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ROYCE
PREMIER
FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
THE ROYCE FUNDS
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<PAGE>
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Shareholder:
After a left foot start in January, small company stocks, as measured by the
Russell 2000 Index, outperformed their large company brethren (S&P 500) in
February, March, April and May (15.2% versus 6.2%), but were unable to continue
their winning ways in June (-4.1% versus 0.4%). June's downturn in performance
was the first sign of potentially higher volatility for small-cap issues. In
fact, the Nasdaq Composite closed the second quarter off over 5% from the high
it established on June 5th, its largest decline since a 13.8% drop in the second
quarter of 1994. In spite of June's downturn, and because of the February-May
surge, the Russell 2000 Index of small-cap stocks won the first half performance
derby with a 10.4% total return versus a 10.2% total return for the large-cap
oriented S&P 500.
Within small-cap, 'growth' finished ahead of 'value' with the Russell 2000
Growth Index providing an 11.9% return versus an 8.7% gain for the Russell 2000
Value Index. A similar performance relationship, but with wider disparity, was
also present in the Wilshire Target Small Cap Index Funds, as the Small Cap
Growth Fund (+13.2%) handily outperformed the Small Cap Value Fund (+3.9%).
ROYCE PREMIER FUND ('PREMIER'), with its small-cap value orientation, performed
in line with the two small-cap value proxies, posting a 7.4% return for the
first six months. Contributing to the Fund's performance were nice gains in two
sectors (retail and consumer durables) which had been mediocre performers in
1995.
Although not always leading in the short-term, Premier's longer-term results
are competitive on an absolute and risk adjusted basis. Average annual total
returns for the Fund over the last three years and since its inception on
December 31, 1991 were 12.7% and 14.0%, respectively, and its risk profile
remained low. According to independent mutual fund evaluation service,
Morningstar, Premier was the lowest risk domestic small-cap fund for the three
years ended June 30, 1996, as measured by Morningstar's risk ratio (LOWEST out
of 194 funds), and among the lowest as measured by standard deviation (3rd
lowest out of 194 funds) and beta (3rd lowest out of 194 funds). WE BELIEVE THAT
OUR APPROACH OF INVESTING IN HIGH QUALITY SMALL-CAP COMPANIES, USING ABSOLUTE
VALUATION STANDARDS, IS AN APPROPRIATE STRATEGY FOR GENERATING ABOVE AVERAGE
RESULTS.
FIREWORKS IN JULY
Louis Pasteur once [GRAPHIC]
said, 'Chance favors the prepared mind.' Although everyone was prepared for the
fireworks of July 4th, few were prepared for the market fireworks which began in
June and intensified throughout July. Double digit gains in small-cap indices
were erased and many investors now find themselves starting over at mid-year.
Performance Update Through July 31
<TABLE>
<CAPTION>
% Decline July '96 YTD Return
From High* Return thru 7/31/96
--------- -------- ------------
<S> <C> <C> <C>
PREMIER -5.5% -3.7% +3.5%
Russell 2000 -13.1% -8.7% +0.7%
Nasdaq Comp. -13.4% -8.8% +2.7%
</TABLE>
* Russell 2000 high was made on 5/22/96.
2
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We view the current pyrotechnics of July from the vantage point that these
fluctuations are inevitable and desirable, and part of the normal rhythm of the
market. We are prone to keep ourselves at a distance. This is largely common
sense -- no special preparation needed.
WORTH REPEATING
To be quoted is flattering. To quote oneself presents the dual risk of boring
our readers and tooting our own horn. Nevertheless, we want to repeat some of
our comments from the 1995 Annual Report. (We promise we won't do this again.)
IN OUR LAST REPORT WE SAID:
'An interesting aspect of this five year rise in both
stocks and bonds is the ever increasing participation
of individual investors . . . . In fact, it is that very same
demand which is believed to ensure future success
and prevent any major reversal in market
fortunes . . . . The suggestion that continued success is
nearly guaranteed by demand is a scary
proposition . . . . We remain most astonished, not with
the magnitude of investor appetite for stocks, but the
nearly universal assumption of its permanence.'
WE NOW THINK:
In a perverse way, the least informed (the purchasing public) now appear to
be dictating investment policy to those presumed most knowledgeable (portfolio
managers). Normally prudent professionals have taken comfort in the fact that
the public is pouring money into equity mutual funds. As one of our shareholders
commented, 'The inmates are running the asylum.'
ALSO IN THE 1995 ANNUAL REPORT WE SAID:
'We are certain, particularly in a global
economy, that an ample supply of securities can
be created to meet and even exceed investors'
demands.'
AND NOW:
The $132 billion of new investments in equity mutual funds for the first half
of 1996 has eclipsed the prior annual record set in 1993 ($130 billion for the
full year). Yet, the dramatic upward progress that this commitment was expected
to produce has not materialized. A move up in long-term interest rates and
increased corporate insider selling activity are partly to blame, as well as a
surge in IPO activity. By late June, roughly 80 new offerings a week were
producing a fresh supply of securities at the rate of approximately $20 billion
a month.
[GRAPHIC]
One of the most instructive offerings of the recent IPO boom was the creation
and issuance of Berkshire Hathaway Inc. Class B shares. Berkshire Hathaway's
Chairman, Warren Buffett, is perhaps the best known investor of our time.
Multiple warnings on the front page of the prospectus included: 'Neither Mr.
Buffett nor Mr. Munger (Vice Chairman) would currently buy Berkshire shares (at
the current
3
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price), nor would they recommend that their families or friends do so'
and 'Berkshire has attempted to assess the current demand for Class B shares
and has tailored the size of this offering to fully satisfy that demand
(and) therefore, buyers hoping to capture quick profits are almost certain
to be disappointed.' Yet, despite the warnings, over $500 million was raised.
WALL STREET HAS BEEN SUCCESSFUL IN CREATING AN AMPLE SUPPLY OF NEW AND
SECONDARY OFFERINGS TO FULLY SATISFY DEMAND. HOWEVER, IT PROVIDES NO
SIMILAR 'WARNING LABELS.'
ADDITIONALLY WE SAID:
'The magnitude of the decline in interest rates
is virtually not repeatable. Consequently, a
further decline in interest rates will not have the
same favorable impact on stock prices, no
matter how bullish one is on rates.'
AND NOW:
The consensus expectations of lower rates (then at 6%) in an election year
have proved to be wrong. Long-term government bond yields rose by over 20% in
the first half to a current yield of over 7.0%. While this surprise has not
ended the party, it's getting hard to find the punch bowl.
AND FINALLY WE SAID:
'THE NEXT FIVE YEARS WILL BE DIFFERENT! It's
not likely that the next five years will rival the
previous five in terms of ideal wind conditions
or spectacular performance. History tells us
that periods of high valuation and high return
are usually followed by periods of lower, less
dynamic returns . . . . We see no reason why
performance should not revert to the mean and,
thus, a period of lower five year returns is
likely. Very simply, the last five years was a
period in which risk and reward were
synonymous and one in which risk management
provided virtually no benefit. It's likely that we
have completed the best five year performance
period for this decade.'
AND NOW?
Enough said.
THE VALUE IN VALUE INVESTING
A basic premise of value investing is that stocks, like other goods and
services, should be purchased at the most attractive prices possible, preferably
at a discount to their 'intrinsic worth.' The reality for most investors is just
the opposite. In other words, investor comfort levels and, therefore, demand
increase when prices rise, and diminish as prices decline. The higher a stock
rises, the greater the perceived opportunity.
Value investing, on the other hand, takes a contrary view to this highly
emotional process. By systematically reducing risk when others ignore it and
taking risk when it is feared, one can capitalize on valuation discrepancies
(opportunities) which develop from time to time. The greatest risk that the
value investor confronts is the loss of either patience or discipline when faced
with the prospect of being out-of-sync with the market. THE VALUE IN 'VALUE
INVESTING' IS TO PROVIDE A COHERENT SYSTEM FOR RATIONAL DECISION MAKING . . .
THE PURPOSE OF WHICH IS TO COMPOUND WEALTH WHILE MINIMIZING RISK. Its basic
premise is that the price one pays for an investment makes a significant
difference in the return one receives.
WHAT WE DO
[GRAPHIC] Royce Premier Fund uses a risk-averse approach to invest
in the securities of small-cap companies viewed by the
advisor as having superior financial characteristics and/or
unusually attractive business prospects. Experience tells us that paying
attention to risk does not diminish long-term results, although individual
market phases may not necessarily confirm this.
4
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Our approach attempts to understand and value a company's private
worth -- what we believe an enterprise would sell for in a private transaction
between rational parties. The price we will pay for a security must be
significantly under our appraisal of its private worth. The consistent use of
this discipline, applied to less well-known securities, is the source of our
performance.
NO OTHER PLACE WE WOULD RATHER BE
While the Fund focuses on companies with market caps below $1 billion, our
weighted average and median market caps are actually much lower: $576 million
and $496 million, respectively, at June 30, 1996.
Although our orientation is small-cap stocks, our picking universe is by no
means small, with over 10,000 companies valued at more than $900 billion in
total market capitalization. It is both robust and perpetuating; IPO's, spin-
offs and reorganizations create hundreds of new prospects each year. It is a
sector rich in opportunity and easily accommodates our strategy given the size
of the investable universe.
Not long ago we had a conversation with a highly successful and respected
fund manager about diversification. His contention was that statistical
diversification could be achieved with just 13 holdings. His own portfolio was
concentrated in a mere 20 selections. We were impressed. Yet, upon further
examination, we discovered his 20 large-cap holdings were involved in 61
different businesses. As defined by Standard Industrial Classification codes
(SICs), Philip Morris has seven different business groups, Pepsi has six,
Johnson & Johnson has five and so on. In contrast, the vast majority of our
holdings have single lines of business. When one adds up the numbers, there's
really not much difference in terms of diversification between our approach and
that of 'focused' managers.
HOW IT WORKS
Our approach to investing in individual small-cap [GRAPHIC]
companies has proven historical benefits, but can be both
unpredictable and frustrating in the near-term. We believe that the stock market
in the short-term is a polling place, and in the long-term, a highly efficient
weighing device. While our ultimate success will continue to be driven by the
process of 'weighing the true value' of the small companies in which we have
invested, the following provides a brief glimpse of some of this year's
'election results.'
FALLING IN LOVE
[GRAPHIC] Despite a generally rising market, there were
numerous opportunities for us to either add new
positions or increase our investment in some old
favorites. The following companies represent our most
significant commitments in 1996's first half. More importantly, they represent
examples of works in progress which we hope will build future performance.
<TABLE>
<CAPTION>
SECURITY NET INVESTED
- ----------------------------------------- ------------
<S> <C>
New England Business Service, Inc. $ 4,669,744
Electroglas, Inc. 4,066,592
The Newhall Land and Farming Company 2,495,607
Unifi, Inc. 2,459,874
National Computer Systems, Inc. 2,368,911
</TABLE>
Our largest new purchases included two business service companies, one
technology stock, a California real estate owner and a globally dominant
processor of yarns. Both New England Business Service and National Computer
Systems have been leaders in their respective fields for years. These companies
have solid balance sheets, achieve high internal rates of return on their
capital and generate
5
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plenty of free cash from operations. In addition, both companies have new
and talented top management teams dedicated to enhancing shareholder value.
The Newhall Land and Farming Company is now emerging from a California real
estate depression with a similar, well documented commitment to its
shareholders. Electroglas is, much to our surprise, a technology company.
Electroglas, the undisputed leader (70% world market share) in its niche within
the technology industry, gets wonderful returns and now trades at one third of
last year's valuation. At two times the cash on its balance sheet, we couldn't
resist. Finally, Unifi assures its own leadership position in the textile sector
by driving down the costs of its products mercilessly. If Unifi's customers in
the fabric and apparel industries recover, our investment will prove timely.
HARVEST SEASON
Selling stocks is always difficult for the value [GRAPHIC]
investor for it requires either parting with success or
admitting mistakes. So far this year we have done both. The following is a list
of our five largest divestitures during 1996's first half.
<TABLE>
<CAPTION>
SECURITY NET PROCEEDS
- ----------------------------------------- ------------
<S> <C>
Claire's Stores, Inc. $7,632,432
Reebok International Ltd. 5,997,589
Grey Advertising Inc. 3,608,736
NCH Corporation 3,530,939
Precision Castparts Corp. 3,358,851
</TABLE>
In the cases of Claire's Stores and Precision Castparts, we reduced our
exposure due to full and fair valuations. These companies were purchased when
the respective conditions in the retailing and aerospace industries were
challenging and their potential was obscure to most investors. Lately,
fortunes have reversed and we have enjoyed some nice winners. Reebok
International and Grey Advertising were both reasonable selections and
modestly profitable investments pushed aside by more promising opportunities
for Premier's highly focused portfolio. NCH Corporation, on the other hand,
may have been a mistake. While we suffered no material loss, our confidence
of future gain had diminished to the point that our patience ran out.
VOLATILITY IS A FRIEND
Recently, stock market volatility has generated a great deal of attention
from the financial press. While large changes (100 point or greater moves) in
the Dow Jones Industrial Average make interesting reading in the morning papers,
their significance is exaggerated. The table below depicts the Russell 2000's
yearly price variation using the index's annual range as a percentage of the
beginning year's price.
[GRAPHIC]
It's interesting to note how tame the markets have remained in the last four
and a half years relative to the prior thirteen. TO US, VOLATILITY IS A FRIEND
IN THAT IT CREATES IRRATIONAL PRICING OF SECURITIES AND, THEREFORE,
OPPORTUNITIES FOR US TO CAPITALIZE ON OUR RISK MANAGEMENT SKILLS.
6
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ARE THERE ANY REAL INVESTORS LEFT?
The term 'investor' denotes a long-term supplier of [GRAPHIC]
capital. In contrast, a 'speculator' is one who takes
opportunistic risk in hopes of generating quick profits. In
essence, investors expect to get paid by the correct assessment of
underlying business fundamentals, whereas speculators count on others
(often referred to as greater fools) to buy them out profitably.
In the current bull market, it has become very difficult to tell the
difference between investors and speculators. For example, what exactly is
'momentum investing?' The term seems oxymoronic. While equities represent a
permanent ownership position in an enterprise, in many fund portfolios, they are
reviewed and replaced more frequently than three month Treasury Bills. Wall
Street brokerage firms publish 'Buy' and 'Sell' recommendations based on a
company's quarterly progress down to the penny per share; and the country's
largest equity mutual fund lost its star manager after a short period of
underperformance, which may have contributed to the decision by that fund's
investors to withdraw in excess of $1 billion.
Only time and more difficult market conditions will separate true investors
from disappointed speculators. GIVEN THAT WE BELIEVE THAT EQUITIES REPRESENT
LONG-TERM INTERESTS IN BUSINESSES, THE TERM 'INVESTOR' SUITS US JUST FINE.
WHAT DO WE DO NOW?
Given our belief that the next phase of the market will include lower equity
returns and greater volatility -- the need for basic blocking and tackling, in
the form of commitment, focus and experience, is paramount. We remain committed
to investing in high quality, small-cap companies using absolute valuation
standards; our focus remains sharp, and exclusively on small and micro-cap
companies; and our 20+ years of investment experience ensures that our vigilance
and discipline remain constant. Your continued confidence is appreciated.
Yours faithfully,
<TABLE>
<C> <S>
CHARLES M. ROYCE
Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George
President Vice Presidents
</TABLE>
August 1, 1996
P.S. Our 'new era' fund will wait for the 'new era.'
Morningstar proprietary risk ratio, beta and standard deviation are measures of
a fund's relative risk and are calculated for the trailing 36-month period.
Morningstar risk ratio measures a fund's downside volatility relative to all
equity funds which have an average score of 1.00. Beta is a measure of
sensitivity to market movements compared to the unmanaged S&P 500 index, with
the beta of the S&P 500 equal to 1.00. Standard deviation is a statistical
measure within which a fund's total return falls. The average Morningstar risk
ratio, beta and standard deviation for the 194 small-cap funds with a three-year
history as of 6/30/96 were: 1.02, 0.87 & 11.87, respectively. The Morningstar
risk ratio, beta and standard deviation for Royce Premier Fund over the same
period were: 0.46, 0.42 & 5.83, respectively. Source: Morningstar, Inc.
The Russell 2000, Russell 2000 Growth, Russell 2000 Value and S&P 500 indices
are unmanaged and include the reinvestment of dividends. The Nasdaq Composite is
an unmanaged index. The Wilshire Target Small Company Value and Growth Funds
attempt to replicate the performance of the Wilshire Next 1750 Small Company
Value and Growth Indices, respectively.
7
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FINANCIAL REVIEW
<TABLE>
<CAPTION>
TOTAL
PERIOD RETURN
- ------------------------------- -----
<S> <C>
1996 (through 6/30)............ 7.4%
1995........................... 17.8%
1994........................... 3.3%
1993........................... 19.0%
1992........................... 15.8%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- ---------------------------------------
(THROUGH 6/30/96)
<S> <C>
1-year......................... 11.9%
3-year......................... 12.7%
Since Inception*............... 14.0%
</TABLE>
ROYCE PREMIER FUND VERSUS S&P 500
VALUE OF $10,000 INVESTED ON 12/31/91
<TABLE>
<CAPTION>
ROYCE PREMIER FUND S&P 500
------------------ -------
<S> <C> <C>
12/31/91 10,000 10,000
3/31/92 10,160 9,745
6/30/92 10,140 9,937
9/30/92 10,440 10,245
12/31/92 11,580 10,769
3/31/93 12,125 11,233
6/30/93 12,608 11,288
9/30/93 12,923 11,578
12/31/93 13,784 11,845
3/31/94 13,891 11,394
6/30/94 13,741 11,438
9/30/94 14,258 12,000
12/31/94 14,236 12,001
3/31/95 14,851 13,170
6/30/95 16,103 14,425
9/30/95 16,807 15,578
12/31/95 16,774 16,503
3/31/96 17,339 17,403
6/30/96 18,022 18,193
</TABLE>
* Inception Date -- December 31, 1991
The results presented in this report should not be considered
representative of the total return from an investment in the Fund today. They
are provided only to give an historical perspective of the Fund. The investment
return and principal value of Fund shares will fluctuate, so that shares may be
worth more or less than their original cost when redeemed. Redemption fees are
not included because they apply only to purchases held for less than one year.
8
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PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the Royce
Premier Fund portfolio. For a more complete picture, the full portfolio and
accompanying financial statements should be read in their entirety.
<TABLE>
<S> <C> <C>
PORTFOLIO COMPOSITION VALUE % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Common Stocks $ 238,335,462 83.4%
Cash & Other Net Assets 47,249,439 16.6
--------------- -------
Total Net Assets $ 285,584,901 100.0%
--------------- -------
--------------- -------
PORTFOLIO DIAGNOSTICS
- ----------------------------------------------------------------------------------------------------------
Weighted Average Market Capitalization $576 Million
Median Market Capitalization $496 Million
Weighted Average P/E Ratio 15.1x
Weighted Average P/B Ratio 1.8x
Weighted Average Portfolio Yield 2.1%
COMMON STOCK SECTORS % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Financial 22.4%
Industrial Cyclicals 19.1
Services 15.7
Retail 8.8
Consumer Durables 7.6
Technology 4.1
Energy 2.4
Consumer Staples 2.0
Health 1.3
TOP TWENTY POSITIONS VALUE % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------
1. Marshall Industries $7,352,800 2.6%
2. Family Dollar Stores, Inc. 7,125,488 2.5
3. The Standard Register Company 7,013,200 2.5
4. Comdisco, Inc. 6,524,456 2.3
5. Lilly Industries, Inc. 6,381,800 2.2
6. The Dress Barn, Inc. 5,897,850 2.1
7. Stanhome Inc. 5,824,700 2.0
8. Florida Rock Industries, Inc. 5,630,400 2.0
9. Woodward Governor Company 5,609,032 2.0
10. LANDS' END, INC. 5,576,175 2.0
11. Juno Lighting, Inc. 5,480,800 1.9
12. Zenith National Insurance Corp. 5,472,263 1.9
13. The Lincoln Electric Company Cl. A 5,384,500 1.9
14. Wesco Financial Corporation 5,256,200 1.8
15. Curtiss-Wright Corporation 5,221,800 1.8
16. New England Business Service, Inc. 5,128,500 1.8
17. CalMat Co. 4,862,937 1.7
18. Orion Capital Corporation 4,600,200 1.6
19. E.W. Blanch Holdings, Inc. 4,543,425 1.6
20. Tom Brown, Inc. 4,492,059 1.6
</TABLE>
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[THIS PAGE INTENTIONALLY LEFT BLANK]
10
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ROYCE
PREMIER
FUND
FINANCIAL STATEMENTS
11
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ROYCE PREMIER FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS - 83.4%
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
CONSUMER DURABLES - 7.6%
160,000 Ethan Allen Interiors
Inc. ................... $ 3,960,000
203,800 Garan Incorporated........ 3,464,600
322,400 Juno Lighting, Inc. ...... 5,480,800
115,400 The Singer Company
N.V. ................... 2,336,850
245,800 The Stride Rite
Corporation............. 2,027,850
96,600 Sturm, Ruger & Company,
Inc. ................... 4,491,900
------------
21,762,000
------------
CONSUMER STAPLES - 2.0%
219,800 Stanhome Inc. ............ 5,824,700
------------
ENERGY - 2.4%
262,310 *Tom Brown, Inc. ......... 4,492,059
67,400 Camco International
Inc. ................... 2,283,175
------------
6,775,234
------------
FINANCIAL - 22.4%
15,846 *Alleghany Corporation.... 3,042,432
58,550 W. R. Berkley Corp. ...... 2,444,462
228,600 E.W. Blanch Holdings,
Inc. ................... 4,543,425
245,050 Comdisco, Inc. ........... 6,524,456
124,900 The Commerce Group,
Inc. ................... 2,607,288
248,500 Crawford & Company Cl.
A....................... 4,224,500
116,500 Arthur J. Gallagher &
Co. .................... 3,728,000
92,900 The John Nuveen Company... 2,310,887
106,600 Leucadia National
Corporation............. 2,611,700
147,000 The Newhall Land and
Farming Company......... 2,425,500
<CAPTION>
Shares Value
<C> <S> <C>
90,200 Orion Capital
Corporation............. $ 4,600,200
255,760 Pennsylvania Manufacturers
Corporation............. 4,347,920
55,000 The Pioneer Group,
Inc. ................... 1,471,250
87,900 Trenwick Group Inc. ...... 4,395,000
32,800 Wesco Financial
Corporation............. 5,256,200
329,600 `D'Willis Corroon Group
plc..................... 3,914,000
199,900 Zenith National Insurance
Corp. .................. 5,472,263
------------
63,919,483
------------
HEALTH - 1.3%
208,600 *Haemonetics
Corporation............. 3,806,950
------------
INDUSTRIAL CYCLICALS - 19.1%
268,300 CalMat Co. ............... 4,862,937
96,700 Curtiss-Wright
Corporation............. 5,221,800
162,000 Fab Industries, Inc. ..... 4,414,500
217,600 Florida Rock Industries,
Inc. ................... 5,630,400
229,900 P. H. Glatfelter
Company................. 4,224,413
64,500 Kaydon Corporation........ 2,773,500
141,000 Kimball International,
Inc. Cl. B.............. 3,895,125
375,400 Lilly Industries, Inc. Cl.
A....................... 6,381,800
178,000 The Lincoln Electric
Company................. 5,384,500
108,200 Liqui-Box Corporation..... 3,246,000
105,800 Unifi, Inc. .............. 2,975,625
63,739 Woodward Governor
Company................. 5,609,032
------------
54,619,632
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
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ROYCE PREMIER FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS - (continued)
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
RETAIL - 8.8%
561,700 *The Dress Barn, Inc. .... $ 5,897,850
410,100 Family Dollar Stores,
Inc. ................... 7,125,488
225,300 LANDS' END, INC. ......... 5,576,175
302,900 *Mikasa, Inc. ............ 3,331,900
98,500 The Talbots, Inc. ........ 3,188,937
------------
25,120,350
------------
SERVICES - 15.7%
94,050 Air Express International
Corporation............. 2,656,913
268,400 Arnold Industries, Inc. .. 3,824,700
119,000 Atlantic Southeast
Airlines, Inc. ......... 3,361,750
166,600 Bowne & Co., Inc. ........ 3,436,125
121,600 *International Dairy
Queen, Inc. Cl. A....... 2,675,200
262,600 *Marshall Industries...... 7,352,800
263,000 New England Business
Service, Inc. .......... 5,128,500
111,400 Sbarro, Inc. ............. 2,798,925
307,600 Sotheby's Holdings, Inc.
Cl. A................... 4,460,200
284,800 The Standard Register
Company................. 7,013,200
235,000 *TBC Corporation.......... 2,026,875
------------
44,735,188
------------
TECHNOLOGY - 4.1%
74,600 *Dionex Corporation....... 2,405,850
245,000 *Electroglas, Inc. ....... 3,491,250
<CAPTION>
Shares Value
<C> <S> <C>
99,400 National Computer Systems,
Inc. ................... $ 2,124,675
217,400 Scitex Corporation
Limited................. 3,750,150
------------
11,771,925
------------
Total Common Stocks
(Cost $209,812,371)..... 238,335,462
------------
U.S. TREASURY OBLIGATION - 5.0%
<CAPTION>
Principal
Amount
- ---------
<C> <S> <C>
$14,000,000 U.S. Treasury Notes 7.00%
due 4/15/99 (Cost
$14,194,688)........... 14,251,580
------------
REPURCHASE AGREEMENT - 11.0%
State Street Bank and Trust Company,
4.90% due 7/01/96, collateralized by
U.S. Treasury Notes, 5.25%, due
12/31/97, valued at $32,029,812 (Cost
$31,400,000)......................... 31,400,000
------------
TOTAL INVESTMENTS - 99.4% (COST
$255,407,059)........................ 283,987,042
CASH AND OTHER ASSETS LESS
LIABILITIES - 0.6%................... 1,597,859
------------
NET ASSETS - 100.0%.................... $285,584,901
------------
------------
</TABLE>
*Non-income producing.
`D'American Depository Receipt.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $255,517,702. At June 30, 1996, net unrealized appreciation for all
securities amounted to $28,469,340, consisting of aggregate gross unrealized
appreciation of $36,236,013 and aggregate gross unrealized depreciation of
$7,766,673.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<PAGE>
ROYCE PREMIER FUND
STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $224,007,059).............................................. $252,587,042
Repurchase agreement............................................................................. 31,400,000
Cash............................................................................................. 26,180
Receivable for investments sold.................................................................. 1,934,574
Receivable for shares of beneficial interest sold................................................ 785,473
Receivable for dividends and interest............................................................ 755,845
Prepaid expenses and other assets................................................................ 42,669
------------
TOTAL ASSETS................................................................................... 287,531,783
------------
LIABILITIES:
Payable for investments purchased................................................................ 1,303,995
Payable for shares of beneficial interest redeemed............................................... 323,412
Payable for investment advisory fees............................................................. 238,397
Accrued expenses................................................................................. 81,078
------------
TOTAL LIABILITIES.............................................................................. 1,946,882
------------
NET ASSETS..................................................................................... $285,584,901
------------
------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income.............................................................. $ 2,164,974
Accumulated net realized gain on investments..................................................... 13,925,328
Net unrealized appreciation on investments....................................................... 28,579,983
Shares of beneficial interest.................................................................... 37,312
Additional paid-in capital....................................................................... 240,877,304
------------
NET ASSETS..................................................................................... $285,584,901
------------
------------
PRICING OF SHARES:
Net asset value, offering and redemption price per share
($285,584,901[div]37,311,634 shares outstanding)............................................... $7.65
-----
-----
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
------------ -----------------
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income..................................................... $ 1,861,203 $ 3,878,109
Net realized gain on investments.......................................... 13,189,787 16,399,430
Net change in unrealized appreciation on investments...................... 6,300,002 20,989,542
------------ -----------------
Net increase in net assets resulting from investment operations......... 21,350,992 41,267,081
DIVIDENDS AND DISTRIBUTIONS:
From net investment income................................................ -- (3,659,780)
From net realized gain on investments..................................... -- (16,629,199)
------------ -----------------
Total dividends and distributions....................................... -- (20,288,979)
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets from capital share transactions..... (38,005,541) 78,871,235
------------ -----------------
NET INCREASE (DECREASE) IN NET ASSETS....................................... (16,654,549) 99,849,337
NET ASSETS:
Beginning of period....................................................... 302,239,450 202,390,113
------------ -----------------
End of period (including undistributed net investment income of $2,164,974
and $303,771, respectively)............................................. $285,584,901 $ 302,239,450
------------ -----------------
------------ -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<PAGE>
ROYCE PREMIER FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends.................................................................................... $ 2,562,570
Interest..................................................................................... 1,091,772
-----------
Total Income....................................................................... 3,654,342
-----------
Expenses:
Investment advisory fees..................................................................... 1,469,363
Custodian and transfer agent fees............................................................ 108,678
Administrative and office facilities expenses................................................ 77,640
Professional fees............................................................................ 14,924
Trustees' fees............................................................................... 10,920
Other expenses............................................................................... 111,614
-----------
Total Expenses..................................................................... 1,793,139
-----------
Net Investment Income.............................................................. 1,861,203
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................................................. 13,189,787
Net change in unrealized appreciation on investments.............................................. 6,300,002
-----------
Net realized and unrealized gain on investments.................................... 19,489,789
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................................. $21,350,992
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<PAGE>
ROYCE PREMIER FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating the Fund's
performance.
<TABLE>
<CAPTION>
Six Months
ended Years ended December 31,
June 30, 1996 -------------------------------------
(unaudited) 1995 1994 1993 1992
------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $7.12 $6.48 $6.41 $5.52 $5.00
------------- ----- ----- ----- -----
INVESTMENT OPERATIONS:
Net investment income (a)................ 0.05 0.10 0.06 0.02 0.02
Net realized and unrealized gain on
investments............................ 0.48 1.05 0.15 1.03 0.77
------------- ----- ----- ----- -----
Total from investment operations....... 0.53 1.15 0.21 1.05 0.79
------------- ----- ----- ----- -----
DIVIDENDS AND DISTRIBUTIONS:
Net investment income.................... -- (0.09) (0.05) (0.02) (0.02)
Net realized gain on investments......... -- (0.42) (0.09) (0.14) (0.25)
------------- ----- ----- ----- -----
Total dividends and distributions...... -- (0.51) (0.14) (0.16) (0.27)
------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD................ $7.65 $7.12 $6.48 $6.41 $5.52
------------- ----- ----- ----- -----
------------- ----- ----- ----- -----
TOTAL RETURN.................................. 7.4% 17.8% 3.3% 19.0% 15.8%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)...... $285,585 $302,239 $202,390 $47,143 $2,329
Ratio of Expenses to Average Net Assets (b)... 1.22%* 1.25% 1.38% 1.50% 1.77%
Ratio of Net Investment Income to Average Net
Assets...................................... 1.27%* 1.48% 1.19% 0.68% 0.53%
Portfolio Turnover Rate....................... 16% 39% 38% 85% 116%
Average Commission Rate Paid+................. $0.0642 -- -- -- --
</TABLE>
- ------------
(a) Net investment income is shown after fee waivers by the investment adviser
and distributor. For the years ended December 31, 1993 and 1992, the per
share effect of these waivers is $0.01 and $0.09, respectively.
(b) Expenses are shown after fee waivers by the investment adviser and
distributor. For the years ended December 31, 1993 and 1992, expense ratios
before the waivers would have been 1.68% and 4.17%, respectively.
* Annualized.
+ For fiscal years beginning on or after October 1, 1995, the Fund is required
to disclose its average commission rate paid per share for purchases and
sales of investments.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<PAGE>
ROYCE PREMIER FUND
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Premier Fund (the 'Fund') is a series of The Royce Fund (the
'Trust'), a diversified open-end management investment company. The Trust,
originally established as a business trust under the laws of Massachusetts,
converted to a Delaware business trust at the close of business on June 28,
1996. The Fund commenced operations on December 31, 1991.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
a. Valuation of investments:
Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of the last reported sale prior to the time the
valuation is made or, if no sale is reported for such day, at their bid price
for exchange-listed securities and at the average of their bid and asked prices
for Nasdaq securities. Quotations are taken from the market where the security
is primarily traded. Other over-the-counter securities for which market
quotations are readily available are valued at their bid price. Securities for
which market quotations are not readily available are valued at their fair value
under procedures established and supervised by the Board of Trustees. Bonds and
other fixed income securities may be valued by reference to other securities
with comparable ratings, interest rates and maturities, using established
independent pricing services.
b. Investment transactions and related investment income:
Investment transactions are accounted for on the trade date and dividend
income is recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. Realized gains and losses from investment transactions and
unrealized appreciation and depreciation are determined on the basis of
identified cost for book and tax purposes.
c. Taxes:
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal year.
The Schedule of Investments includes information regarding income taxes under
the caption 'Income Tax Information'.
d. Distributions:
Dividend and capital gain distributions are recorded on the ex-dividend
date and paid annually in December. These distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to paid-in capital and
may affect net investment income per share. Undistributed net investment income
may include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
17
<PAGE>
<PAGE>
ROYCE PREMIER FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
e. Repurchase agreements:
The Fund enters into repurchase agreements with respect to its portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of its assets. The Fund restricts repurchase agreements to maturities
of no more than seven days. Securities pledged as collateral for repurchase
agreements are held by SSB&T until maturity of the repurchase agreements.
Repurchase agreements could involve certain risks in the event of default or
insolvency of SSB&T, including possible delays or restrictions upon the ability
of the Fund to dispose of the underlying securities.
2. INVESTMENT ADVISER:
Under the Trust's investment advisory agreement with Quest Advisory Corp.
('Quest'), the Fund accrued and paid Quest fees totaling $1,469,363 for the six
months ended June 30, 1996. The agreement provides for fees equal to 1.0% per
annum of the Fund's average net assets. Such fees are computed daily and are
payable monthly to Quest.
3. FUND SHARES:
The Board of Trustees has authority to issue an unlimited number of shares
of beneficial interest of the Fund, with a par value of $.001. Share
transactions were as follows:
<TABLE>
<CAPTION>
Six Months ended
June 30, 1996 Year ended
(unaudited) December 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sold.............................................. 6,420,101 $ 46,954,993 19,665,370 $138,651,613
Issued as reinvested dividends and
distributions................................... -- -- 2,684,934 18,955,637
Redeemed.......................................... (11,534,362) (84,960,534) (11,134,302) (78,736,015)
</TABLE>
Shares redeemed within one year of purchase are subject to a 1% redemption
fee, payable to the Fund, which is used to offset costs associated with the
redemption.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
For the six months ended June 30, 1996, the cost of purchases and the
proceeds from sales of investment securities, other than short-term securities,
amounted to $41,825,688 and $73,199,252, respectively.
18
<PAGE>
<PAGE>
At the Special Meeting of Shareholders held on June 26, 1996, Trust
shareholders approved a conversion of the Trust to a Delaware business trust,
elected Trustees and ratified the Board's selection of the Trust's independent
public accountants, and Fund shareholders approved proposals to permit
securities lending and investment in warrants, rights and options.
<TABLE>
<CAPTION>
Proposal/ Votes Votes Votes Cast Votes
Name of Trustee Cast For Withheld Against Abstained
- -------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Convert the Trust to a Delaware business trust.... 37,472,360 N/A 845,090 3,121,147
Proposal to permit loans of portfolio
securities...................................... 16,930,523 N/A 1,387,430 1,516,025
Proposal to change the Fund's investment policy
concerning warrants, rights and options......... 17,220,106 N/A 1,185,854 1,428,018
Ratification of independent public accountants.... 51,370,026 N/A 442,499 2,816,187
Charles M. Royce.................................. 52,309,497 2,319,215 N/A N/A
Thomas R. Ebright................................. 52,314,207 2,314,505 N/A N/A
Hubert L. Cafritz................................. 52,219,769 2,408,943 N/A N/A
Richard M. Galkin................................. 52,305,456 2,323,256 N/A N/A
Stephen L. Isaacs................................. 52,258,406 2,370,306 N/A N/A
William L. Koke................................... 52,300,723 2,327,989 N/A N/A
David L. Meister.................................. 52,282,477 2,346,235 N/A N/A
</TABLE>
19
<PAGE>
<PAGE>
POSTSCRIPT: NEW ERA DEFINITIONS
A by-product of any new era is a change in its language. The use of new
words and definitions typically signifies the emergence of a new culture. For
example, the acceptance of popular slang words 'cool' and 'hip' in the '60s
ushered in an era known as 'pop culture.'
The protracted bull market of the last five years has many believing that
we have entered into a new age of investing. Just as 'bad' came to mean 'good'
in the slang of the '70s, Steve Leuthold, stock market researcher and money
manager, with further corroboration from USA Today 'Money Talk' columnist,
Daniel Kadlec, has suggested, with tongue firmly in cheek, that the following
'new definitions for a new era' have replaced those established by Mr. Webster:
BEAR MARKET: When stocks decline for a week.
MAJOR CORRECTION: When stocks decline for a day.
OLD-TIMER: A person who knows someone who lost money in the stock market.
CYNIC: Anyone reminding you stocks can go down.
CONSERVATIVE: Anyone without a margin account.
RISK: How much you can lose being out of the market.
INFLATION: Historical phenomena that used to adversely affect stocks.
CONTRARIAN: Someone with nothing to talk about at parties.
IPO: Instant profit opportunity.
SHORT SALE: Temporary condition associated with memory failure.
GRAHAM & DODD: Ancient philosophers who believed the book value of a
company was too much to pay. It's widely assumed they also believed the world
was flat.
MUTUAL FUND: A pool of money guaranteed to grow because it has lots of
contributors, and you just know that many people can't be wrong.
As conservative cynics, we can only hope that when the current market is no
longer 'hip,' it will not find too many people feeling 'bad,' as it was
originally defined.
------------------------------------------------------
THE ROYCE FUNDS
General Information and Telephone Purchases ......... 1 (800) 221-4268
Shareholder Account Services ........................ 1 (800) 841-1180
Investment Advisor Services ......................... 1 (800) 33-ROYCE
The Royce Funds InfoLine ............................ 1 (800) 78-ROYCE
E-mail Address ................................ [email protected]
Internet Homepage .......................... http://www.roycefunds.com
1414 Avenue of the Americas, New York, New York 10019
This report must be accompanied by or preceded by a current prospectus of the
Fund.
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as `D'
The division sign shall be expressed as [div]
GRAPHIC APPENDIX
On page 2 of the paper format Royce Premier Fund report:
Picture of firecracker exploding
On page 3 of the paper format Royce Premier Fund report:
A picture of a Prospectus cover of Berkshire Hathaway Inc.
On page 4 of the paper format Royce Premier Fund report:
A picture of a scale balancing a dollar sign and a factory.
On page 5 of the paper format Royce Premier Fund report:
A picture of a man in long white coat pointing with a pointer.
A picture of Cupid shooting an arrow with two hearts around him.
On page 6 of the paper format Royce Premier Fund report:
A picture of a basket of fruit at harvest time.
A bar graph of the Russell 2000 price variations from 1979 to 1996.
On page 7 of the paper format Royce Premier Fund report:
A picture of a ticker tape machine.
