Value Investing in Small Companies For Over 20 Years
THE
ROYCE
FUNDS
Royce Global Services Fund
1997 Semi-Annual Report
<PAGE>
[SIDEBAR]
[ GRAPHIC OMITTED ]
Photo of Charles M. Royce, President
The small-cap world has evolved dramatically during the last ten to fifteen
years, especially in terms of capitalization. When we began managing money in
the early '70's, small-cap was a much less efficient sector; but today, all
that has changed. The small-cap market now behaves more like the large-cap
market.
Small and micro-cap are distinct markets, which require distinct strategies.
The idea of two distinct markets inside small-cap is one that we believe will
be the party line in another half dozen years.
[END SIDEBAR]
LETTER TO OUR SHAREHOLDERS
[ GRAPHIC OMITTED ]
Cartoon: "How come Jasper's mutual fund is up twelve per
cent and mine's up only eight?"
BIGGER WAS BETTER . . .
In light of 1997's results to date, investors in small-cap mutual funds
are probably asking similar questions to that posed in the cartoon.
Performance in the first six months resembled that of the last half of 1996.
Investors' preference for easy-to-trade securities enabled larger, more
well-known stocks to perform better, even within the small-cap universe.
After a sluggish start, small-cap securities came roaring back in the
second quarter, posting their best results since 1991. They, however, still
trailed their large company counterparts, which provided impressive second
quarter results to go along with their solid early 1997 returns. For the first
six months, the Russell 2000 Index of small company stocks was up 10.2% versus
a gain of 20.6% for the large-cap oriented S&P 500 Index. The disparity
between large and small-cap is even more dramatic for the one-year period
ended June 30, 1997: 34.7% for the S&P 500 versus 16.3% for the Russell
2000. In fact, this is the widest margin of outperformance by the S&P 500
since the Russell 2000's inception in 1979. COINCIDENTALLY, THE PREVIOUS TWO
PERIODS OF SUBSTANTIAL SMALL-CAP, ONE-YEAR UNDERPERFORMANCE (APRIL '87 AND
MAY '90) OCCURRED JUST PRIOR TO THE LAST TWO GENERAL MARKET DECLINES. Although
periods of large-cap dominance are not unusual, the magnitude of the current
outperformance is almost unprecedented. Over the last three and one-half
calendar years, the S&P 500 has provided a 23.1% average annual total return
versus 14.8% for the Russell 2000.
While not matching the S&P 500, recent small-cap returns, as measured by
the Russell 2000, are excellent in both the absolute and the historical
contexts. It is hard to imagine how anyone who invested in a sector that
produced average annual total returns for the one, five, ten and fifteen-year
periods of 16.3%, 17.9%, 11.1% and 15.1%, respectively, would be disappointed.
It is only through the lens of relative performance that one can find fault.
...AND SO WAS VALUE
Over the last twelve months, small-cap investors experienced greater
volatility than in recent years. Increased volatility tends to benefit value
investing, as evidenced by year-to-date and one-year performance results.
Despite strong returns in May for growth stocks within the Russell 2000,
sparked by a decline in interest rates in mid-April, value stocks within
the small-cap index retained the performance edge that began in the second
half of 1996. Through the first six months of 1997, the Russell 2000 Value
Index was up 14.8% versus a gain of 5.2% for the Russell 2000 Growth Index.
This performance disparity is even more evident when reviewing the last
twelve months. We believe that the higher level of volatility will continue
within the small-cap sector. This favors our value approach, which takes
advantage of price fluctuations.
WE ARE PLEASED TO REPORT SOLID ABSOLUTE AND RELATIVE SIX AND TWELVE-MONTH
RESULTS. FOR A COMPLETE DISCUSSION OF HOW WE DID, INCLUDING BOTH PERFORMANCE
AND PORTFOLIO DIAGNOSTICS, PLEASE SEE PAGE 8.
SMALL-CAP AIN'T WHAT IT USED TO BE
It has been documented by Ibbotson and Associates that small-cap companies
have outperformed their larger counterparts by approximately 2% annually, on
average, since 1926. This performance premium is known as the "small-cap
effect." While this is not an every year occurrence and 2% per annum may not
seem like much, the results are eye-popping when one compounds this
differential over the last 70 years! Even though this performance rule of
thumb is generally accepted, we believe that it can be misleading. The index
utilized to calculate the small-cap effect includes only the "smallest" of
small-cap companies, those in the 9th and 10th deciles of market
capitalization. Today, this roughly equates to companies under $300 million
in market capitalization. In contrast, the world has generally redefined
small-cap to include companies under $1 billion. WHAT HAS BEEN LABELED A
SMALL-CAP EFFECT SHOULD IN FACT NOW BE VIEWED AS A MICRO-CAP PHENOMENON.
This has important implications for all investors.
The case for two distinct markets-small and micro-cap-is apparent in other
ways as well. The annual rebalancing of the Russell 2000 in June produced an
estimated 30% increase in the index's weighted average market cap ($609 million
versus $468 million at 6/30/96), and for the second year in a row, no companies
with market caps below $100 million were included in the reconstituted index.
Also, according to Morningstar, there are now over 500 small-cap mutual funds,
totaling approximately $100 billion in assets. AS THE WORLD GETS SMALLER,
SMALL-CAP STOCKS ARE GETTING BIGGER, AND MICRO-CAP STOCKS ARE GETTING MORE
INTERESTING.
NO SMOKE, NO MIRRORS
Just recently, one of our children asked a question that parents often
hear, "WHAT EXACTLY DO YOU DO?" This question is posed to us frequently by
shareholders and investment advisors as well, and it often leads to more
questions. We thought it would be useful to employ a "Q and A" format to
communicate our core beliefs, which have been developed over the last 25 years,
principally by Chuck Royce.
[SIDEBAR]
Withhin the small-cap market ($300 million to $1 billion), we utilize a
concentrated approach. We focus our efforts on identifying those forty to fifty
companies that we believe will give us the absolute best performance in this
slightly more efficient area. The micro-cap area (below $300 million) is really
what the small-cap area was twenty years ago, in that these stocks represent
the last frontier of domestic equity opportunity. We use a diversified approach
because of liquidity constraints and the higher-than-usual volatility in this
sector.
[END SIDEBAR]
In the exchange that follows, Whitney George and Jack Fockler discuss some
of these tenets. Whitney joined our firm six years ago as a "maitre d'" serving
on the front line of our investment activity. Whitney's talent and steady
contributions have enabled him to move to chef status as a portfolio manager in
our "restaurant." Jack joined us eight years ago primarily working with
clients. Jack's and Whitney's responsibilities have expanded into a central
role; both are now managing directors. We hope this helps you become more
familiar with our investment philosophy.
. . . an organized and intensive process
that includes interviewing a company's
customers, competitors and suppliers. This
"detective work" universally is not done
on Wall Street.
WHAT DO YOU LOOK FOR IN A COMPANY? Essentially, we are interested in three
things-strong balance sheets, strong evidence of success and strong prospectus.
Small and micro-cap entities can be very fragile; and, as a result, we look for
companies that can survive during times that are difficult for their products
or their particular industry as a whole. We maintain primary focus on
internal returns: namely, return on assets and return on invested capital.
Both measures provide a deeper insight into a company's health. In essence,
we seek growing businesses that produce free cash flow.
IS A COMPANY'S ANNUAL REPORT WORTH READING? One of the
most important and under appreciated sources of information is the annual
report. We are enthusiastic and diligent readers of annual reports and not
just for the numbers. We look for the obvious and the not-so-obvious
signals that a CEO or Chairman is sending in the various discussions. We look
at what is being said and not said, and compare what we find to previous years'
reports. Dog-eared annual reports are our standard.
DO YOU CONSIDER THE QUANTITATIVE OR QUALITATIVE ASPECTS OF YOUR RESEARCH
TO BE THE MOST IMPORTANT? While quantitative research remains the cornerstone
of our process, it is the qualitative aspects that take on an increasingly
important role. Information is readily available to everyone, so being the
fastest reader or collector of documents no longer affords the advantage it
once did. The non-quantitative effort is where we add value, and it is also
the most fun.
ONE OF THE MOST IMPORTANT AND UNDER
APPRECIATED SOURCES OF INFORMATION IS THE
ANNUAL REPORT.
WHAT DO YOU WANT TO ACCOMPLISH WHEN YOU MEET WITH COMPANY MANAGEMENT
TEAMS? We listen carefully to their plans, aspirations and dreams for the
business. The research process begins as we assess their credibility and that
of their plans. As careful investors, we must be able to trust management.
HOW DO YOU CONFIRM THEIR ASPIRATIONS AND DREAMS? Management meetings are
just a starting point. It's very important to be able to validate what we have
been told. We do this through an organized and intensive process that includes
interviewing a company's customers, competitors and suppliers. This "detective
work" universally is not done on Wall Street.
ARE THERE CERTAIN STANDARDS THAT YOU LOOK FOR WHEN YOU TALK TO MANAGEMENT?
Honesty is paramount, both in actions and thought processes. We try to
understand motivations and make certain management's intentions are consistent
with ours. We look for confirmation of integrity in all corporate actions. We
spend considerable time reviewing proxies for conflicts and governance issues
that others often gloss over.
WE SPEND CONSIDERABLE TIME REVIEWING
PROXIES FOR CONFLICTS AND GOVERNANCE
ISSUES
THAT OTHERS OFTEN GLOSS OVER.
HOW DO YOU FIND NEW IDEAS FOR THE PORTFOLIOS? We are open-minded and
non-discriminating about how new ideas find their way into the firm. We think
of ourselves as "shop-a-holics" when it comes to finding a new name, and we
are prepared to talk to anyone or look anywhere to learn about an idea. This
means shopping at Wall Street "supermarkets," regional firms and research
boutiques. We even go to "garage sales" where there is no analytical coverage.
But, at the end of the day, we are exceptionally discriminating about
our purchases.
DO YOU INVEST IN INITIAL PUBLIC OFFERINGS (IPOS)? We do significant analyses of
IPOs, although this does not necessarily mean that we are significant
investors. While IPOs represent a wonderful source of new ideas, our
interest in them tends to be six to eighteen months following the initial
offering, when the prices are more to our liking.
DO YOU INVEST IN TECHNOLOGY STOCKS? While we believe the technology sector is a
vibrant and important part of our economy, we view the investment opportunity
somewhat differently. Most of the attention in this sector is on cutting-edge
companies. While this is an exciting and potentially rewarding area, it is also
very difficult. These companies tend to be consumers, not producers, of cash,
and it's hard for us to feel comfortable that the financial characteristics we
are looking for will be in place five years from now. Our preferred type of
technology investment, while not on the front line, is able to deliver
comparable growth without the inherent risk. Electronics distributors are a
good example of a low-risk way to participate in what has historically been a
high-risk sector.
WHILE IPOS REPRESENT A WONDERFUL SOURCE OF
NEW IDEAS, OUR INTEREST IN THEM TENDS TO
BE SIX TO EIGHTEEN MONTHS FOLLOWING THE
INITIAL OFFERING, WHEN THE PRICES ARE MORE
TO OUR LIKING.
HOW DIFFICULT IS IT TO KEEP TRACK OF NAMES IN THE PORTFOLIOS? It is not as big
a project as one might think. The business world does not change as rapidly as
the stock market. While a company's stock price may change daily, earnings
are only reported quarterly, and the balance sheet evolves even more
slowly. We combine a running evaluation of these slower developments with a
very disciplined and rigorous tracking process that continually focuses on the
relationship of "private worth" to market price.
[SIDEBAR]
Value works because markets are cyclical. We think of ourselves as risk
managers. It is not a fruitful idea to focus only on risk. We're committed
to the idea of finding stocks that we believe can double in value over
approximately a four-year time frame while keeping risk levels relatively
low.
[END SIDEBAR]
HOW DO ROYCE ANALYSTS INTERACT WITH THE PORTFOLIO MANAGERS? We sit together
in an open environment that encourages constant dialogue; there are no
offices in which to hide. Our analysts generally work together in teams;
multiple eyes reduce nearsightedness. They are not industry specialists,
but generalists. This is in contrast to most firms, which organize their
research effort around specific industries and designate analysts to cover
narrow niches. The problem with industry analysts is that they tend to fall
in love with their sectors.
We want our analysts to be able to recognize good companies, regardless of
sector. We require written records of our thought processes; this minimizes the
human tendency to reinvent a story as circumstances change.
OUR ANALYSTS GENERALLY WORK TOGETHER IN
TEAMS; MULTIPLE EYES REDUCE NEARSIGHTEDNESS.
HOW IMPORTANT IS TRADING EXECUTION? Execution is critical to successful
small-cap investing because costs are higher than in the large-cap market.
Indeed, spreads of 5% or more between a stock's bid and ask price are not
uncommon. Daily trading volume is often low, demanding significant patience on
the part of the trader/buyer. Many a good large-cap manager who ventures into
the small and micro-cap universes becomes immediately frustrated by the trading
nuances of the sector. We work hard at this part of our business and believe
that our 20+ years of experience give us an edge.
HOW DO YOU WEIGH YOUR OWN EVALUATIONS VERSUS THOSE OF OUTSIDE ANALYSTS? It's
only through doing your own work that you're able to develop confidence and
conviction. Much of Wall Street's research is directed toward those companies
that provide opportunities for making money through trading or investment
banking. While we use outside research, it is for general context purposes
only.
WHAT HAPPENS WHEN A STOCK THAT YOU LIKE GOES DOWN IN PRICE? This gives us a
reason to go back and review the work to gain an understanding as to why the
stock has declined. If we find we have missed something, then we re-evaluate
how bad the situation is and how much is already reflected in the price.
Hopefully, the outcome is higher conviction coinciding with a more attractive
purchase price. We are not afraid to average down (buy more shares at
lower prices) when our conviction level is in place.
IT'S ONLY THROUGH DOING YOUR OWN WORK THAT
YOU'RE ABLE TO DEVELOP CONFIDENCE AND
CONVICTION.
HOW DOES ONE AVOID UNDERPERFORMANCE? It's not clear that one can avoid
underperformance in the short-run because the greatest opportunities come when
conditions are at their worst. We try to address this by being realistic in
terms of our holding period, which is generally four years on average, and by
recognizing that this year's poor performer may be the stock that everyone
wants to own several years later. Stock selection and performance are not
related in the short-term.
WHAT SHOULD BE EXPECTED FROM AN INVESTMENT MANAGER? Investors should look for a
return that is reasonable and an approach that stresses absolute, not relative,
performance goals. Although relative performance comparisons are useful, they
should not drive the evaluation process; you cannot eat from the table of
relative performance. We also think managers should communicate openly, sharing
their successes, failures and expectations with their investors.
[ GRAPHIC OMITTED ]
Picture of 2 Lane Road and rising sun with clouds
[ GRAPHIC OMITTED ]
Photo of Jack Fockler, Whitney George and Chuck Royce
THE ROAD AHEAD
While the last two and one-half calendar years have produced only one down
quarter for small-cap stocks, there is plenty of evidence to suggest the road
ahead will be different. Since May '96 volatility has been higher in the small
and micro-cap sectors, usually a prelude to lower returns. We believe that
active management and a value orientation are especially appropriate in this
more volatile environment. Although large-cap stocks have been market leaders
for over three years, we do not believe that this is a permanent condition. The
market's preference for large and liquid securities will run its course as it
has before.
Although absolute returns for the market are likely to diminish following
this extraordinary return period, we remain excited about near and long-term
prospects for our risk-averse style of investing. Your continued confidence is
appreciated.
Sincerely,
/s/ Charles M. Royce /s/ W. Whitney George /s/ Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George Jack E. Fockler, Jr.
President Vice President Vice President
July 25, 1997
We want to pay tribute to our friend and colleague, Tom Ebright, who passed
away on July 14, 1997. For over sixteen years, Tom was a substantial
contributor and valued partner of our firm. He is survived by his wife,
Joyce, his two daughters, Jennifer and Ellen, and many shareholders and
friends who knew and loved Tom.
ROYCE GLOBAL SERVICES FUND PERFORMANCE AND PORTFOLIO REVIEW
WHAT WE DO-Royce Global Services Fund ("RGS") uses a value approach to
invest in globally-oriented companies in service industries, including
banking, insurance, securities, investment management, advertising, publishing,
consulting and communications.
HOW WE DID-How We Did RGS continued its winning ways into 1997. After a
solid first quarter showing, the Fund flourished in the strong second quarter,
to finish the first half up 16.1%. This compares favorably to the Russell
2000 index of small-cap companies which was up 10.2% and the Morgan Stanley
World Index which was up 15.4%. The Fund's focus on globally-oriented
companies in service industries has resulted in strong near-term returns as
well: 23.5% for the one-year and 21.3% for the since inception (12/15/94)
period. Currently, the Fund has a small-cap bias, an area of the market
we know well and one, where we believe, investment opportunities are
more plentiful.
We are enthused about the early results and
remain committed to the Fund's long-term success.
<TABLE>
TOTAl RETURNS (through 6/30/97) PORTFOLIO DIAGNOSTICS
- ------------------------------ ---------------------
<S> <C> <C> <C>
2nd Quarter 1997: 12.7% Median Market Cap: $439 million
Y-T-D 16.1% Wtd. Avg. P/E Ratio: 11.2x
1-Year 23.5% Wtd. Avg. P/B Ratio: 1.5x
Since Inception* Avg. Annual 21.3% Wtd. Avg. Yield: 0.9%
Fund Assets: $2.2 million
* Inception date was 12/15/94. Symbol: RYGSX
</TABLE>
Royce Global Services versus Morgan Stanley World Index
Value of $10,000 invested on 12/15/94 (LINE GRAPH)
<TABLE>
Date RGS MSCI
- ---- --- ----
<S> <C> <C>
12/15/94 $10,000 $10,000
12/31/94 10,120 10,206
3/31/95 10,860 10,684
6/30/95 11,699 11,140
9/30/95 12,260 11,763
12/31/95 12,268 12,321
3/31/96 12,765 12,823
6/30/96 13,218 13,195
9/30/96 13,304 13,370
12/31/96 14,062 13,982
3/31/97 14,483 14,021
6/30/97 16,326 16,132
</TABLE>
[TEXT BOX]
Royce Global Services Fund outperformed its benchmark, the
Morgan Stanley World Index, on a year-to-date and since
inception basis.
[END TEXT BOX]
PORTFOLIO COMPOSTION
- --------------------
<TABLE>
TOP TEN POSITIONS % OF NET ASSETS
- ----------------- ---------------
<S> <C>
1. PXRE Corporation 4.8%
2. Marshall Industries 4.7%
3. Sevenson Environmental Services 4.4%
4. Zenith National Insurance 3.6%
5. Pennsylvania Manufacturers Cl. A 3.5%
6. Telecomunicacoes Brasileiras ADR 3.4%
7. Circle International Group 3.2%
8. Stanhome 3.1%
9. Panamerican Beverages Cl. A 3.0%
10. Suzy Shier 2.8%
</TABLE>
Portfolio Industries* (Pie Chart)
Financial Intermediaries 22%
Industrial Services 17%
Consumer Products 15%
Retail 13%
Financial Services 12%
Technology 10%
Utilities 4%
Industrial Products 3%
Health 2%
Natural Resources 1%
Consumer Services 1%
* excludes cash and cash equivalents
UPDATES & NOTES TO PERFORMANCE AND RISK INFORMATION
THE ROYCE FUNDS UNVEILS AN UPDATED WEB SITE
We want to draw your attention to our newly enhanced internet web site
(www.roycefunds.com) where you can find out more about our
small and micro-cap mutual fund offerings, obtain the most
recent quarterly performance, and review recent articles and
Fund write-ups as well as up-to-the minute topics.
ROYCE & ASSOCIATES, INC. NAME CHANGE (FORMERLY QUEST ADVISORY CORP.)
We recently announced a name change of the Funds' Investment Adviser, from
Quest Advisory Corp. to Royce & Associates, Inc. The new name change more
closely identifies the name of the Adviser with that of the Funds
that it manages and recognizes the important contributions
of the Adviser's associates.
NOTES TO PERFORMANCE AND RISK INFORMATION
All performance information is presented on a total return basis and
reflects the reinvestment of distributions. Past
performance is no guarantee of future results. Share prices
will fluctuate, so that shares may be worth more or less
than their original cost when redeemed. This report is not
authorized for distribution unless preceded or accompanied
by a current prospectus. Please read the prospectus
carefully before investing or sending money.
The Morgan Stanley World Index is an unmanaged index of global common
stocks. All other indices referred to in this report are
unmanaged indices of domestic common stocks.
SCHEDULE OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
<TABLE>
ROYCE GLOBAL SERVICES FUND
COMMON STOCKS- 88.3%
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
CONSUMER PRODUCTS- 8.9% INDUSTRIAL SERVICES- 15.8%
Coca-Cola Femsa ADR 1,000 $ 51,625 Circle International Group 2,700 $ 71,213
Panamerican Beverages Cl. A 2,000 65,750 Cordiant ADR 4,000 24,750
Semi-Tech Corporation Cl. A 5,000 10,937 DIMON Incorporated 2,000 53,000
South African Brewereies AD 1,005 29,648 Sevenson Environmental Services 5,000 97,500
Velcro Industries 500 41,000 Standard Commercial* 3,090 53,689
------ Telefonica de Argentina ADR 1,000 34,625
198,600 Vallen Corporation* 900 16,425
CONSUMER SERVICES- 0.7% ------
Grupo Televisa GDR* 500 15,187 351,202
------ -------
FINANCIAL INTERMEDIARIES- 19.8% NATURAL RESOURCES- 0.7%
BHI 2,000 44,000 MK Gold Company* 10,000 15,625
Banca Quadrum ADR* 1,000 3,250 ------
Barclays ADR 300 23,775 RETAIL- 11.5%
Grupo Financiero Serfin ADR 2,000 6,000 Amway Asia Pacific 500 21,812
Leucadia National Corporation 1,300 40,219 Amway Japan ADR 1,000 17,313
PXRE Corporation 3,500 107,625 Sotheby's Holdings Cl. A 3,000 50,625
Pennsylvania Manufacturers Cl. A 5,000 77,500 Stanhome 2,100 69,037
Trenwick Group 1,500 56,250 Suzy Shier 9,700 63,217
Zenith National Insurance 3,000 81,000 The Talbots 1,000 34,000
------ ------
439,619 256,004
------- -------
FINANCIAL SERVICES- 11.3% TECHNOLOGY- 8.1%
American Express 300 22,350 Marshall Industries* 2,800 104,300
Amvescap ADR 360 20,970 Nam Tai Electronics 3,500 58,188
E.W. Blanch Holdings 2,000 53,375 Scitex Corporation 2,000 17,625
C.I. Fund Management 1,000 19,009 ------
Phoenix Duff & Phelps 4,000 29,500 180,113
The Pioneer Group 1,500 34,500 -------
U.S. Global Investors Cl. A * 5,000 10,469 UTILITIES- 3.4%
Willis Corroon Group ADR 5,500 61,531 Telecomunicacoes Brasileiras ADR 500 75,875
------ ------
251,704 Total Common Stocks
HEALTH- 2.1% (Cost $ 1,549,799) 1,966,501
Haemonetics Corporation* 2,500 47,812 ---------
Principal
Amount
------
INDUSTRIAL PRODUCTS- 2.5% CORPORATE BOND- 2.7%
Concordia Paper Holdings AD 1,000 3,375 International Semi-Tech Corporation 0%/11.5%
Simpson Manufacturing Co.* 2,000 53,000 Sr. Note due 8/15/03 (Cost $58,875) $100,000 59,750
------ ------
56,375
------ TOTAL INVESTMENTS- 91.0%
(Cost $1,608,674) 2,026,251
CASH AND OTHER ASSETS LESS LIABILITIES-9.0% 199,609
-------
NET ASSETS-100.0% $2,225,860
=========
</TABLE>
*Non-income producing.
The abbreviations ADR and GDR refer to American Depository Receipt and Global
Depository Receipt, respectively.
INCOME TAX INFORMATION-The cost of total investments for federal income tax
purposes was $ 1,608,674. At June 30, 1997, net unrealized appreciation for
all securities was $ 417,577, consisting of aggregate gross unrealized
appreciation of $ 521,628 and aggregate gross unrealized depreciation of
$ 104,051.
The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
Royce Global
Services Fund
-------------
<S> <C>
ASSETS:
Investments at value (identified cost $1,608,674) $ 2,026,251
Cash 191,339
Receivable for dividends and interest 3,383
Prepaid expenses and other assets 9,302
-----
TOTAL ASSETS 2,230,275
---------
LIABILITIES:
Accrued expenses 4,415
-----
TOTAL LIABILITIES 4,415
-----
NET ASSETS $ 2,225,860
=========
ANALYSIS OF NET ASSETS:
Undistributed net investment income $ 1,914
Accumulated net realized gain on investments 125,218
Net unrealized appreciation on investments 417,577
Capital shares 318
Additional paid-in capital 1,680,833
---------
NET ASSETS $ 2,225,860
=========
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares authorized for
ea Fund) 318,065
=======
NET ASSET VALUE:
(offering and redemption price per share) $7.00
====
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
Royce Global Services Fund
Six Months Year ended Year Ended
June 30, 1997 December 31,
(unaudited) 1996
----------- ----
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income (loss) $ (1,443) $ 3,357
Net realized gain on investments 68,348 166,813
Net change in unrealized appreciation on investments 241,754 89,685
------- ------
Net increase in net assets from investment operations 308,659 259,855
------- -------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income 0 0
Net realized gain on investments 0 (151,970)
- -------
Total dividends and distributions 0 (151,970)
- -------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares sold 192,645 569,431
Dividends reinvested 0 150,879
Cost of shares redeemed (223,329) (506,967)
------- -------
Net increase (decrease) in net assets from capitaL
share transactions (30,684) 213,343
------ -------
NET INCREASE IN NET ASSETS 277,975 321,228
NET ASSETS:
Beginning of period 1,947,885 1,626,657
--------- ---------
End of period $2,225,86O(a) $1,947,885(a)
============ ============
CAPITAL SHARE TRANSACTIONS:
Shares sold 30,529 95,566
Shares issued for reinvestment of dividends and
distributions 0 25,616
Shares redeemed (b) (35,349) (84,524)
------ ------
Net increase (decrease) in shares outstanding (4,820) 36,658
----- ------
</TABLE>
(a) Includes undistributed net investment income of $1,914 in 1997 and $3,357
in 1996.
(b) 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.
The accompanying notes are an integral part of the financial statements.
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
Royce Global
Services Fund
-------------
<S> <C>
INVESTMENT INCOME:
Income:
Dividends $15,613
Interest 46
--
Total Income 15,659
======
Expenses:
Investment advisory fees 15,191
Distribution fees 2,532
Custodian and shareholder servicing fees 4,167
Administrative and office facilities expenses 681
Professional fees 2,100
Trustees' fees 158
Other expenses 5,880
Total Expenses 30,709
Fees Waived by Investment Adviser and Distributor (13,607)
------
Net Expenses 17,102
------
Net Investment Loss (1,443)
-----
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 68,348
Net change in unrealized appreciation on investments 241,754
-------
Net realized and unrealized gain on investments 310,102
-------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $308,659
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
FINANCIAL HIGHLIGHTS
This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in in evaluating the
Fund's performance for the periods presented.
<TABLE>
Net Asset Value Net Investment Net Realized and Dividends from Distributions from Net Asset Value
Beginning Income Unrealized Gain on Net Investment Net Realized Gain End
of Period (Loss) Investments Income on Investments of Period
-----------------------------------------------------------------------------------------------------------------
Royce Global Services Fund (a)
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
++ 1997 $6.03 $0.00 $0.97 $0.00 $0.00 $7.00
1996 5.68 0.01 0.81 0.00 (0.47) 6.03
1995 5.06 0.00 1.07 0.00 (0.45) 5.68
1994 5.00 0.00 0.06 0.00 0.00 5.06
Net Assets, Ratio of Expenses Ratio of Net Average
Total End of Period to Average Investment Income (Loss) to Portfolio Commission Rate
Return (in thousands) Net Assets Average Net Assets Turnover Rate Paid+
------------------------------------------------------------------------------------------------------------------
Royce Global Services Fund (a)
<S> <C> <C> <C> <C> <C> <C>
++ 1997 16.1% $2,226 1.69%* -0.14%* 10% $0.0657
1996 14.6% 1,948 1.56% 0.17% 81% 0.0591
1995 21.2% 1,627 1.97% -0.58% 106% --
1994 1.2% 514 1.78%* 0.00% 0% --
</TABLE>
(a) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the periods ended June 30, 1997, and December 31, 1996,
1995 and 1994, the expense ratios before the waivers would have been
3.03%, 3.31%, 3.72%, and 3.69%, respectively. The Fund commenced
operations on December 15, 1994.
* 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.
++ Six months ended June 30, 1997 (unaudited).
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Global Services Fund ("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. Royce Global Services Fund commenced operations on
December 15, 1994.
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.
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.
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.
EXPENSES:
Expenses directly attributable to each Fund are charged to
that Fund's operations while expenses which are applicable to all
Funds are allocated in an equitable manner.
TAXES:
As qualified regulated investment companies under Subchapter
M of the Internal Revenue Code, the Fund is not subject to income
taxes to the extent that the Fund 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".
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DISTRIBUTIONS:
Any 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.
REPURCHASE AGREEMENTS:
The Fund enters into repurchase agreements with respect to
portfolio securities solely with State Street Bank and Trust
Company ("SSB&T"), the custodian of the Fund's 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
its underlying securities.
INVESTMENT ADVISER AND DISTRIBUTOR:
Under the Trust's investment advisory agreements with Royce
& Associates, Inc. ("Royce") (formerly Quest Advisory Corp.),
Royce is paid a monthly fee at an annual rate of 1.5% of the
average net assets of Royce Global Services Fund. For the six
months ended June 30, 1997, Royce Global Services Fund recorded
advisory fees of $4,116 (net of voluntary waivers of $11,075).
Royce Fund Services, Inc. ("RFS") (formerly Quest
Distributors, Inc.), the distributor of shares of The Royce Fund,
is an affiliate of Royce. RFS voluntarily waived the Fund's
distribution fees of $2,532 for the six months ended June 30,
1997. The distribution agreement provides for maximum fees of
.25% per annum of the Fund's average net assets.
PUCHASES AND SALES OF INVESTMENT SECURITIES:
For the six months ended June 30, 1997, the cost of
purchases and the proceeds from sales of investment securities,
other than short-term securities, were as follows:
Royce Global Services Fund
--------------------------
Purchases $182,832
Sales $402,415
[SIDEBAR]
So while the "bulls" of both basketball and the market may reach dazzling
new heights this year, we will continue to bone our approach and emphasize
building returns over the long term.
[END SIDEBAR]
POSTSCRIPT
ALL THAT JAZZ
[ GRAPHIC OMITTED ]
Basketball on top of first paragraph of text
This year's National Basketball Association Championship Finals pitted the
high-flying exploits of Michael Jordan and the Chicago Bulls against the Utah
Jazz. The appearance this year of the Jazz represented the culmination of over
a decade's work for two of the game's premier players, John Stockton and league
MVP Karl Malone. To achieve a consistent level of success,
these two players have relied on a style of play that is the complete
antithesis of Jordan & Co.'s acrobatic airborne style. The Jazz are patient;
they rely on the fundamentals of intelligent ballhandling and passing, smart
shot selection and tough defense.
Their two stalwarts, Stockton & Malone, specialize in one of basketball's
oldest and most reliable plays, the pick and roll. Stockton dribbles the ball
toward the 6'10" Malone, who sets the "pick," standing in the way of the player
defending the smaller, quicker Stockton, in effect taking that in effect taking
that opponent out of the play. Malone then "rolls" toward the basket to receive
a pass from Stockton and make an easy score. This formula
has been confounding the team's opponents for years, in spite of the fact that
every team the Jazz plays knows what is coming. The key to the duo's success
lies in their execution, in their ability to master a fundamentally sound
approach.
You might describe the fundamental approach we bring to small-cap value
investing as our version of the pick and roll. Whether in basketball or stock
selection, each approach hinges on two elements working closely in sync with
one another to achieve success. We employ the "pick" on small-cap stocks with
the "roll" toward a disciplined value approach. Consistent application over the
years may have made what we do predictable, but we have been no less successful
for being so. For over twenty years, we have emphasized the fundamentals of
investing when looking for small company stocks. As value investing continues
to "score points" with solid returns in 1997, we are witnessing what looks like
a return to a period of higher volatility. This environment gives us the
"home-court advantage," as a more volatile market demands active management and
closer attention to risk factors. The importance we place on a company's
financial characteristics at the time of purchase is the essential element to
our risk-averse value approach.
WHY VALUE INVESTORS RELY ON
THE ROYCE FUNDS
[triangle] ONE OF THE MOST WELL-RESPECTED AND OLDEST SMALL-CAP INVESTMENT
MANAGERS WITH A VALUE ORIENTATION - We are an independent small-cap
manager with over 20 years of investment management experience.
Based in New York, Royce has more than $2 billion in total assets
under management - all dedicated to small and micro-cap value
investing. We offer a full range of small-cap, open-end mutual
funds and closed-end funds, providing investors and advisors with a
wide variety of small-cap alternatives.
[triangle] DEDICATED PROFESSIONALS WITH A SINGULAR FOCUS - Over the last
20 years, we have built substantial trading and research
relationships in an attempt to provide shareholders with the best
possible small-cap portfolios available. Our time-tested investment
approach is supported by 12 professionals. Charles M. Royce, Chief
Investment Officer, remains the primary portfolio manager.
[triangle] REALISTIC EXPECTATIONS AND CONSISTENT RESULTS - Royce Premier,
Royce Total Return and Pennsylvania mutual are consistently ranked
among the "lowest risk" small-cap equity funds available. We offer
a systematic and disciplined investment approach that avoids style
and capitalization drift. All the funds seek to provide above
average full market cycle total returns with below average risk.
[triangle] CO-OWNERSHIP OF FUNDS - We believe it is important for our
employees'financial interests to be congruent with our
shareholders' financial interests. The Firm's officers and
employees currently have more than $30 million invested in
the Funds.
VALUE INVESTING IN SMALL COMPANIES FOR OVER 20 YEARS
For General Information, Advisor Services
Additional Report Copies For Fund Materials, Performance Updates,
& Prospectus Inquiries Transactions or Account Inquiries
(800) 221-4268 (800) 59-ROYCE (597-6923)
Shareholder Services Automated Telephone Services
(800) 841-1180 (800) 78-ROYCE (787-6923)
E-mail:[email protected]
The Royce Funds 1414 Avenue of the Americas New York, NY 10019
This report must be accompanied by or preceded by a current prospectus of
each of the Funds. Please read the prospectus carefully before investing or
sending money.
