The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Shareholder:
Harold Geneen, former CEO of the giant conglomerate ITT Corp.,
once offered the following advice: "In the business world, everyone is
paid in two coins: cash and experience. Take the experience first;
the cash will come later." In 1995, however, the formula seemed to be
reversed as investors were paid with "cash" in the form of high stock
market returns. One can only wonder when investors will be paid with
"experience."
"Able To Leap Tall Buildings [cartoon of flying man with cape]
In A Single Bound"
This familiar phrase describes popular superhero Superman,
but it could also reflect 1995's stock market performance. 1995, like
Superman, was extraordinary by any standard of measurement. The
large-cap oriented S&P 500, which was up 37.5%, had its best calendar
year return since 1958. Propelled by strong performance in 1995's
first two quarters, the S&P 500 took a breather in the third quarter
only to resume a leadership role in the final quarter of the year.
Small-cap securities emerged as performance leaders in the middle of
the year, but were unable to keep up with the "faster than a speeding
bullet" S&P 500. For the year, the Russell 2000 index of small-cap
companies was up 28.4%.
Royce Total Return Fund's ("RTR") income oriented, small-cap value
approach was no match for the performance of the raging bull market of
1995. Just as "small-cap" under-performed large-cap, "value" under-
performed growth within the small-cap category. Also, a low exposure to
the market's best performing sector, technology, and an above-average
exposure to the consumer and service sectors acted like kryptonite in
holding back the Fund's relative short- term performance. Nevertheless,
RTR's risk-averse style produced a 26.9% return in 1995.
The Fund has $2.5 million in assets and two years of performance
history. Average annual total return for the Fund since inception
(12/15/93) was 15.1%.
The Relevance of Relative Performance [graphic of Einstein]
At some point in every modern bull market, generally at the
later stages, the concept of relative performance becomes dominant in
any discussion of investment results. As prospects of financial loss
become distant memories, investors shift their focus from absolute
gains to relative rewards. Investment strategies are changed,
portfolio managers are replaced and solid results are ignored in the
quest for better relative performance. The problem is ....... you
can't eat relative performance! The whole concept dies quickly in a
period of negative returns. When markets turn south, new car
purchases are deferred and vacation plans are canceled, relative
performance soon becomes irrelevant. While relative performance may
make a great conversation topic at the cocktail party, it is positive
absolute returns, compounded at reasonable rates, which put dinner on
the table.
The Value In Value Investing
A basic premise of value investing is that stocks, like other
goods and services, should be
<PAGE>
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 of balance weighing factory vs. $]
Royce Total Return Fund uses a risk-averse approach to invest in
income oriented securities of small-cap companies. Experience tells us
that paying attention to risk does not diminish long-term results,
although individual market phases may not always confirm this
assumption's validity.
Our approach attempts to understand and value a company's "private
worth." Private worth is what we believe the company would bring if the
entire enterprise were sold in a private transaction to a rational
buyer. 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, $337 million and $267 million, respectively, at December 31,
1995. Although our orientation is small-cap stocks, the capitalization
of our picking universe is by no means small. The small-cap market is
huge in numbers, 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. The small-cap sector is rich in opportunity
and easily accommodates our strategy given the size of the investable
universe.
How It Works [cartoon of man in lab coat with pointer]
Our approach to investing in individual small-cap companies has
proven long-term 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. Ultimately, our success is driven by the
process of "weighing the true value" of the small companies in which
we invest.
Anything But Typical
What do you get when interest rates fall precipitously,
inflation is low, demand for equities is strong and corporate earnings
outpace analysts' estimates? Answer: the LAST FIVE YEARS (actually
the last 5 1/4 years)! The last five years have been an exceptional
period for equity investing, one in which all the "right stuff" was in
place. Consider the following:
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There has not been a correction of 10% or more for the S&P 500 or
15% or more for the Russell 2000 since October of 1990, the longest
stretch ever for both indices.
The last five years were an anomaly in that a full market cycle did
not take place, but rather a trough (bottom) to peak (top) experience
only.
It was the best (in terms of return and duration) trough to peak
period in the 17-year history of the Russell 2000.
It was only the 8th time out of 49 quarterly trailing five year
return periods that the Russell 2000 generated a 20%+ average annual
return.
Within this market cycle, short-term interest rates had one of
their most significant declines - three month T-bills went from 8.2% in
September 1989 to 2.7% in September 1992.
It was one of the least volatile periods on record, and especially
so in the years 1993, 1994 and 1995.
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 highly likely that we have completed the best five year
performance period for this decade.
Cause or Effect [cartoon of smiling character with thought baloon]
An interesting aspect of this five year rise in both stocks and
bonds is the ever increasing participation of individual investors.
Demand for liquid securities has grown to proportions that now cloud
our understanding as to whether it is the cause or the effect of this
bull market. While it seemed clear several years ago that repeated
and uninterrupted gains in stocks and bonds would heighten mass
appeal, few predicted the growing appetite we have today. Now, armed
with demographic studies and a healthy dose of 20-20 hindsight, it is
the consensus belief that our population has become a nation of savers
and that demand for stocks will remain steady, if not grow. In fact,
it is that very same demand which is believed to ensure future success
and prevent any major reversal in market fortunes.
We are a bit uncomfortable with this widely held assumption of
continuous prosperity. Just as rising markets initially created
greater demand for equities, corrections could dampen enthusiasm. We
think there may be limits as to how long individuals will forgo
consumption in pursuit of savings. Furthermore, we know there are
alternative investments, like real estate or natural resources, at
times more attractive, for individuals to pursue. Finally, we are
certain, particularly in a global economy, that an ample supply of
securities can be created to meet and even exceed investors' demands.
The suggestion that continued success is nearly guaranteed by demand
is an absurd proposition. We remain most astonished, not with the
magnitude of investor appetite for stocks, but the nearly universal
assumption of its permanence. The real world is cyclical and so are
its markets.
A New Era ? [cartoon of cavemen hammering on rocket]
As the bull market enters its sixth year uninterrupted by normal
corrections, we find ourselves asking (and more to the point, others
asking us) is this a new era in investing? Have changes in national
demographics and attitudes and, therefore,
<PAGE>
investing patterns evolved to the point where traditional assumptions
are obsolete? By sticking to our own time tested and cycle proven
discipline, have we become the "Clark Kent" of the investment world,
permanently nerdy within the new order?
We believe fundamental economic principles and human nature
remain unchanged in the '90s. Our national economy has not entered a
new era of accelerated growth. In fact, we would argue the opposite.
American corporations, despite restructuring and down-sizing, are not
measurably more profitable if cumulative retained earnings are any
gauge. We still believe that individual investors are motivated by
fear and greed. In the current environment, greed has driven fear
from the investment dictionary.
Before long, we expect some normal balance in people's spending
habits to resume. Appetites for mutual fund investing may moderate in
favor of consumption or debt repayments. Weak sectors of our economy
like apparel retailing and infrastructure construction will recover.
Basic commodity prices could rise and equities would once again
represent long-term interests in business, as opposed to trading
vehicles. Absolute return goals, previously forgotten, will regain
the spotlight.
The Next Five Years Will Be Different
"It is not the going out of port, but the coming in, that
determines the success of a journey." Henry Ward Beecher
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.
Historical performance returns are built with periods of over-
performance and periods of under-performance and, over the long-term,
small-cap stocks have averaged approximately 12.5% per annum, not the
20% provided by the last five years. (1926 - 1995; source: Ibbotson
and Associates). We see no reason why performance should not revert
to the mean and, thus, a period of lower five year returns is likely.
The primary driver behind the most recent rally (and almost 15
years of soaring markets) has been interest rates. Although short-
term rates remain at the lower end of their trading range, it's the
change in interest rates and not the absolute level, which drives
price earnings multiples and stock prices. 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.
[Graph of log-term government bond yields over time since Dec. 75
with indication of when the Dow average passed 1000 and 5000]
The last five years were also unique in that never in our
nation's history have so many traditional bank savers become stock
market investors. The primary reason for the massive level of CD
conversions has been the high returns afforded stock market investors
compared to the declining returns available in traditional bank
products. A strong contributing factor has been the stock market's
lack of volatility. Volatility has been so low that new investors
have been lulled by the apparent "safety" of equity investing.
Volatility, which has always been a part of the investment
<PAGE>
equation, is likely to resurface and resume a more normal course as
background conditions change.
Time For Change ... We Think Not [graphic of jubilant alarm clock]
We have been discussing what has happened. Now it's time to talk
about what has not happened.
First, we have not changed our investment time horizon even
though it seems the rest of the world has. We view companies and
investment performance with the same long-term horizon because
attractive valuations and returns, like the planting and harvesting
seasons, are never one and the same. Although our risk-averse
approach has worked against us in the most recent performance period,
it has provided very decent returns in the context of history.
Second, we have not changed our underlying investment premise,
that a
<PAGE>
disciplined approach to investing in high quality, small-cap companies
using absolute valuation standards can provide attractive long-term
returns. Experience tells us that failure to "stay the course"
results in failure.
Third, the natural laws of gravity and market cycles have not
been rescinded.
And finally, our confidence in the ultimate outcome of our
approach has not changed. We expect our income oriented approach to
small-cap investing to have both an absolute and relative pay-off as
it has in the past. Your continued confidence is appreciated.
Yours faithfully,
Charles M. Royce Jack E. Fockler, Jr.
President W. Whitney George
Vice Presidents
February 15, 1996
NOTE: S&P 500 and Russell 2000 are unmanaged indices and include the
reinvestment of dividends.
<PAGE>
FINANCIAL REVIEW
Period Total Return Average Annual Total Return
1995 ..................26.9% Since Inception*...............15.1%
1994 .................. 5.1%
Royce Total Return Fund
Value of $10,000 Invested on 12/15/93
[Graph of value of $10000 investment in RGS vs. MS World Index since 12/15/94]
* Inception date - December 15, 1993
The results presented in this Annual Report should not be considered
representative of the total return from an investment in the Fund
today. They are only provided to give an historical perspective of the
Fund. The investment return and principal value of Fund shares will
fluctuate so that the shares may be worth more or less than their
original cost when redeemed. Redemption fees are not included because
they apply only to accounts open for less than one year.
<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.
Portfolio Composition Value % of Net Assets
Common Stocks $1,860,237 73.0 %
Corpoate Bonds and Preferred Stocks 536,413 21.1
Cash & Other Net Assets 151,024 5.9
Total Net Assets $2,547,674 100.0 %
Portfolio Diagnostics (unaudited)
Weighted Average Market Capitalization $337 Million
Median Market Capitalization $267 Million
Weighted Average P/E Ratio 12.8 x
Weighted Average P/B Ratio 1.5 x
Weighted Average Portfolio Yield 5.0 %
Common Stock Sectors % of Net Assets
Industrial Cyclicals 24.7 %
Financial 21.9
Consumer Durables 9.4
Services 6.8
Technology 5.6
Consumer Staples 3.4
Retail 1.2
Top Twenty Positions Value % of Net Assets
1 *AnnTaylor Stores Corporation $123,750 4.9%
2 *Reliance Group Holdings, Inc. 103,500 4.1%
3 *Figgie International Inc. Cl. A 99,500 3.9%
4 Curtiss-Wright Corporation 96,750 3.8%
5 Willis Corroon Group plc 93,000 3.7%
6 Landauer Inc. 89,175 3.5%
7 Stanhome Inc. 87,375 3.4%
8 Nobel Insurance Limited 86,450 3.4%
9 P.H. Glatfelter Company 85,625 3.4%
10 Garan Incorporated 82,685 3.2%
11 *Cliffs Drilling Company 82,500 3.2%
12 E.W. Blanch Holdings, Inc. 81,813 3.2%
13 Weyco Group, Inc. 78,500 3.1%
14 *Bird Corp. 74,100 2.9%
15 Ennis Business Forms, Inc. 73,500 2.9%
16 Woodward Governor Company 73,500 2.9%
17 Pennsylvania Manufacturers Corporation73,000 2.9%
18 Hilb, Rogal & Hamilton Company 66,875 2.6%
19 Fab Industries, Inc. 63,750 2.5%
20 Lilly Industries, Inc. Cl. A 63,750 2.5%
*Debt security of issuer.
<PAGE>
ROYCE TOTAL RETURN FUND
Schedule of Investments at December 31, 1995
COMMON STOCKS - 73.0%
Value
Shares (Note 1)
CONSUMER DURABLES - 9.4%
4,900 Garan Incorporated $82,685
3,100 Juno Lighting, Inc. 49,600
1,000 Sturm, Ruger & Company, Inc. 27,375
2,000 Weyco Group, Inc. 78,500
238,160
CONSUMER STAPLES - 3.4%
3,000 Stanhome Inc. 87,375
FINANCIAL - 21.9%
3,500 E.W. Blanch Holdings, Inc. 81,813
1,100 Fremont General Corporation 40,425
5,000 Hilb, Rogal & Hamilton Company 66,875
2,000 The John Nuveen Company 49,500
7,600 Nobel Insurance Limited 86,450
4,000 Pennsylvania Manufacturers Corporatio 73,000
1,000 The Pioneer Group, Inc. 27,250
8,000 * Willis Corroon Group plc 93,000
1,800 Zenith National Insurance Corp. 38,475
556,788
INDUSTRIAL CYCLICALS - 24.7%
5,100 Blessings Corporation 52,913
1,800 Curtiss-Wright Corporation 96,750
2,000 Fab Industries, Inc. 63,750
2,000 Florida Rock Industries, Inc. 58,500
2,100 Gilbert Associates, Inc. Cl. A 26,250
5,000 P. H. Glatfelter Company 85,625
5,000 Lilly Industries, Inc. Cl. A 63,750
1,500 Paul Mueller Company 51,375
3,700 Oshkosh Truck Corporation Cl. B 56,425
1,000 Woodward Governor Company 73,500
628,838
RETAIL - 1.2%
1,000 Blair Corporation 31,625
The accompanying notes are an integral part of the financial statements.
<PAGE>
SERVICES - 6.8%
1,000 Crawford & Company Cl. B 16,250
6,000 Ennis Business Forms, Inc. 73,500
2,900 Jackpot Enterprises, Inc. 33,713
2,500 The Standard Register Company 50,313
173,776
TECHNOLOGY - 5.6%
4,100 Landauer Inc 89,175
4,000 Scitex Corporation Limited 54,500
143,675
Total Common Stocks (Cost $1,668,080)1,860,237
PREFERRED STOCKS - 6.2%
3,900 Bird Corp. $1.85 Cv. 74,100
3,000 Cliffs Drilling Company $2.3125 Cv. E 82,500
Total Preferred Stocks (Cost $141,998 156,600
CORPORATE BONDS - 14.9%
150,000 AnnTaylor Stores Corporation 123,750
8.75% Sb. Db. due 6/15/00
100,000 Figgie International Inc. 99,500
9.875% Sr. Note due 10/01/99
75,000 National Education Corporation 53,063
6.5% Cv. Sb. Db. due 5/15/11
100,000 Reliance Group Holdings, Inc. 103,500
9% Sr. Note due 11/15/00
Total Corporate Bonds (Cost $345,506) 379,813
REPURCHASE AGREEMENT - 6.5%
State Street Bank and Trust Company, 5.25% due 1/2/96, collateralized
by U.S. Treasury Bonds,7.25% due 5/15/16, valued at $172,127
(Cost $345,506) 165,000
TOTAL INVESTMENTS - 100.6%
(Cost $2,320,584) 2,561,650
LIABILITIES LESS CASH AND
OTHER ASSETS - (.6%) (13,976)
NET ASSETS - 100.0% $2,547,674
*American Depository Receipt.
Income Tax Information - The cost for federal income tax purposes was
$2,325,066. At Decmber 31, 1995, net unrealized appreciation for all
securities amounted to $236,584, consisting of aggregate gross unrealized
appreciation of $259,153 and aggregate gross unrealized depreciation of
$22,569.
The accompanying notes are an integral part of the financial statements.
<PAGE>
ROYCE TOTAL RETURN FUND
Statement of Assets and Liabilities at December 31, 1995
ASSETS:
Investments at value (identified cost $2,320,584) $2,561,650
Receivable for investments sold 6,900
Receivable for dividends and interest 10,092
Prepaid expenses and other assets 5,754
TOTAL ASSETS 2,584,396
LIABILITIES:
Payable for investments purchased 23,446
Investment advisory fee payable 1,800
Accrued expenses 11,476
TOTAL LIABILITIES 36,722
NET ASSETS $2,547,674
ANALYSIS OF NET ASSETS:
Undistributed net investment income $181
Accumulated net realized loss on investments (4,482)
Net unrealized appreciation on investments 241,066
Shares of beneficial interest 443
Additional paid-in capital 2,310,466
NET ASSETS $2,547,674
PRICING OF SHARES:
Net asset value, offering and redemption price per share
($2,547,674 442,572 shares outstanding) (Note 3) $5.76
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31,
1995 1994
From Investment Activities:
Net investment income $52,405 $5,137
Net realized gain on investments 234,948 32,565
Net unrealized appreciation on investments218,434 22,632
Increase in net assets resulting from
operations 505,787 60,334
Dividends paid from net investment income (51,027) (5,037)
Distributions paid from net realized
gains (235,511) (37,781)
From Capital Share Transactions:
Increase in net assets from capital shar 672,225 1,187,741
Increase in Net Assets 891,474 1,205,257
Net Assets:
Beginning of year $1,656,200 450,943
End of year (including undistributed net investment income
of $181 and $43, respectively) $2,547,674 $1,656,200
The accompaning notes are an integral part of the financial statements.
<PAGE>
ROYCE TOTAL RETURN FUND
Statement of Operations for the year ended December 31, 1995
INVESTMENT INCOME:
Income:
Dividends $64,495
Interest 24,105
Total income 88,600
Expenses:
Investment advisory fee 21,974
Legal and auditing fees 7,966
Custodian and transfer agent fees 7,026
Distribution fee 5,414
Shareholder reports and notices 2,637
Miscellaneous 1,815
Organizational costs 1,676
Supplies and postage 1,248
Administrative and clerical services 922
Trustees' fees 618
Facilities and office space 260
Fees waived by Adviser and Distributor (Note 2) (15,361)
Total expenses 36,195
Net investment income 52,405
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments $234,948
Net unrealized appreciation on investments 218,434
Net realized and unrealized gain on investments 453,382
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $505,787
The accompaning notes are an integral part of the financial statements.
Financial Highlights
This table is presented to show selected data for a share outstanding
throughout the period, and to assist shareholders in evaluating the
Fund's performance over the last three periods.
Years For the period
ended December 15,1993
December 31, through
1995 1994 December 31,1993
Net Asset Value, Beginning of Year $5.12 $5.00 $5.00
Income From Investment Activities:
Net investment income 0.13 0.02 0.00
Net realized and unrealized gain on 1.24 0.24 0.00
Total from investment activities 1.37 0.26 0.00
Less Distributions:
Dividends paid from net investment i (0.13) (0.02) 0.00
Distributions paid from net realized (0.60) (0.12) 0.00
Total distributions ($0.73) ($0.14) 0.00
Net Asset Value, End of Year $5.76 $5.12 $5.00
Total Return 26.9% 5.2% 0.0%
Ratios/Supplemental Data:
Net Assets, End of Year $2,547,674 $1,656,200 450,943
Ratio of Expenses to Average Net Assets 1.67% 1.96% 0.29% *
Ratio of Net Investment Income to Avera 2.42% 0.49% -0.29% *
Portfolio Turnover Rate 68% 88% 0%
*Annualized
(a) Expenses are shown after waivers by the investmemt adviser and
distributor. For the years ended December 31, 1995 and 1994 and
for the period ended December 15, 1993, the expense ratios
before the waivers would have been 2.38%, 3.21%, and 2.04%,
respectively.
<PAGE>
ROYCE TOTAL RETURN FUND
Notes to Financial Statements
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 established as a business trust under the laws of
Massachusetts. 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".
<PAGE>
ROYCE TOTAL RETURN FUND
Notes to Financial Statements (continued)
d. Distributions:
Dividend and capital gains 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.
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
and initial registration of shares of $10,288 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 its investment advisory agreement with Quest Advisory
Corp. ("Quest"), advisory fees of $9,947 were voluntarily waived by
Quest for the year ended December 31, 1995. The agreement provides
for fees equal to 1.0% per annum of the Fund's average total 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 $5,414 for the year ended December
31, 1995. The distribution agreement provides for maximum fees of
.25% per annum of the Fund's average total net assets.
<PAGE>
ROYCE TOTAL RETURN FUND
Notes to Financial Statements (continued)
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:
Year Ended Year Ended
December 31, 1995 December 31, 1994
Shares Amount Shares Amount
Sold ............... 80,015 449,217 341,214 $1,731,736
Issued as reinvested
dividends and
distributions....... 50,053 286,304 8,363 42,817
Redeemed............ (10,697) (63,296) (116,576) (586,812)
4. Purchases and Sales of Securities:
For the year ended December 31, 1995, the cost of purchases
and the proceeds from sales of investment securities, other than
short-term securities, amounted to $1,688,764 and $1,336,184,
respectively.
<PAGE>
ROYCE TOTAL RETURN FUND
Report of Independent Accountants
To the Board of Trustees of The Royce Fund and Shareholders of
Royce Total Return Fund:
We have audited the accompanying statement of assets and
liabilities of Royce Total Return Fund, including the schedule of
investments as of December 31, 1995, the related statement of
operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and
the financial highlights for each of the two years in the period
then ended and for the period from December 15, 1993 (commencement
of operations) to December 31, 1993. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned as of December 31, 1995, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Royce Total Return Fund as of
December 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the
two years in the period then ended and from December 15, 1993
(commencement of operations) to December 31, 1993, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND
L.L.P.
Boston, Massachusetts
February 7, 1996
<PAGE>
[ARTICLE] 6
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 2320584
[INVESTMENTS-AT-VALUE] 2561650
[RECEIVABLES] 16992
[ASSETS-OTHER] 5754
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2584396
[PAYABLE-FOR-SECURITIES] 23446
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 13276
[TOTAL-LIABILITIES] 2547674
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2310466
[SHARES-COMMON-STOCK] 443
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 181
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (4482)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 241066
[NET-ASSETS] 2547674
[DIVIDEND-INCOME] 64495
[INTEREST-INCOME] 24105
[OTHER-INCOME] 0
[EXPENSES-NET] 36195
[NET-INVESTMENT-INCOME] 52405
[REALIZED-GAINS-CURRENT] 234948
[APPREC-INCREASE-CURRENT] 218434
[NET-CHANGE-FROM-OPS] 505787
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 51027
[DISTRIBUTIONS-OF-GAINS] 235511
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 449217
[NUMBER-OF-SHARES-REDEEMED] 63296
[SHARES-REINVESTED] 286304
[NET-CHANGE-IN-ASSETS] 891474
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 21974
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 51556
[AVERAGE-NET-ASSETS] 2165640
[PER-SHARE-NAV-BEGIN] 5.12
[PER-SHARE-NII] .13
[PER-SHARE-GAIN-APPREC] 1.24
[PER-SHARE-DIVIDEND] .13
[PER-SHARE-DISTRIBUTIONS] .60
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 5.76
[EXPENSE-RATIO] 1.67
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
