How did the Small-Cap Opportunistic Value Strategy perform in 4Q23 and in 2023?

Jim Harvey: We were really pleased with the way that Royce Small-Cap Opportunity Fund, the portfolio we manage in the Strategy, performed in both periods, although relative results for the quarter could have been better. The Fund advanced 11.2% in 4Q23, a strong performance on an absolute basis even though it lagged both its primary benchmark, Russell 2000 Value Index, which was up 15.3% for the same period, and the Russell 2000, which gained 16.9%. In 2023, the Fund advanced 19.6%, well ahead of both the Russell 2000 Value and the Russell 2000, which were up 14.6% and 16.9% respectively for the same period.

How has the Fund done versus its benchmark over longer-term periods?

Brendan Hartman: We were even happier with the results for those always important long-term periods. The Fund beat both benchmarks for the 3-, 5-, 10-, 15-, 20-, 25-year, and since inception (11/19/96) periods ended 12/31/23.

What were the Fund’s results on a sector basis in 4Q23?

Kavitha Venkatraman: They were very strong. Eight of the portfolio’s 10 equity sectors made a positive impact on quarterly performance, led by Industrials, Consumer Discretionary, and Information Technology. The only negative impacts came from Energy and Real Estate while Consumer Staples made the smallest contribution.

What happened at the industry level during the quarter?

Jim Stoeffel: Aerospace & defense from Industrials, household durables in Consumer Discretionary, and banks in Financials contributed most for the quarter, while energy equipment & services in Energy, electrical equipment from Industrials, and pharmaceuticals in Health Care were the largest detractors.

How did the Fund perform relative to the Russell 2000 Value on a sector basis in 4Q23?

Brendan Hartman: The Fund’s disadvantage versus the small-cap value index came mostly from stock selection, though sector allocation also detracted. Both our significantly lower weighting and stock selection in Financials hurt relative results, as did stock selection in Industrials and Health Care. Conversely, our lower weighting in Energy, lack of exposure to Utilities, and higher weighting in Consumer Discretionary all were additive versus the Russell 2000 Value.

How did the Fund perform at the sector level in 2023?

Kavitha Venkatraman: Eight of the Fund’s 10 equity sectors made positive contributions to calendar year results, led by Industrials, Consumer Discretionary, and Information Technology. Communication Services and Real Estate detracted, though only slightly, while Consumer Staples made the smallest contribution.

What were the biggest industry contributors and detractors in the calendar year?

Jim Harvey: The industries that contributed most were construction & engineering from Industrials, household durables in Consumer Discretionary, and metals & mining, which is in Materials. Communications equipment in Information Technology, pharmaceuticals in Health Care, and energy equipment & services in Energy were the largest detractors.

How did performance stack up at the sector level versus the Russell 2000 Value in 2023?

Brendan Hartman: The Fund’s advantage came from sector allocation. Our much lower weighting in Financials, higher weighting in Industrials, and both a lower weighting and stock selection in Health Care drove our edge at the sector level. Conversely, stock selection in Information Technology, a higher weighting and stock selection in Communication Services, and stock selection in Energy hurt relative performance most.

What is your outlook for the Strategy?

Jim Stoeffel: We continue to find new investment ideas that fit our theme-based investment framework. With inflation rolling over and the U.S. economy remaining healthy, it appears the “soft landing” scenario may actually play out. It also seems increasingly likely that the Fed rate hike cycle has ended with the markets anticipating significant rate cuts in 2024. However, there are a variety of “expert” views on when this will occur and how aggressive these cuts might be. Despite wars in the Ukraine and Middle East—and related disruptions to global shipping lanes—energy prices have remained stable but were creeping higher as of this writing and bear watching as we enter 2024. With all this in mind, we remain generally optimistic on the state of the U.S. economy and remain broadly overweight in Industrials and Information Technology.

Brendan Hartman: Many of our portfolio companies are reporting that supply chains have returned to normal or near normal conditions after several years of Covid-related disruptions. Despite our view that the long-term competitive dynamics of the industry are challenging, we have been slowly adding to our bank exposure given the outlook for lower rates in 2024, which should help alleviate the risks associated with credit quality issues. We also continue to look for opportunities to take advantage of unprecedented investments from both the private and public sectors in U.S. infrastructure spending. This investment is being fueled by the realization that companies need shorter and more secure supply chains, as well as the concerns about strategic imperatives around semiconductor production capabilities. The increasing demand for Artificial Intelligence (AI) capabilities is accelerating these trends, which in addition to driving demand for semiconductor capabilities, are driving significant demand for energy efficiency. We view this investment thesis as being in the early innings.

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