Fund Performance

Royce Small-Cap Trust gained 2.6% on an NAV basis and fell -0.8% based on its market price versus respective losses of -1.8% and -4.5% for its small-cap benchmarks, the Russell 2000 Index and the S&P Small Cap 600 Index, for the year-to-date period ended 6/30/25. The Fund also outperformed the Russell 2000 on both an NAV and market price basis for the 1-, 3-, 5-, 10-, 15-, 25-, 30-, 35-year, and since inception (11/26/86) periods ended 6/30/25 (while also beating it on an NAV basis for the 20-year period).

What Worked… and What Didn’t

Of the Fund’s 11 equity sectors, six made positive contributions to performance in the first half, led by Industrials, Financials, and Materials while Information Technology, Real Estate, and Communication Services were the biggest detractors. The top contributing industries were construction & engineering (Industrials), capital markets (Financials), and metals & mining (Materials) while the biggest detractors were semiconductors & semiconductor equipment (Information Technology), life sciences tools & services (Health Care), and professional services (Industrials).

The Fund’s top contributor at the position level was IES Holdings, which was also the top contributor in 2024. IES designs and installs electrical and technology systems into numerous infrastructure segments. Through a thoughtful growth strategy focused on both internal and external opportunities, IES has been building scale in each of its four business segments, which has resulted in rapidly improving operating profitability. The company reported strong revenue and earnings growth for both 1Q25 and 2Q25 thanks to rising demand in its Communications, Infrastructure Solutions, and Commercial & Industrial segments especially in the data center market.

TransMedics Group, a leader in the high-value transplant sector, with its organ care services (“OCS”) being the only FDA-cleared portable system that provides warm perfusion for heart, lung, and liver transplants. This technology preserves human organs designated for transplant in a near-physiologic condition, which expands the limitations of cold storage organ preservation. Management reported a 48% increase in total revenue for 1Q25 compared to 1Q24, driven by OCS liver and heart transplants. The company also increased its full-year 2025 revenue guidance by about 30%. The company’s logistics services, including the use of its own planes for organ transport, are also contributing to revenue growth and further streamlining the organ transplant process. In addition, Transmedics is expanding its manufacturing capacity with a new facility in Italy and advancing next-generation OCS clinical programs.

Corcept Therapeutics is a commercial-stage pharmaceutical company that specializes in the discovery, development, and commercialization of medications that treat severe metabolic, oncologic, and psychiatric disorders, with a focus on the development of drugs for disorders that are associated with a steroid hormone called cortisol. Its share price spiked in April 2025 after it presented excellent phase III data on its late stage pipeline product for the treatment of platinum-resistant ovarian cancer—which is the first of several studies targeting solid tumors in Corcept’s pipeline. In the meantime, the bridge has been crossed for its lead product Korlym, which went generic last year, to its new and improved compound Relacorilant, which is expected to receive FDA approval near the end of 2025.

E-L Financial operates as an investment and insurance holding company in Canada in two segments, E-L Corporate and Empire Life. Management implemented a 100-for-1 stock split in May 2025, which made the stock more accessible to a wider range of investors while potentially increasing liquidity. Robust growth in revenue and profitability, combined with a low-debt balance sheet, seemed to draw more investors to its shares.

The next best contributor in 2025’s first half was APi Group, which is a global market-leading business services provider of safety and specialty services. In early May, management reported fiscal first quarter results that saw revenue and earnings growth driven by strength in Api’s Safety Services segment as well as its focus on expanding service offerings and improving operational efficiencies.

The top detractor at the position level was Enovis Corporation, a medical technology company that derives 50% of its sales from orthopedic and support products, with the remaining 50% coming from its faster growing orthopedics surgical implant segment, which has solid market positions in knee, shoulder, hip, foot, and ankle products. Management reported solid 1Q25 results, including low double-digit organic growth in its Reconstruction segment. However, while management reiterated 6.0-6.5% total company organic growth guidance for the year, it reduced EBIT (earnings before interest and taxes) guidance by about 5% for the year due to tariff impacts (mainly in its Prevention & Rehab business). The company has a strong slate of new product introductions that will debut as the year progresses, but investors continue to take a wait-and-see approach.

Ziff Davis is a digital media company that owns websites and related properties that target specific niche verticals. About 60% of its revenue comes from website advertising revenue while 40% is subscription based from its broadband connectivity data services, marketing technology, and cybersecurity offerings. The stock has been a consistent underperformer since the emergence of generative AI-based search and associated concerns about potential disruptions in the traditional digital advertising model. Additionally, Ziff Davis hasn’t completed a meaningful acquisition for about two years, despite M&A being a core source of historic value creation (20%+ internal rates of return). While management did announce the more material, strategic acquisition of CNET in 3Q24 and took more aggressive cost actions to preserve margins given lower-than-planned second half growth, our conviction in the long-term business model has waned given continual improvements in AI, combined with new AI search offerings from both incumbents such as Google, as well as new AI search entrants, such as ChatGPT Search in beta, and Perplexity. The threat of disruption from these new “answer engines” to the Google-dominated search advertising ecosystem appears to be growing, with content creators such as Ziff Davis, which receive a lot of traffic from Google, in the crosshairs for potential disintermediation. Each of these developments influenced our decision to substantially reduce our position.

Azenta, another large detractor, provides automated cold storage solutions for biological and chemical compound samples while also focusing on genomic analysis and the management and care of biological samples used in pharmaceutical, biotech, healthcare, clinical, and academic research, and development markets. The company has struggled to meet revenue and earnings targets, though it does have a low-debt balance sheet and ample cash, so we held our shares at the end of June.

Impinj manufactures radio-frequency identification chips (ICs) that are used for location and authentication, which go into readers and a variety of retail items and which help companies manage, track, and secure their inventories. Starting in the apparel industry, Impinj has won customers in the larger categories of general merchandise and package logistics, thereby extending its growth runway. Its shares began to rebound in April (in tandem with much of the U.S. stock market) but not enough to push the shares into the black. The company issued revenue guidance in 1Q25 that fell well below analysts’ expectations, leading its stock downward.

Vestis Corporation, which provides uniform rentals and workplace supplies in the U.S. and Canada, rounded out the Fund’s top five detractors. During May, the stock was battered after the company reported significantly lower 2Q25 results, pulled its guidance for the full year 2025, and provided weak guidance for the third quarter (a forecasted revenue decline of between -2.3% and -3.5% and earnings before interest, taxes, depreciation & amortization (EBITDA) decline of -27.4%). Alarmingly, operational progress seemed to have stalled as the retention rate dropped by 50 basis points to 92.4% along with several other key performance indicators. Vestis also announced a new CEO who lacked uniform rental experience (the CFO is also fairly new) and amended its credit agreement to allow a higher degree of leverage for a longer time frame. With the company’s long-term prospects thus growing more uncertain, we reduced our stake in the Fund significantly during the first half of the year.

The Fund’s advantage over the Russell 2000 for the year-to-date period was driven mostly by stock selection, though sector allocation was also additive. At the sector level, stock selection and, to a lesser extent, an overweight helped most in Financials, followed by stock selection and lower exposure in Health Care and stock selection and a higher exposure in Industrials. Conversely, stock selection and, to a lesser extent, an overweight in Information Technology, stock selection in Communication Services, and much lower exposure to Utilities hurt relative performance the most.

Current Positioning and Outlook

Against a backdrop of ample economic and geopolitical uncertainty, we note that as of the end of June, the Russell 2000 remained much less expensive than the Russell 1000. Based on our preferred index valuation metric, EV/EBIT or enterprise value over earnings before interest and taxes, small-caps stayed close to a 25-year low relative to large-cap stocks. Many small-cap stocks appear to be emerging from a two-year earnings recession, which should, in our view, help boost performance for an asset class that’s lagged large-cap for several years and currently faces low expectations. And previous low expectations and relatively underwhelming returns have often been opportune times to increase allocations. Historically, sitting on the sidelines during corrections or the early stage of rallies has carried a high cost. We are therefore cautiously optimistic for the advantages of active, risk-conscious, small-cap investing for the long run.

Average Annual Total Returns Through 06/30/25 (%)

Annual Operating Expenses: N/A

¹ Not annualized.

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