<PAGE>
<PAGE>
ROYCE
TOTAL RETURN
FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
THE ROYCE FUNDS
<PAGE>
<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 TOTAL RETURN FUND ('RTR') outperformed both small-cap value proxies,
posting a 14.2% return for the first six months. Contributing to the Fund's
performance were nice gains in two sectors (consumer durables and services)
which had been mediocre performers in 1995.
Two of our goals for the Fund for the remainder of the year, besides,
providing above average returns, are to increase the current asset base, which
stands at approximately $3.6 million, and to qualify it for daily newspaper
listings. Of note, to our knowledge, RTR remains one of the few funds with a
focus on small companies with attractive dividend yields. We believe that this
is a distinct advantage because dividends tend to enhance price and portfolio
stability. Although the Fund's investment history is relatively short, its
returns are highly competitive on an absolute and relative basis. Average annual
total returns for the Fund over the one year and since inception (December 15,
1993) periods were 26.8% and 18.0%, respectively. WE BELIEVE THAT THE INCOME
ORIENTED SEGMENT OF SMALL-CAP IS A REWARDING ALTERNATIVE FOR INVESTORS AND THAT
OUR APPROACH, WHICH USES ABSOLUTE VALUATION STANDARDS, IS AN APPROPRIATE
STRATEGY FOR CAPTURING THE RETURNS THAT THE SECTOR AFFORDS.
FIREWORKS IN JULY
[GRAPHIC]
Louis Pasteur once 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.
2
<PAGE>
<PAGE>
Performance Update Through July 31
<TABLE>
<CAPTION>
% Change July '96 YTD Return
From High* Return thru 7/31/96
--------- -------- ------------
<S> <C> <C> <C>
RTR +0.3% -1.5% +12.5%
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.
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.
3
<PAGE>
<PAGE>
[GRAPHIC GOES HERE]
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 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.
4
<PAGE>
<PAGE>
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 Total Return Fund's investment focus is both
long-term growth of capital and current income. It seeks to
achieve these objectives by investing in small-cap stocks
which pay above average dividends.
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
Under normal conditions, the Fund will have at least 80% of its assets in
common stocks, of which at least 90%, pay dividends. Of the 7,500 public
companies with market caps below $1 billion, over 1,500 have dividend yields of
2% or greater. The small-cap dividend paying universe is broad and offers many
attractive 'total return' opportunities.
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]
5
<PAGE>
<PAGE>
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.
ARE THERE ANY REAL INVESTORS LEFT?
The term 'investor' denotes a long-term supplier of
capital. In contrast, a 'speculator' is one who takes [GRAPHIC]
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 the 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-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 Jack E. Fockler, Jr.
President W. Whitney George
Vice Presidents
</TABLE>
August 1, 1996
P.S. Our 'new era' fund will wait for the 'new era.'
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.
6
<PAGE>
<PAGE>
FINANCIAL REVIEW
<TABLE>
<CAPTION>
PERIOD TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------- ------------ ----------------------------------------------------
(THROUGH 6/30/96)
<S> <C> <C> <C>
1996 (through 6/30).................. 14.2% 1 year............................... 26.8%
1995................................. 26.9% Since Inception*..................... 18.0%
1994................................. 5.2%
</TABLE>
ROYCE TOTAL RETURN FUND VERSUS S&P 500
VALUE OF $10,000 INVESTED ON 12/15/93
<TABLE>
<CAPTION>
ROYCE TOTAL RETURN S&P 500
------------------ -------
<S> <C> <C>
12/15/93 10000 10000
12/31/93 10000 10100
1/15/94 9980 10439
2/28/94 9960 10155
3/31/94 9940 9715
4/30/94 9960 9840
5/31/94 9980 10000
6/30/94 9960 9752
7/31/94 10180 10075
8/31/94 10601 10485
9/30/94 10361 10231
10/31/94 10401 10469
11/30/94 10362 10085
12/31/94 10514 10233
1/31/95 10576 10498
2/28/95 11049 10905
3/31/95 11152 11229
4/30/95 11337 11560
5/31/95 11645 12017
6/30/95 12014 12299
7/31/95 12405 12713
8/31/95 12734 12747
9/30/95 13001 13282
10/31/95 12980 13235
11/30/95 13083 13817
12/31/95 13339 14073
1/31/96 13292 14555
2/29/96 13779 14696
3/31/96 13964 14840
4/30/96 14635 15062
5/31/96 15029 15450
6/30/96 15238 15513
</TABLE>
*Inception date - December 15, 1993
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.
7
<PAGE>
<PAGE>
PORTFOLIO SUMMARY
The following information is provided as a 'bird's eye' view of the Royce Total
Return Fund portfolio. For a more complete picture, the full portfolio and
accompanying financial statements should be read in their entirety.
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION VALUE % OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks $2,356,300 64.7%
Corporate Bonds 342,750 9.4
Cash & Other Net Assets 943,149 25.9
---------- -----
Total Net Assets $3,642,199 100.0%
---------- -----
---------- -----
PORTFOLIO DIAGNOSTICS
- ------------------------------------------------------------------------------------------------------------
Weighted Average Market Capitalization $336 Million
Median Market Capitalization $267 Million
Weighted Average P/E Ratio 14.7x
Weighted Average P/B Ratio 1.4x
Weighted Average Portfolio Yield 4.4%
COMMON STOCK SECTORS % OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------
Industrial Cyclicals 16.2%
Financial 15.3
Services 13.6
Consumer Durables 8.0
Consumer Staples 6.0
Technology 5.6
TOP TWENTY POSITIONS MARKET VALUE % OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------
1. New England Business Service, Inc. $195,000 5.4%
2. AnnTaylor Stores Corporation 8.75% Sub. Deb. due 6/15/00 142,500 3.9
3. Oregon Steel Mills, Inc. 137,500 3.8
4. Stanhome Inc. 119,250 3.3
5. BGS Systems, Inc. 117,000 3.2
6. Ennis Business Forms, Inc. 113,750 3.1
7. Zenith National Insurance Corp. 109,500 3.0
8. Fab Industries, Inc. 109,000 3.0
9. Pennsylvania Manufacturers Corporation 102,000 2.8
10. Figgie International Inc. 9.875% Sr. Note due 10/01/99 100,500 2.8
11. Arnold Industries, Inc. 99,750 2.7
12. Reliance Group Holdings, Inc. 9.00% Sr. Note due 11/15/00 99,750 2.7
13. Arthur J. Gallagher & Co. 96,000 2.6
14. Scitex Corporation Limited 86,250 2.4
15. The Standard Register Company 86,187 2.4
16. The Commerce Group, Inc. 83,500 2.3
17. Garan Incorporated 83,300 2.3
18. Weyco Group, Inc. 81,000 2.2
19. Oshkosh Truck Corporation Cl. B 77,688 2.1
20. Florida Rock Industries, Inc. 67,275 1.8
</TABLE>
8
<PAGE>
<PAGE>
ROYCE TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS - 64.7%
<TABLE>
<CAPTION>
Shares Value
<C> <S> <C>
CONSUMER DURABLES - 8.0%
4,900 Garan Incorporated............ $ 83,300
3,100 Juno Lighting, Inc............ 52,700
2,000 Skyline Corporation........... 50,000
500 Sturm, Ruger & Company,
Inc......................... 23,250
2,000 Weyco Group, Inc.............. 81,000
----------
290,250
----------
CONSUMER STAPLES - 6.0%
3,000 A.T. Cross Company Cl. A...... 53,250
2,500 *Dimon Inc.................... 46,250
4,500 Stanhome Inc.................. 119,250
----------
218,750
----------
FINANCIAL - 15.3%
2,000 E.W. Blanch Holdings, Inc..... 39,750
4,000 The Commerce Group, Inc....... 83,500
3,000 Crawford & Company Cl. B...... 52,125
3,000 Arthur J. Gallagher & Co...... 96,000
3,500 Hilb, Rogal & Hamilton
Company..................... 48,563
6,000 Pennsylvania Manufacturers
Corporation................. 102,000
1,000 The Pioneer Group, Inc........ 26,750
4,000 Zenith National Insurance
Corp........................ 109,500
----------
558,188
----------
INDUSTRIAL CYCLICALS - 16.2%
5,100 Blessings Corporation......... 52,275
4,000 Fab Industries, Inc........... 109,000
2,600 Florida Rock Industries,
Inc......................... 67,275
2,500 P. H. Glatfelter Company...... 45,937
2,000 International Aluminum
Corporation................. $ 50,500
1,500 Paul Mueller Company.......... 51,000
10,000 Oregon Steel Mills, Inc....... 137,500
5,500 Oshkosh Truck Corporation Cl.
B........................... 77,688
----------
591,175
----------
SERVICES - 13.6%
7,000 Arnold Industries, Inc........ 99,750
10,000 Ennis Business Forms, Inc..... 113,750
10,000 New England Business Service,
Inc......................... 195,000
3,500 The Standard Register
Company..................... 86,187
----------
494,687
----------
TECHNOLOGY - 5.6%
3,000 BGS Systems, Inc.............. 117,000
5,000 Scitex Corporation Limited.... 86,250
----------
203,250
----------
Total Common Stocks (Cost
$2,290,865)................. 2,356,300
----------
<CAPTION>
Principal
Amount
- ---------
<C> <S> <C>
CORPORATE BONDS - 9.4%
$ 150,000 AnnTaylor Stores Corporation
8.75% Sub. Deb. due
6/15/00..................... 142,500
100,000 Figgie International Inc.
9.875% Sr. Note due
10/01/99.................... 100,500
100,000 Reliance Group Holdings, Inc.
9.00% Sr. Note due
11/15/00.................... 99,750
----------
Total Corporate Bonds (Cost
$303,219)................... 342,750
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<PAGE>
ROYCE TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
-----
<S> <C>
REPURCHASE AGREEMENT - 22.0%
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 $816,337 (Cost
$800,000).............................. $ 800,000
TOTAL INVESTMENTS - 96.1%
(COST $3,394,084)...................... $3,499,050
CASH AND OTHER ASSETS LESS
LIABILITIES - 3.9%..................... 143,149
----------
NET ASSETS - 100.0%...................... $3,642,199
----------
----------
</TABLE>
* Non-income producing.
INCOME TAX INFORMATION - The cost of total investments for federal income tax
purposes was $3,394,084. At June 30, 1996, net unrealized appreciation for all
securities amounted to $104,966, consisting of aggregate gross unrealized
appreciation of $148,364 and aggregate gross unrealized depreciation of $43,398.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<PAGE>
ROYCE TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $2,594,084)................................................... $2,699,050
Repurchase agreement................................................................................ 800,000
Cash................................................................................................ 234,363
Receivable for investments sold..................................................................... 18,375
Receivable for dividends and interest............................................................... 10,944
Prepaid expenses and other assets................................................................... 4,425
----------
TOTAL ASSETS...................................................................................... 3,767,157
----------
LIABILITIES:
Payable for investments purchased................................................................... 116,219
Accrued expenses.................................................................................... 8,739
----------
TOTAL LIABILITIES................................................................................. 124,958
----------
NET ASSETS........................................................................................ $3,642,199
----------
----------
ANALYSIS OF NET ASSETS:
Undistributed net investment income................................................................. $ 35,771
Accumulated net realized gain on investments........................................................ 508,834
Net unrealized appreciation on investments.......................................................... 104,966
Shares of beneficial interest....................................................................... 554
Additional paid-in capital.......................................................................... 2,992,074
----------
NET ASSETS........................................................................................ $3,642,199
----------
----------
PRICING OF SHARES:
Net asset value, offering and redemption price per share
($3,642,199 [div] 553,600 shares outstanding)..................................................... $6.58
</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................................................... $ 35,590 $ 52,405
Net realized gain on investments........................................ 513,316 234,948
Net change in unrealized appreciation on investments.................... (136,100) 218,434
---------------- -----------------
Net increase in net assets resulting from investment operations....... 412,806 505,787
DIVIDENDS AND DISTRIBUTIONS:
From net investment income.............................................. -- (51,027)
From net realized gain on investments................................... -- (235,511)
---------------- -----------------
Total dividends and distributions..................................... -- (286,538)
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions.............. 681,719 672,225
---------------- -----------------
NET INCREASE IN NET ASSETS................................................ 1,094,525 891,474
NET ASSETS:
Beginning of period..................................................... 2,547,674 1,656,200
---------------- -----------------
End of period (including undistributed net investment income of $35,771
and $181, respectively)............................................... $3,642,199 $ 2,547,674
---------------- -----------------
---------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<PAGE>
ROYCE TOTAL RETURN FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends.......................................................................................... $ 38,816
Interest........................................................................................... 21,021
---------
Total Income................................................................................... 59,837
---------
Expenses:
Investment advisory fees........................................................................... 15,159
Custodian and transfer agent fees.................................................................. 4,708
Distribution fees.................................................................................. 3,789
Professional fees.................................................................................. 2,500
Administrative and office facilities expenses...................................................... 1,497
Other expenses..................................................................................... 3,353
---------
Total Expenses................................................................................. 31,006
---------
Fees waived by investment adviser and distributor.............................................. (6,759)
---------
Net Expenses................................................................................... 24,247
---------
Net Investment Income.......................................................................... 35,590
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments....................................................................... $ 513,316
Net change in unrealized appreciation on investments................................................... (136,100)
---------
Net realized and unrealized gain on investments................................................ 377,216
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $ 412,806
---------
---------
</TABLE>
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>
Years ended For the Period
Six Months ended December 31, December 15, 1993
June 30, 1996 ---------------- through
(unaudited) 1995 1994 December 31, 1993
---------------- ------ ------ -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $5.76 $5.12 $5.00 $5.00
-------- ------ ------ -------
INVESTMENT OPERATIONS:
Net investment income................................... 0.06 0.13 0.02 --
Net realized and unrealized gain on investments......... 0.76 1.24 0.24 --
-------- ------ ------ -------
Total from investment operations.................... 0.82 1.37 0.26 --
-------- ------ ------ -------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income................................... -- (0.13) (0.02) --
Net realized gain on investments........................ -- (0.60) (0.12) --
-------- ------ ------ -------
Total dividends and distributions................... -- (0.73) (0.14) --
-------- ------ ------ -------
NET ASSET VALUE, END OF PERIOD.............................. $6.58 $5.76 $5.12 $5.00
-------- ------ ------ -------
-------- ------ ------ -------
TOTAL RETURN................................................ 14.2% 26.9% 5.2% 0.0%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands).................... $3,642 $2,548 $1,656 $451
Ratio of Expenses to Average Net Assets (a)................. 1.60%* 1.67% 1.96% 0.29 %*
Ratio of Net Investment Income to Average Net Assets........ 2.35%* 2.42% 0.49% (0.29)%*
Portfolio Turnover Rate..................................... 74% 68% 88% 0%
Average Commission Rate Paid`D'............................. $ 0.0607 -- -- --
</TABLE>
- ------------
(a) Expenses are shown after fee waivers by the investment adviser and
distributor. For the period ended June 30, 1996, and for the periods ended
December 31, 1995, 1994 and 1993, expense ratios before the waivers would
have been 2.05%, 2.38%, 3.21% and 2.04%, respectively.
* Annualized.
`D' 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.
12
<PAGE>
<PAGE>
ROYCE TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Total Return 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 15, 1993.
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.
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ROYCE TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
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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.
f. Organizational expenses:
Costs incurred by the Fund in connection with its organization have been
deferred and are being amortized on a straight line basis over a five-year
period from the date of commencement of operations.
2. INVESTMENT ADVISER AND DISTRIBUTOR:
Under the Trust's investment advisory agreement with Quest Advisory Corp.
('Quest'), the Fund paid Quest fees totalling $12,189 (net of $2,970 voluntarily
waived by Quest) 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.
Quest Distributors, Inc. ('QDI'), the distributor of the Fund's shares, is
an affiliate of Quest. QDI voluntarily waived the Fund's distribution fee of
$3,789 for the six months ended June 30, 1996. The distribution agreement
provides for maximum fees of .25% per annum of the Fund's average net assets.
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........................................................... 113,511 $697,206 80,015 $449,217
Issued as reinvested dividends and distributions............... -- -- 50,053 286,304
Redeemed....................................................... (2,483) (15,487) (10,697) (63,296)
</TABLE>
Shares redeemed within one year 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 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 $2,371,943 and $2,446,759, respectively.
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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.
<TABLE>
<CAPTION>
Proposal/ Votes Cast Votes Votes Cast Votes
Name of Trustee 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
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>
15
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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.
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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.
GRAPHIC APPENDIX
On page 2 of the paper format Royce Total Return report:
Picture of firecracker exploding
On page 4 of the paper format Royce Total Return report:
A picture of a prospectus cover of Berkshire Hathaway Inc
On page 5 of the paper format Royce Total Return report:
A picture of a scale balancing a dollar sign and a factory.
A bar graph of the Russell 2000 price variations from 1979 to 1996.
On page 6 of the paper format Royce Total Return report:
A picture of a ticker tape machine.
STATEMENT OF DIFFERENCES
The division sign shall be expressed as.............. [div]
The dagger symbol shall be expressed as.............. 'D'
