not annualized.

Important Performance, Expense and Disclosure Information