Fund Performance

Royce SMID-Cap Total Return Fund increased 15.2% for the year-to-date period ended 6/30/26 versus respective gains of 22.7% and 24.2% for the Russell 2500 Index and the Russell 2500 Value Index for the same period.

What Worked… And What Didn’t

Seven of the portfolio’s nine equity sectors made a positive impact on performance for the year-to-date period ended 6/30/26, led by Industrials, Financials, and Materials. The only negative impacts came from Consumer Staples and Communication Services. At the industry level, semiconductors & semiconductor equipment (Information Technology), chemicals (Materials), and trading companies & distributors (Industrials) contributed most, while IT services (Information Technology), health care providers & services (Health Care), and consumer staples distribution & retail (Consumer Staples) were the largest detractors.

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.

FTAI Aviation is an aircraft leasing and aerospace engine maintenance and repair organization (MRO) specializing in the CFM56 engine, the workhorse powering the global aircraft fleet. In the post-Covid era, airlines have seen a significant resurgence in passenger demand, but engine OEMs (original equipment manufacturers) have struggled with delivery and quality issues on the new generation LEAP and GTF engines, causing airlines to maximize the utilization of their older CFM56 engines. This increases demand for FTAI’s product, which provides small-and-mid-sized airlines the flexibility to buy, lease, or exchange engines, as well as maintenance cost certainty and significant time and cost savings. So far in 2026, FTAI has achieved larger airline program wins and significant progress in its Strategic Capital Initiative—an aircraft/engine leasing joint venture with third-party investors to operate hundreds of aircraft while retaining the maintenance contract on the engines. In addition, FTAI Power, a new initiative to rebuild old CFM-56 engines at the end of their useful life into highly prized industrial gas turbines to run AI data centers, announced a joint venture with China-based Jereh Group, which lends customer credibility, scale, and lower parts prices.

Andersen Group Cl. A, which came to market via an IPO at the end of 2025, provides tax advisory, valuation, financial advisory, and related consulting services, primarily to ultra-high net worth families and private companies. The company has been around in this form since 2003 and has grown revenue every year since, which speaks to the resilience of the business model. Andersen does not provide audit work, in order to avoid any potential conflicts of interest, and instead leans into very complex areas of advisory work with a high-touch service model and where the client ROI is generally massive, often saving clients many multiples of what they pay Andersen for the services rendered. Its clients award very high marks to the company for the value-add of the advice given and importantly do not view this judgement-based work as an area of advice that they would trust from an AI model. To the contrary, Andersen’s expertise is in areas where the client specifically wants the human touch to lean on for particularly thorny situations where trust is paramount. The stock has performed very well since the IPO, as the market has begun to appreciate the high-quality nature of the business, as well as the strong earnings results in Andersen’s first two quarters as a public company.

The top detracting position was Kyndryl Holdings, 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.

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.

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.

Assured Guaranty is the largest financial guaranty company in the world. Using their AA rated balance sheet, which has significant excess capital, the company “insures” bonds (mostly public entity and/or municipal but also some structured finance bonds), so that if the issuer misses a coupon or principal payment, Assured Guaranty will make it in a timely manner. This high value add core business is starting to grow after a decade of shrinking, now that interest rates have normalized following the zero interest rate era. In addition, Assured is well known for outstanding capital allocation, specifically, its strong share repurchase program. Since the share repurchase program began in 2013, Assured has repurchased $6 billion of stock, reducing the share count by 77%, in our view an astonishing figure. In recent years, the company has repurchased about $500 million worth of shares. On Assured’s 1Q26 call, management noted that this number would be lower this year, as they are choosing to invest capital into high return growth opportunities in its core business, as well as in newer, adjacent areas. The market took a dim view of this announcement, and the stock sold off. While the pace of share repurchases may slow going forward, something we viewed as inevitable at some point, we continue to see a compelling risk/reward and anticipate that the deployment of capital into growth initiatives should improve Assured’s return on equity, resulting in a higher multiple.

TriNet Group is a Private Employer Organization (PEO), which essentially means that it provides outsourced human resources for small businesses. This is an underpenetrated market with a long runway of growth ahead of it, as the entrepreneurs running these small businesses can focus on their core competencies and customer value add, while leaving the headaches of HR to the PEO provider. TriNet gets paid a percentage markup of the client’s payroll and also provides access to health insurance benefits to these small businesses. A combination of three elements have impacted its shares: multi-year weakness in the small business part of the U.S. economy, which has limited the growth in TriNet’s end markets; a significant rise in healthcare costs that has hurt the profitability of the insurance segment of the business; and a perception that AI will limit employee growth in small businesses. We view the first two as transitory and cyclical. As for the third, we think that AI will actually increase the need to have a PEO partner that can provide access to necessary technology and best-in-class services.

The portfolio’s disadvantage versus its benchmark was primarily attributable to sector allocation decisions in the first half of 2026. At the sector level, both our significant underweight and stock selection in Information Technology detracted the most by far, in large part because we had far more limited exposure to the AI-related stocks that drove the index’s advance. Four of the top 10 contributing industries in the Russell 2500 were in Information Technology. Although we were slightly overweight in the electronic equipment, instruments & components industry, we were underweight in semiconductors & semiconductor equipment and had no exposure to technology hardware, storage & peripherals or communications equipment. Stock selection in Industrials and Consumer Staples (where our slight underweight also hurt) followed with sizable negative impacts versus the benchmark. Conversely, stock selection and, to a lesser extent, an underweight in Consumer Discretionary helped versus the Russell 2500, as did stock selection in Materials and Financials.

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 11% 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 (SMID-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 SMID-cap 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 SMID-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: Gross 1.66 Net 1.34

¹ Not annualized.

Important Performance, Expense and Disclosure Information