Fund Performance

Royce Smaller-Companies Growth Fund advanced 25.8% for the year-to-date period ended 6/30/26, outperforming its small-cap benchmark, the Russell 2000 Growth Index, which rose 22.2%, and the Russell 2000 Index, which was up 22.6% for the same period. The Fund also beat the Russell 2000 Growth for the 1-, 3-, 5-, 10-, 25-year, and since inception (6/14/01) periods ended 6/30/26. The Fund’s average annual total return since inception was 11.6%.

What Worked… And What Didn’t

All of the Fund’s 10 equity sectors made a positive contribution to performance in the first half of 2026. Health Care made the by far the biggest positive impact, followed by Information Technology and Industrials. The Fund’s three lowest sector weightings—Utilities, Consumer Staples, and Communication Services—made the smallest contributions. At the industry level, pharmaceuticals (Health Care), health care providers & services (Health Care), and semiconductors & semiconductor equipment (Information Technology) were the top contributors, while software (Information Technology), commercial services & supplies (Industrials), and health care equipment & supplies (Health Care) made the biggest detractions.

The Fund’s top contributor at the position level was Definium Therapeutics, a late-stage pharmaceutical company with an oral LSD-based therapy, for generalized anxiety disorder (GAD) and major depressive disorder (MDD). We view the opportunity as large and underserved, particularly in GAD, where drug innovation has been limited and current standards of care often provide only modest benefit. The stock was a significant contributor, especially during the second quarter after Definium reported better-than-expected Phase III MDD data, demonstrating durable efficacy and no new safety signal. Looking ahead, we remain constructive on the setup into upcoming Phase III GAD readouts, while our longer-term thesis is that durable efficacy, infrequent dosing, and a favorable tolerability profile could support a multi-billion-dollar product opportunity if successfully commercialized.

TTM Technologies is the largest PCB (printed circuit board) manufacturer in North America and a key supplier across the aerospace & defense, data center/networking, medical/industrial, auto, and communications markets. We initiated the position in late 3Q25 as the market appeared to be underappreciating the company’s pivot toward higher growth and higher-margin AI infrastructure and defense applications. The stock has been a major year-to-date winner as TTM repeatedly beat and raised expectations, with demand for PCBs accelerating in data center networking and aerospace & defense, supported by a $1.6 billion defense backlog. Management raised fiscal 2026 revenue guidance to roughly $4.0 billion, or 38% growth year-over-year. We trimmed the position in 2Q26 after the shares re-rated sharply, though we still like the company given scarce advanced PCB capacity, improving margins, durable defense demand, and additional runway from capacity additions.

Hinge Health Cl. A is the category leader in virtual healthcare, taking one of the most common, inconvenient healthcare experiences—going to in-person physical therapy—and moving it to a virtual experience. Sessions occur in the home via a self-paced digital model, while still giving patients access to personalized guidance from licensed physical therapists, coaches, and AI-supported care tools. The company focuses primarily on musculoskeletal (MSK) care, helping patients manage joint and muscle pain through its mobile app, with the goal of improving access and outcomes while lowering costs for employers and health plans. We began buying the stock in 4Q25, and it has been strong year-to-date because the company has repeatedly executed ahead of expectations. We continue to like Hinge because it combines category leadership in virtual MSK, underpenetrated eligible lives, expanding member utilization, and a very long runway of growth while exhibiting healthy operating leverage.

Penguin Solutions is an AI infrastructure company that designs, builds, deploys, and manages advanced computing systems for enterprise, government, and data center customers. We initiated a position earlier this year as the market seemed not to fully appreciate the Penguin’s transition from a more cyclical memory/hardware supplier into a focused AI infrastructure platform, with exposure to enterprise inference, AI factories, and higher-value managed infrastructure. The stock was strong in the first half of 2026 as results and guidance moved sharply higher. Penguin posted a broad-based fiscal 3Q beat, raised fiscal 2026 revenue growth guidance, and provided preliminary fiscal 2027 guidance for roughly 30% revenue growth, driven by strength in AI-related memory demand and improving Advanced Computing momentum. We have trimmed the position after the significant move but continue to like Penguin because its differentiated mix of AI compute, memory architecture, software, and services gives it leverage to a multi-year AI infrastructure buildout.

Legence Corporation Cl. A is a specialty infrastructure services company that designs, installs, and maintains complex mechanical, electrical, plumbing, and HVAC systems for buildings, with particularly strong exposure to data centers, life sciences, healthcare, and education facilities. We initiated a position in 2025 because we viewed Legence as an underappreciated “pick-and-shovel” beneficiary of AI infrastructure growth, where rising data center construction and demand for prefabricated / liquid-cooling systems could drive faster revenue growth and better margins than the market was discounting. That thesis has played out faster than expected. Year-to-date strength has been driven by repeated beat-and-raise quarters, sharply higher data center revenue, strong backlog growth, and upward earnings revisions. While we trimmed the position after the stock’s significant move, we continue to like Legence because its differentiated engineering-to-installation model, expanding fabrication capacity, strong backlog visibility, and balance sheet capacity for accretive M&A should support durable growth over the next several years.

The Fund’s top detractor was PAR Technology, a restaurant technology company that sells cloud-based point-of-sale, loyalty, ordering, payments, and back-office software to large restaurant and convenience-store chains. We owned the company for its opportunity to replace legacy restaurant systems and consolidate more of a customer’s technology spend onto one platform, but the stock was weak in the first half of 2026 as ARR/revenue growth slowed, much of the historical expansion had come from acquisitions, and investors became less willing to underwrite elevated leverage and still developing free cash flow. While PAR continued to sign and roll out large enterprise customers, including Burger King and Papa John’s, the timing of the expected growth and margin inflection kept moving out. We exited the position in 2Q26 because we felt that the investment case had become too dependent on flawless execution, large customer rollouts, and future cross-sell, while the balance sheet and competitive backdrop left less room for error.

Alphatec Holdings is a medical technology company focused on spine surgery, with products spanning spinal implants, surgical planning, imaging, and neuromonitoring. Its Surgical segment represents the vast majority of revenue, complemented by its EOS imaging platform. The stock was weak year-to-date as investors became concerned that growth was decelerating. Surgical growth slowed in 4Q25 and in 1Q26, while the company also reduced 2026 revenue guidance. Despite the near-term disappointment, we added to our long-term holding in 2Q26 because the core thesis remains intact. Surgeon adoption continues to grow at a strong rate, adjusted EBITDA (earnings before interest, taxes, depreciation & amortization) guidance was maintained, and the selloff left the shares trading at what we viewed as an attractive valuation relative to the company’s longer-term opportunity in spine, deformity, and robotics, as well as free cash flow generation.

Onterris, formerly Montrose Environmental Group, is an environmental solutions company that helps corporate and government customers evaluate, analyze, and remediate environmental issues across air, water, soil, compliance, and treatment. The company rebranded in April, with the new name intended to unify several acquired businesses under one integrated environmental services platform. We initiated the position in 1Q26 because the underlying fundamentals looked strong, including organic growth potential, margin expansion, and integration benefits from prior acquisitions, despite some acquisition related noise in reported results. The stock grew weak after a 1Q26 revenue miss, 2Q26 revenue guidance came in well below consensus, and management’s full-year outlook became heavily dependent on a sharp second half recovery following severe weather delays and lower episodic emergency response revenue. While management maintained its 2026 guidance, the increased quarterly volatility and back-half execution risk reduced our confidence in the timing of the thesis, so we sold our stake in 2Q26, while continuing to monitor the company for improved execution.

Coastal Financial is a small community bank in Washington, but its core growth engine is CCBX, a Banking-as-a-Service (“BaaS”) platform that enables partners such as Robinhood and Dave to offer deposit, card, and consumer-lending products to their customers. The shares weakened in early 2026 following a strong 2025 advance as investors reassessed the predictability of the model, with partner specific economics, higher expenses, and pressure on net interest margins creating increased earnings volatility. While the BaaS growth opportunity remained attractive, profitability depends on the credit and fraud performance of partner programs, the adequacy of contractual credit protections, and Coastal’s ability to distribute assets and manage its balance sheet within regulatory capital constraints, all of which made the business difficult to forecast and value. We trimmed the position at the end of 2025 following the stock’s strong positive appreciation and sold what remained of our position in 1Q26 as execution risk and estimate volatility were increasing, reducing the prospective risk/reward. (Although Coastal Financial detracted from performance in the first half of 2026, the investment was a positive contributor over our full holding period.)

SI-BONE is a medical device company whose iFuse implants are used in minimally invasive procedures to stabilize the sacroiliac, or SI, joint and broader sacropelvic anatomy, an area that can be a source of severe lower-back pain. SI-BONE has been a long-term holding for us because we believe the company has a leading position in SI joint fusion, a meaningful runway for surgeon adoption, and a pipeline that is expanding the business into trauma and broader spine applications. The stock was weak because, despite solid reported results and raised 2026 guidance, investors focused on slowing near-term growth. We added slightly toward the end of 2Q26 as the valuation had compressed, while the thesis remained intact. Key drivers such as a partnership rollout, INTRA Ti (a 3-D printed titanium implant system), reimbursement changes, and the next breakthrough-device launch are still largely back-half 2026 and 2027 events.

The Fund’s advantage over the Russell 2000 Growth was due to stock selection in the first half of 2026. At the sector level, stock selection and, to a lesser extent, our larger weighting in Health Care had biggest positive effect, followed by stock selection in Materials and Consumer Discretionary. Conversely, stock selection in Industrials (along with a smaller impact from our lower weighting) hurt relative results the most. The portfolio’s higher weighting in Consumer Staples and lower weighting in Information Technology also detracted from relative results.

Current Positioning and Outlook

The reasons associated with recent small-cap outperformance are some of those we highlighted two quarters ago: Federal spending (in particular infrastructure and defense); rapid innovation and capital investment in AI-related segments of the economy (power producers, electronic component makers and distributors, data center construction, et al.) and a tame economy and interest rate outlook. In addition, the U.S. and Israeli military actions against Iran have been creating a great deal of uncertainty (as to the duration and severity of actions) in the market, including a spike in oil prices, but investors appear to be looking past this in hopes of a near-term resolution.

Overall, we are encouraged by the increased breadth of market returns outside the very largest technology stocks and still see opportunities in areas of the economy that have not directly been involved with the AI theme. While we have reduced our Information Technology weighting this year given the concerns of pricing pressure in software, as well as the outperformance and higher valuations in areas such as semiconductors, we believe we are just beginning to see how enterprises will benefit from automating and streamlining business processes of all types and the productivity improvements that will follow. At the end of June, our Health Care weighting remained above the Russell 2000 Growth, in part due to our drug discovery theme, particularly in newer therapies we have identified for depression and anxiety.

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

Annual Operating Expenses: Gross 1.57 Net 1.49

¹ Not annualized.

Important Performance, Expense and Disclosure Information