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Value Investing in Small Companies For Over 20 Years
THE
ROYCE
FUNDS
Royce Low-Priced Stock Fund
Royce Total Return Fund
Royce Global Services Fund
Royce Equity Income Fund
1996 Annual Report
WWW.ROYCEFUNDS.COM
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The Royce Funds
When we took over the management of Pennsylvania Mutual Fund in mid-1973,
small-cap stocks were those under $300 million in market capitalization, not
under $1 billion as they are now defined. This considerable capitalization
drift has permanently changed the small-cap landscape. Small-cap stocks are no
longer "small" by previous standards; no longer "unknown" given that the
sector is now regarded as a professional asset class; and no longer
"under-owned" as the number of small-cap mutual fund offerings has grown to
well over 400.
TWO DISTINCT MARKETS
Given the changes in the small-cap universe (most of which have occurred since
1991), we believe that the small-cap market should now be viewed as two
markets in one: small-cap at the upper end and micro-cap at the lower end of
the capitalization range.
SMALL-CAP MICRO-CAP
$300 million - $1 billion $5 million - $300 million
1,400 companies 6,500 companies
$810 billion total capitalization $470 billion total capitalization
DIFFERENT
PERFORMANCE
DIFFERENT
LIQUIDITY
DIFFERENT
INSTITUTIONAL
ACCEPTANCE
TWO CORE FUNDS: DISTINCT STRATEGIES FOR DISTINCT MARKETS
The Firm uses a two pronged approach, which incorporates both the small and
micro-cap investment universes. We believe that higher portfolio concentration
is necessary for delivering above average results at the upper end and that
diversification is both necessary and appropriate at the lower end. These two
Funds represent THE ROYCE FUNDS' core investment strategies.
ROYCE PREMIER ROYCE MICRO-CAP
- Small-cap orientation - Micro-cap orientation
- Concentrated portfolio - Broadly diversified
THE ROYCE FUNDS'
TWO CORE
PHILOSOPHIES
COMBINED PORTFOLIOS
Portfolios incorporate approximately equal weightings of each capitalization
(small and micro-cap) strategy.
PENNSYLVANIA MUTUAL
PMF II
ROYCE VALUE
ROYCE GIFTSHARES
THE PENNSYLVANIA
MUTUAL FUND
BLENDED STYLE OF
INVESTING
REMAINS OUR
FLAGSHIP APPROACH.
STOCK SELECTION - COMPANY AND SECTOR SPECIFIC THEMES
Stock selection for THE ROYCE FUNDS incorporates low valuation securities with
attractive risk/reward characteristics. These valuation principles are
combined with specific company attributes, such as assets, dividends, cash
flow, markets and price. THE ROYCE FUNDS have introduced some of these
opportunistic, company specific, selection themes in funds. Virtually all
securities used by these funds are also found in the core portfolios.
Royce Low-Priced Royce Total Return Royce Global Services
Stocks under $15 Royce Equity Income Globally oriented service
companies
Dividend-paying securities
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[Logo]
Dear Fellow Shareholders:
<TABLE>
<S> <C>
We are pleased to present our 1996 investment results and [Photo]
our new Annual Report format. Included in this report are
Royce Low-Priced Stock, Royce Total Return, Royce Equity Charles M. Royce,
Income and Royce Global Services performance, diagnostics, President and Chief
financial statements and a shareholder letter. This new, Investment Officer
combined Annual Report reflects specific capitalization
strategies and selection themes, around which the
individual fund portfolios are managed and displayed (as
shown on the front inside cover).
</TABLE>
The year was a good one in terms of absolute and relative
performance, and consistent with our long held
tenet -- when a disciplined value approach is combined
with small company investing, above average returns with
lower volatility are possible. This core belief has formed
the basis for our approach which emphasizes risk
management and consistency of application. We believe that
a system for rational decision making, whose basic premise
is that the price one pays for an investment makes a
significant difference in the returns one receives, is
more important than ever.
We invite your comments.
Sincerely,
CHARLES M. ROYCE
Charles M. Royce
President
1996 PERFORMANCE RESULTS
<TABLE>
<CAPTION>
THROUGH 12/31/96: RLP RTR REI RGS
----- ----- ----- -----
<S> <C> <C> <C> <C>
Last 3 months 5.1% 7.9% 6.5% 5.7%
Last 6 months 0.9% 9.8% 7.9% 6.4%
1996 22.8% 25.5% 16.5% 14.6%
</TABLE>
ANNUAL REPORT REFERENCE GUIDE
Royce Total Return Fund was awarded a 5 Star (*****) rating by Morningstar
out of 1,826 equity funds for the period ended 12/31/96...SEE PAGE 7.
Royce Low-Priced Stock Fund's first 3 years of performance history resulted
in a 15.7% average annual total return...SEE PAGE 5.
Royce Equity Income Fund's risk averse approach generated a 5-year average
annual total return of 12.1%...SEE PAGE 9.
Royce Global Services Fund has provided an 18.1% average annual total return
since inception...SEE PAGE 11.
For Statements of Assets and Liabilities, Statements of Operations,
Statements of Changes in Net Assets and Financial Highlights and Notes to
Financial Statements...SEE PAGES 12-16.
See accompanying Schedules of Investments.
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THE ROYCE FUNDS
VALUE INVESTING IN SMALL COMPANIES FOR OVER 20 YEARS
Small-cap securities were bullied in 1996 for a third straight [MAN]
year by their large-cap brethren. After running even in the first six
months, small-cap stocks fell behind in the more volatile second half. For
the full year, the Russell 2000 Index of small-cap stocks was up 16.5%
versus a gain of 23.0% for the large-cap oriented S&P 500 Index.
Perhaps the more interesting story in 1996 was the return of market
volatility. The Russell 2000 recorded four down months in 1996, twice as many as
in 1995. According to the independent mutual fund evaluation service,
Morningstar, 361 mutual funds, or 16% of the 2,255 diversified funds that invest
primarily in domestic stocks, lost money in the fourth quarter, as did one of
every three small-cap funds. More funds were in the red for the fourth quarter
than in the previous three quarters combined. We believe that a higher level of
volatility often precedes a period of lower returns.
Combined with increased volatility was a change in market leadership
among small-cap stocks during the second half. The value style of investing,
which was the market laggard earlier in the year, became a market leader during
the latter half. From the first of the year through the Russell 2000 peak on
May 22, the Russell 2000 Value Index was up 10.3% while the Russell 2000 Growth
Index was up a robust 20.9%. However, from the Russell 2000 peak in May through
year-end, the Russell 2000 Value Index recorded a gain of 10.1% versus a decline
of 8.0% for the Russell 2000 Growth Index, quite a reversal of events and
perhaps a harbinger for the market in 1997.
THE THRILL OF REWARD AND THE DENIAL OF RISK
Investment risk and reward are rarely discussed together, as investors
typically focus on one or the other at a time. When times are good, the return
portion of the equation dominates investors' conversations, and when times are
bad, the risk portion moves to center stage. Although the most recent small-cap
cycle clearly favored the "return" component, the "risk" segment is always
worthy of equal consideration because it impacts the path of long-term returns.
Risk involves both uncertainty and possibility of loss. Both aspects are
measurable, and both are paramount to the Funds' management philosophy.
To simplify matters, "uncertainty" relates to fund volatility and is
best measured using two gauges, standard deviation and beta. As the following
table indicates, Royce Total Return Fund ("RTR") and Royce Equity Income Fund
("REI") were among the "lowest risk" funds within their respective objective
categories as tracked by Morningstar, while Royce Low-Priced Stock Fund's risk
rankings were lower than its peers. Rankings for all three Funds were for the
last three years.
MORNINGSTAR RISK*
<TABLE>
<CAPTION>
RTR REI RLP
RANK RANK RANK
---- ---- ----
<S> <C> <C> <C>
Standard Deviation 1 2 109
Beta 1 2 13
Mstar Risk Ratio 1 16 64
</TABLE>
* As of December 31, 1996. Ranking of the lowest to highest out of the 242
funds in Morningstar's small-cap objective category (RTR and RLP) and the 91
funds in the equity income income objective (REI) with at least 3 years of
history. Please read the Prospectus for a more complete discussion of risk.
"Possibility of loss" is perhaps more important than statistical
measures of volatility because it takes into account a fund's actual down market
results. Morningstar risk ratio actually measures the concept of possibility of
loss more effectively because it considers a fund's underperformance (on a
monthly basis) relative to a safe and attainable return (3-month Treasury
bills). Using this methodology also, Royce Total Return Fund and Royce Equity
Income Fund can be considered "below-average risk."
1
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While we use various techniques to reduce risk, we cannot prevent the
Funds' net asset values from going down during market downdrafts. However, REI,
RTR and RLP typically have not declined as much during difficult periods when
compared to their benchmark index, the Russell 2000. Over the last seven years,
there have been seven down quarters for the Russell 2000. In six out of seven
quarters, REI outperformed the Index, while RTR and RLP both outperformed the
Russell 2000 in all three down quarters since their inception. (Note: Since
Royce Global Services' inception, the Morgan Stanley World Index has not had any
down quarters.)
RUSSELL 2000 DOWN QUARTER PERFORMANCE
<TABLE>
<CAPTION>
QTR RUSSELL
ENDED 2000 REI RTR RLP
- -------- ------- ------ ----- -----
<S> <C> <C> <C> <C>
12/31/94 -1.9 % -2.8% +1.5% +0.6%
6/30/94 -3.9 -1.7 +0.2 -1.2
3/31/94 -2.7 -1.5 -0.6 -2.4
6/30/92 -6.8 -1.0
6/30/91 -1.6 +0.8
9/30/90 -24.5 -16.1
3/31/90 -2.1 +0.6
</TABLE>
REI OUTPERFORMED THE RUSSELL 2000 IN 6 OUT OF 7
DOWN QUARTERS SINCE ITS INCEPTION.
RTR AND RLP OUTPERFORMED THE INDEX IN
ALL DOWN QUARTERS SINCE THEIR INCEPTION.
Our focus on risk management remains an important part of our investment
process. While individual market phases reward different risk profiles at
different times, central to the management of the Funds is a belief that paying
attention to risk does not diminish long-term returns. Although this flies in
the face of modern portfolio theory, it remains one of our principal tenets.
WITHIN THE SMALL-CAP UNION:
ONE COUNTRY, TWO COASTS AND [MAP OF UNITED STATES]
MANY STATES
Many changes have taken place in the small-cap investment universe over
the last ten years, and we now believe that small-cap stocks are no longer
"small" by previous standards; no longer "unknown" as this sector is now
regarded as a professional asset class; and no longer "under-owned" as the
number of small-cap mutual fund portfolios has grown to well over 400. What were
once deemed small-cap stocks (under $300 million in market cap), ten years ago
and beyond, are now better defined as "micro-cap" securities by today's
standards. The small-cap universe, which is presently defined as under $1
billion in market cap, is both broad (over 7,900 issues) and substantial ($1.3
trillion in total market capitalization) and as different and diverse as
California and Rhode Island.
This leads to an important, but unrecognized, aspect of the small-cap
market--it is really two markets in one: small-cap at the upper end and
micro-cap at the lower end of the capitalization range. On the surface, the
distinction may seem subtle but upon further investigation the differences are
real and quantifiable.
TWO DISTINCT MARKETS
<TABLE>
<CAPTION>
SMALL-CAP MICRO-CAP
<S> <C>
$300 mill - $1 bil $5 mil - $300 mil
1,400 companies 6,500 companies
$810 bil total cap. $470 bil total cap.
</TABLE>
Different performance
Different liquidity
Different institutional acceptance
Given the substantial differences in performance, liquidity and
institutional acceptance within the two markets of the small-cap universe, we
have developed distinct approaches for each.
At the upper end of the small-cap range, from $300 million to $1
billion, we employ a focused portfolio strategy which emphasizes companies with
superior financial characteristics and/or unusually attractive business
prospects. At the other end of the capitalization range, below $300 million, are
micro-cap securities, the antithesis of what most professional investors seek. A
broadly diversified portfolio strategy is employed to capture these
inefficiencies.
Our company specific themes run across both tiers of the small-cap
universe. Low valuation securities with attractive risk/reward characteristics
are often combined with company specific attributes, such as dividends, price,
markets and cash flow. Several of these company specific selection themes form
funds, which are
2
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run in an opportunistic fashion and use the full spectrum of small and
micro-cap offerings.
As we indicated earlier, in 1996 bigger was better in the equity market.
This was also the case with the small-cap market, as the following table
indicates:
WHY SIZE MATTERED IN
THE SMALL-CAP WORLD
"From California to Rhode Island"
S&P 600 PERFORMANCE RETURNS BY QUINTILE
<TABLE>
<CAPTION>
SIZE (BY QUINTILES) 1996 PERFORMANCE
- ------------------ ----------------
<S> <C>
Largest 20% 46.0%
Next 20% 29.7%
Middle 20% 23.3%
Next 20% 7.5%
Smallest 20% -4.8%
</TABLE>
A similar example of this phenomenon was supplied by Prudential
Securities' quantitative analyst, Claudia Mott. Upon examining year-to-date
performance of the broadly based Nasdaq Composite through November 30, she found
the top 10 contributors (most of which are large-cap oriented) produced more
than half of the Index's total return. When factoring out the top 100
contributors, she found the remaining 4,000+ securities generated a net negative
contribution for the year.
STILLNESS IN THE WATER
[SHARK]
Raymond Devoe, author of "The Devoe Report," recently recounted a
scuba-diving experience of some 30 years ago which evoked eerie analogies to the
current investment climate. After receiving certification at his Caribbean beach
hotel, Mr. Devoe swam off into the clear, blue waters of St. Thomas for his
first reef dive. Making his way along the reef, he stopped near a large rock to
enjoy an array of colorful plants and the tropical fish swimming casually among
them. After ten minutes, Mr. Devoe realized something was terribly wrong -- the
fish had disappeared as if they were hiding from something. He was left alone
with the sound of his beating heart and escaping air bubbles. Not knowing the
cause of the sudden "stillness in the water," he experienced a sense of panic
and returned to the beach without incident, yet badly shaken.
Mr. Devoe discussed his sensation with many other divers and most
responded with curious looks. Years later he read Peter Mathiessen's 1971 book,
Blue Meridian-- The Search for the Great White Shark, and discovered that
"stillness in the water" takes place prior to great white shark attacks. The
panic, or sense that something is wrong, occurs when the brain receives too many
conflicting messages, leading to an eerie sensation that "something's coming."
Divers who have survived shark attacks know the sensation and respond to it
appropriately. They have developed instincts or intuition and have the
experience to rely on them.
Currently, Mr. Devoe and other experienced investors (ourselves
included) cite similar sensations of apprehension about the equity market.
Although one would hardly describe the current equity market as "standing still"
or "stillness in the water," it does evoke a feeling of unease. In what has been
the longest and strongest bull market in history, with the Dow Jones Industrial
Average up over 4,000 points since October 1990, there is seemingly a universal
acceptance that continued prosperity is nearly guaranteed. Although there
haven't been any shark sightings in quite some time, our intuition tells us that
we should not be quick to rule out the possibility. Our own sense of order is
that markets are cyclical; volatility is to be expected; and performance
expectations should be lower.
We are not forecasting bad things for the market. However, our
investment experience may be helpful in recognizing when things seem out of
place. An established decision-making framework (investment process) helps us,
like any good diver, avoid the mistakes or missteps caused by panic or fear.
3
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THE ROAD AHEAD
Charles Dow once observed, "There is always a disposition in peoples'
minds to think that existing conditions will be permanent." In the last several
shareholder reports, we have documented why we believe that the equity market
will be different over the next few years. These changes may already be
underway, when one considers that the rolling 3-year average annual total
returns for the Russell 2000, which peaked at 28.2% in September 1993, are now
13.7% as of December 1996. Furthermore, this Index is flat since its peak in
late May.
[TWO LANE ROAD WITH CLOUDS]
1996 gave us a higher level of market volatility and the shifting
success of investment styles. If these changes continue, 1997 could be a very
interesting year. We are excited about the recent results and remain enthused
about the long-term prospects of our risk-averse style of investing. Your
continued confidence is appreciated.
Sincerely,
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
President Vice President Vice President
February 3, 1997
Performance reviews and portfolio analyses for Royce Low-Priced Stock,
Royce Total Return, Royce Equity Income and Royce Global Services begin on pages
5,7,9 and 11, respectively, of this Report.
All performance information in this Report 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.
Morningstar proprietary ratings reflect historical risk-adjusted
performance as of 12/31/96 and are subject to change monthly. The rating is
calculated from a fund's 3, 5 & 10-year average annual returns, with appropriate
fee adjustments and a risk factor that reflects performance relative to a
three-month Treasury bill returns. Ten percent of the Funds in an investment
category receive five stars and 22.5% receive four stars. Morningstar risk
ratio, beta and standard deviation are measures of a fund's relative risk and
are calculated for the trailing 36 month period. Morningstar proprietary risk
ratio measures a fund's downside volatility relative to all equity funds which
have an average score of 1.00. The average score for the 242 funds in the
small-cap objective category with a three year history was 1.29 for the three
years ended 12/31/96. The lower the risk ratio, the lower a fund's downside
volatility has been. Beta is a measure of sensitivity to market movements
compared to the unmanaged S&P 500 Index, with the beta of the S&P 500 equal to
1.00. A low beta means that a fund's market related volatility has been low.
Standard deviation is a statistical measure within which a fund's total returns
have varied over time. The greater the standard deviation, the greater a fund's
volatility.
The Russell 2000, Russell 2000 Growth, Russell 2000 Value, S&P 600 and S&P
500 are unmanaged indices of common stocks and include the reinvestment of
dividends.
4
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ROYCE LOW-PRICED STOCK FUND
PERFORMANCE REVIEW
WHAT WE DO
Royce Low-Priced Stock Fund ("RLP") invests in small and micro-cap companies
trading below $15 per share. This sector of the market remains underfollowed by
institutions and, therefore, offers significant investment opportunities. The
Fund 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.
HOW WE DID
Royce Low-Priced Stock Fund now has three years of performance history and
approximately $16 million in total net assets. Although not restricted in terms
of market capitalization, the Fund currently has a micro-cap orientation, which
helped performance in the first half of 1996 (+21.7%) and hindered it in the
second half (+0.9%). For the full year, RLP was up 22.8% versus 16.5% for the
Russell 2000, its benchmark index. Three year average annual total return for
RLP was 15.7%, ahead of the Russell 2000 return of 13.6%.
We believe this sector is a fertile and potentially rewarding investment
alternative for investors with patience and a tolerance for above average
volatility. We expect Royce Low-Priced Stock Fund to be highly competitive in
this attractive, yet neglected, area of the market.
ROYCE LOW PRICED STOCK VERSUS
RUSSELL 2000 VALUE OF
$10,000 INVESTED ON
12/15/93
[LINE GRAPH]
TOTAL RETURNS THROUGH 12/31/96
4th Quarter 1996: +5.1%
1-Year: +22.8%
3-Year Average Annual : +15.7%
From Inception* Average Annual: +15.5%
*Inception date: 12/15/93
ANNUAL RETURN COMPARISON
[BAR CHART]
RISK/RETURN COMPARISON
FOR THE THREE YEARS ENDED 12/31/96
Avg. Annual Standard
Total Return Deviation RUR
------------ --------- ---
RLP 15.7% 12.1 1.30
Russell 2000 13.6% 12.1 1.23
RLP's low priced stock focus
outperformed the Russell 2000 over the last three years.
RUR = Return Per Unit of Risk: Average annual total return divided by the
annualized standard deviation over a designated time period. Please read the
Prospectus for a more complete discussion of risk.
The Russell 2000 is an unmanaged index of domestic small-cap
stocks. The S&P 500, an unmanaged index of large company stocks, was up
23.0% in 1996.
5
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ROYCE LOW-PRICED STOCK FUND
PORTFOLIO REVIEW
PORTFOLIO DIAGNOSTICS
Median Market Cap: $123 million
Wtd. Avg. P/E Ratio: 13.7x
Wtd. Avg. P/B Ratio: 1.3x
Wtd. Avg. Yield: 1.0%
Fund Assets: $15.9 million
Symbol: RYLPX
PORTFOLIO INDUSTRY BREAKDOWN*
[PIE CHART]
EXCLUDES CASH AND CASH EQUIVALENTS
MARKET CAP EXPOSURE
[BAR CHART]
% of
Top Ten Positions Net Assets
----------------- ----------
1. Aldila 2.9%
2. Phoenix Duff & Phelps 2.8%
3. Willis Corroon Group 2.6%
4. Buffets 2.6%
5. Johnson Worldwide Associates 2.3%
6. The Bombay Company 2.3%
7. Rykoff-Sexton 2.3%
8. Lechters 2.2%
9. Shoney's 2.2%
10. ILC Technology 2.2%
IDEAS THAT WORKED
During calendar 1996, each of the following companies made meaningful
positive contributions to our overall performance. Among these winners, there
were no examples of hot new issues, high priced take-overs or momentum miracles.
Rather, our top five performers emerged from a series of long-term investment
decisions, carefully considered and executed in prior years. We built our
positions when business conditions were difficult, and other investors had voted
negatively on future prospects.
REALIZED AND
SECURITY UNREALIZED GAIN
------- --------------
The Dress Barn $117,017
Mity-Lite 112,462
Oregon Steel Mills 106,053
Sequent Computer 105,838
Sotheby's Holdings 101,431
GOOD IDEAS AT THE TIME
Even the best small-cap companies are not immune to the business flu.
Usually, if their balance sheets are strong and they have a history of high
internal returns, these companies will recover. We are generally well rewarded
for our persistence, although rebounds can take longer than we anticipate.
Unfortunately, a few of our investments never recover. Our five worst performers
in 1996 were:
REALIZED AND
SECURITY UNREALIZED LOSS
------- --------------
Chico's FAS $107,590
Pentech International 98,195
MacNeal-Schwendler 97,742
Buffets 89,116
Sirena Apparel Group 76,078
6
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Royce Total Return Fund
Performance Review
WHAT WE DO
Royce Total Return Fund ("RTR") uses an opportunistic approach to invest in
dividend-paying small-cap companies. By combining capital appreciation potential
with current yield, we believe that above average absolute and risk-adjusted
total returns are possible. The Fund 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.
HOW WE DID
Royce Total Return Fund now has three years of performance history and a
5-Star (*****) rating from Morningstar out of 1,826 equity funds as of December
31, 1996. The Fund outperformed its relevant benchmark, the Russell 2000, for
the fourth quarter (7.9% vs. 5.2%), for the second half (9.8% vs. 5.6%) and for
the full year (25.5% vs. 16.5%). The Fund's value orientation was especially
helpful in preserving capital
DOWN MARKET* PERFORMANCE
COMPARISON
[BAR CHART]
ROYCE TOTAL RETURN VERSUS
RUSSELL 2000 VALUE OF $10,000
INVESTED ON 12/15/93
[LINE GRAPH]
TOTAL RETURNS THROUGH 12/31/96
4th Quarter 1996: +7.9%
1-Year: +25.5%
3-Year Average Annual : +18.7%
From Inception* Average Annual: +18.4%
*Inception date: 12/15/93
during the more volatile second half. Not only did RTR outperform the Russell
2000 for the last three years (18.7% vs. 13.6%), but it did so with half the
risk, as measured by standard deviation (see Risk/Return Comparison below).
Additionally, RTR's risk averse nature was a factor in the Fund's strong showing
relative to the Russell 2000 during the two market downturns since its
inception. We remain encouraged about the potential rewards of this fertile
sector within the small-cap universe.
RISK/RETURN COMPARISON
For The Three Years Ended 12/31/96
Avg. Annual Standard
Total Return Deviation RUR
------------ --------- ---
RTR 18.7% 6.0 3.14
Russell 2000 13.6% 12.1 1.23
RTR outperformed the Russell 2000 over the last three years with half the
risk.
RUR = Return Per Unit of Risk: Average annual total return divided by the
annualized standard deviation over a designated time period. Please read the
Prospectus for a more complete discussion of risk.
Since its inception, the Fund's opportunistic approach to investing in
dividend paying small-cap companies has resulted in higher absolute and
risk-adjusted returns versus the Russell 2000.
The Russell 2000 is an unmanaged index of domestic small-cap
stocks. The S&P 500, an unmanaged index of large company stocks, was up
23.0% in 1996.
7
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ROYCE TOTAL RETURN FUND
PORTFOLIO REVIEW
PORTFOLIO DIAGNOSTICS
Median Market Cap: $314 million
Wtd. Avg. P/E Ratio: 15.4x
Wtd. Avg. P/B Ratio: 1.9x
Wtd. Avg. Yield: 3.7%
Fund Assets: $6.2 million
Symbol: RYTRX
PORTFOLIO INDUSTRY BREAKDOWN*
[PIE CHART]
EXCLUDES CASH AND CASH EQUIVALENTS
MARKET CAP EXPOSURE
[BAR CHART]
% of
Top Ten Positions Net Assets
----------------- ----------
1. New England Business Service 5.2%
2. The Standard Register Company 4.3%
3. Stanhome 4.3%
4. DIMON Incorporated 3.7%
5. Willis Corroon Group 3.7%
6. BGS Systems 3.5%
7. The Commerce Group 3.2%
8. E.W. Blanch Holdings 3.2%
9. Penn. Manufacturers Corporation 3.0%
10. Arthur J. Gallagher 3.0%
IDEAS THAT WORKED
During calendar 1996, each of the following companies made meaningful
positive contributions to our overall performance. Among these winners, there
were no examples of hot new issues, high priced take-overs or momentum miracles.
Rather, our top five performers emerged from a series of long-term investment
decisions, carefully considered and executed in prior years. We built our
positions when business conditions were difficult, and other investors had voted
negatively on future prospects.
Realized and
Security Unrealized Gain
------- --------------
New England Business Service $ 84,647
The Standard Register Co. 80,710
BGS Systems 66,213
The Registry 56,938
Woodward Governor 55,508
GOOD IDEAS AT THE TIME
Even the best small-cap companies are not immune to the business flu.
Usually, if their balance sheets are strong and they have a history of high
internal returns, these companies will recover. We are generally well rewarded
for our persistence, although rebounds can take longer than we anticipate.
Unfortunately, a few of our investments never recover. Our five worst performers
in 1996 were:
Realized and
Security Unrealized Loss
------- -------------
Scitex $ 30,064
Penn. Manufacturers 23,975
The Learning Co. 14,550
Blair 9,638
A.T. Cross 7,898
8
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Royce Equity Income Fund
Performance Review
WHAT WE DO
Royce Equity Income Fund ("REI") invests in income-oriented small-cap
securities. The Fund 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. A goal of the Fund is
to provide a dividend yield of at least 1% above that of the S&P 500 dividend
yield.
HOW WE DID
Royce Equity Income has approximately $36 million in total net assets and a
4-Star (****) rating from Morningstar out of 1,826 equity funds as of December
31, 1996. With the value style emerging as a market leader in the second half,
so did REI's relative returns. The Fund outperformed its relevant benchmark, the
Russell 2000, for the fourth quarter (6.5% vs. 5.2%) and for the second half
(7.9% vs. 5.6%). For the full year, REI matched the Russell 2000 with a 16.5%
return.
DOWN MARKET* PERFORMANCE COMPARISON
[BAR CHART]
*DECLINE OF AT LEAST 10% IN THE RUSSELL 2000
ROYCE EQUITY INCOME VERSUS
RUSSELL 2000 VALUE OF $10,000
INVESTED ON 1/5/90
[LINE GRAPH]
TOTAL RETURNS THROUGH 12/31/96
4th Quarter 1996: +6.5%
1-Year: +16.5%
5-Year Average Annual : +12.1%
From Inception* Average Annual: +10.0%
*Inception date: 1/2/90
REI's five-year average annual total return of 12.1% approximates the long-term
performance norm for small-cap stocks, and its risk profile remained one of
Morningstar's lowest. In addition, REI's risk averse nature was a factor in the
Fund's strong showing relative to the Russell 2000 during the four market
downturns since its inception.
Given the pick up in market volatility in the last six months, we remain
encouraged about the potential of this conservative approach to small-cap
investing.
RISK/RETURN COMPARISON
FOR THE FIVE YEARS ENDED 12/31/96
AVG. ANNUAL STANDARD
TOTAL RETURN DEVIATION RUR
------------ --------- ---
REI 12.1% 6.0 2.03
Russell 2000 15.6% 12.1 1.29
REI has substantially outperformed the Russell 2000 on a risk-adjusted
basis over the last five years.
RUR = Return Per Unit of Risk: Average annual total return divided by the
annualized standard deviation over a designated time period. Please read the
Prospectus for a more complete discussion of risk.
As the above graph indicates, REI's performance over the last five years
was under the Russell 2000 in a market cycle which generally rewarded high-risk
investments. However, REI's low-risk profile enabled the Fund to outperform the
index on a risk-adjusted basis.
The Russell 2000 is an unmanaged index of
domestic small-cap stocks.
9
<PAGE>
<PAGE>
Royce Equity Income Fund
Portfolio Review
Portfolio Diagnostics
Median Market Cap: $383 million
Wtd. Avg. P/E Ratio: 15.0x
Wtd. Avg. P/B Ratio: 1.7x
Wtd. Avg. Yield: 4.0%
Fund Assets: $36 million
Symbol: RYEQX
PORTFOLIO INDUSTRY BREAKDOWN*
[PIE CHART]
*EXCLUDES CASH AND CASH EQUIVALENTS
MARKET CAP EXPOSURE
[BAR CHART]
% of
Top Ten Positions Net Assets
----------------- ----------
1. The Standard Register Co. 3.4%
2. New England Business Service 3.3%
3. Zenith National Insurance 2.8%
4. The Commerce Group 2.8%
5. Stanhome 2.6%
6. Garan Incorporated 2.6%
7. Woodward Governor Company 2.6%
8. Willis Corroon Group 2.4%
9. Family Dollar Stores 2.3%
10. Lilly Industries 2.2%
IDEAS THAT WORKED
During calendar 1996, each of the following companies made meaningful
positive contributions to our overall performance. Among these winners, there
were no examples of hot new issues, high priced take-overs or momentum miracles.
Rather, our top five performers emerged from a series of long-term investment
decisions, carefully considered and executed in prior years. We built our
positions when business conditions were difficult, and other investors had voted
negatively on future prospects.
Realized and
Security Unrealized Gain
------- --------------
The Standard Register Co. $ 469,837
Woodward Governor 458,423
Kimball International 378,407
Family Dollar Stores 331,738
Claire's Stores 272,162
GOOD IDEAS AT THE TIME
Even the best small-cap companies are not immune to the business flu.
Usually, if their balance sheets are strong and they have a history of high
internal returns, these companies will recover. We are generally well rewarded
for our persistence, although rebounds can take longer than we anticipate.
Unfortunately, a few of our investments never recover. Our five worst performers
in 1996 were:
REALIZED AND
SECURITY UNREALIZED LOSS
------- --------------
Blair $ 213,897
Scitex 169,699
Strawbridge &Clothier 130,667
Oshkosh Truck 114,825
Stanhome 89,737
10
<PAGE>
<PAGE>
ROYCE GLOBAL SERVICES FUND
PERFORMANCE/PORTFOLIO REVIEW
WHAT WE DO
Royce Global Services Fund ("RGS") uses a risk averse approach to invest in
globally oriented companies in service industries. Service industries include
banking, insurance, securities, investment management, advertising, publishing,
consulting, communications, etc. The Fund 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.
HOW WE DID
Royce Global Services now has two years of performance history and almost
$2 million in total net assets. The Fund outperformed its relevant index, the
Morgan Stanley World Index, for the fourth quarter (5.7% vs. 4.6%), for the
second half (6.4% vs. 5.6%) and for the full year (14.6% vs. 13.5%).
ROYCE GLOBAL SERVICES VERSUS
MORGAN STANLEY WORLD INDEX
VALUE OF $10,000 INVESTED ON
12/15/94
[LINE GRAPH]
PORTFOLIO INDUSTRY BREAKDOWN*
[PIE CHART]
*EXCLUDES CASH AND CASH EQUIVALENTS
TOTAL RETURNS THROUGH 12/31/96
4th Quarter 1996: +5.7%
1-Year: +14.6%
2-Year Average Annual : +17.9%
From Inception* Average Annual: +18.1%
*Inception date: 12/15/94
The Fund's risk averse orientation was especially beneficial in the second half,
with the pick up in market volatility and the emergence of value as a market
leader. The two year average annual total return for the Fund was 17.9% vs.
17.0% for the Morgan Stanley World Index.
Although RGS is a relatively new fund, we are encouraged by its early results.
Portfolio Diagnostics
----------------------
Median Market Cap: $389 million
Wtd. Avg. P/E Ratio: 11.1x
Wtd. Avg. P/B Ratio: 1.5x
Wtd. Avg. Yield: 1.8%
Fund Assets: $1.9 million
Symbol: RYGSX
% of
Top Ten Positions Net Assets
---------------- ---------
1. Haemonetics 4.8%
2. PXRE 4.4%
3. Willis Corroon Group 4.4%
4. Marshall Industries 4.4%
5. Zenith National Insurance 4.2%
6. Penn. Manufacturers 4.0%
7. Sevenson Environmental Services 3.7%
8. International Semi-Tech (Sr Note) 3.3%
9. The Harper Group 3.3%
10. Standard Commercial 3.1%
The Morgan Stanley World Index is an arithmatic average, weighted by market
value, of the performance of approximately 1,450 securities listed on the
stock exchanges of 20 countries, including the U.S.A, Europe, Canada, Australia,
New Zealand and the Far East.
11
<PAGE>
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Schedules of Investments as of December 31, 1996, integral parts of the
Financial Statements for Royce Low-Priced Stock Fund, Royce Total Return Fund,
Royce Global Services Fund and Royce Equity Income Fund, are accompanying this
Report.
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Royce Low- Royce Total Royce Global
Priced Stock Fund Return Fund Services Fund
----------------- ----------- -------------
<S> <C> <C> <C>
ASSETS:
Investments at value (identified cost $14,959,751, $4,949,797,
$1,759,909 and $29,881,032, respectively).......................... $14,860,107 $5,374,550 $ 1,935,732
Repurchase agreements (at cost and value)............................ 1,700,000 1,100,000 --
Receivable for investments sold...................................... 226,525 -- --
Receivable for capital shares sold................................... 29,402 15,955 --
Receivable for dividends and interest................................ 12,117 18,895 4,867
Prepaid expenses and other assets.................................... 53,617 75,085 24,995
----------------- ----------- -------------
TOTAL ASSETS....................................................... 16,881,768 6,584,485 1,965,594
----------------- ----------- -------------
LIABILITIES:
Payable for investments purchased.................................... 898,833 341,165 --
Payable for capital shares redeemed.................................. 57,871 -- 6,266
Payable for investment advisory fees................................. -- -- --
Accrued expenses..................................................... 20,161 9,783 11,443
----------------- ----------- -------------
TOTAL LIABILITIES.................................................. 976,865 350,948 17,709
----------------- ----------- -------------
NET ASSETS......................................................... $15,904,903 $6,233,537 $ 1,947,885
----------------- ----------- -------------
----------------- ----------- -------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income.................................. $ -- $ -- $ 3,357
Accumulated net realized gain (loss) on investments.................. 361,841 56,377 56,870
Net unrealized appreciation (depreciation) on investments............ (99,644) 424,753 175,823
Capital shares....................................................... 2,526 991 323
Additional paid-in capital........................................... 15,640,180 5,751,416 1,711,512
----------------- ----------- -------------
NET ASSETS......................................................... $15,904,903 $6,233,537 $ 1,947,885
----------------- ----------- -------------
----------------- ----------- -------------
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares authorized for each
Fund).............................................................. 2,526,098 990,877 322,885
----------------- ----------- -------------
----------------- ----------- -------------
NET ASSET VALUE:
(offering and redemption price per share)............................ $6.30 $6.29 $6.03
----------------- ----------- -------------
----------------- ----------- -------------
<CAPTION>
Royce Equity
Income Fund
------------
<S> <C>
ASSETS:
Investments at value (identified cost $14,959,751, $4,949,797,
$1,759,909 and $29,881,032, respectively).......................... $33,567,730
Repurchase agreements (at cost and value)............................ 2,200,000
Receivable for investments sold...................................... 181,685
Receivable for capital shares sold................................... 56,451
Receivable for dividends and interest................................ 154,747
Prepaid expenses and other assets.................................... 10,705
------------
TOTAL ASSETS....................................................... 36,171,318
------------
LIABILITIES:
Payable for investments purchased.................................... --
Payable for capital shares redeemed.................................. 83,834
Payable for investment advisory fees................................. 51,127
Accrued expenses..................................................... 39,916
------------
TOTAL LIABILITIES.................................................. 174,877
------------
NET ASSETS......................................................... $35,996,441
------------
------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income.................................. $ 14,671
Accumulated net realized gain (loss) on investments.................. (223,912)
Net unrealized appreciation (depreciation) on investments............ 3,686,698
Capital shares....................................................... 6,309
Additional paid-in capital........................................... 32,512,675
------------
NET ASSETS......................................................... $35,996,441
------------
------------
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares authorized for each
Fund).............................................................. 6,308,587
------------
------------
NET ASSET VALUE:
(offering and redemption price per share)............................ $5.71
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Royce Low- Royce Total Royce Global
Priced Stock Fund Return Fund Services Fund
--------------------------- --------------------------- ---------------------------
Years ended December 31, Years ended December 31, Years ended December 31,
--------------------------- --------------------------- ---------------------------
1996 1995 1996 1995 1996 1995
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment income
(loss).................. $ (76,915) $ (27,929) $ 100,069 $ 52,405 $ 3,357 $ (7,845)
Net realized gain on
investments............. 1,678,351 529,308 651,408 234,948 166,813 169,118
Net change in unrealized
appreciation/depreciation
on investments.......... (121,444) (32,889) 183,687 218,434 89,685 79,372
----------- ------------ ----------- ------------ ----------- ------------
Net increase in net assets
from investment
operations.............. 1,479,992 468,490 935,164 505,787 259,855 240,645
----------- ------------ ----------- ------------ ----------- ------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income..... -- -- (124,188) (51,027) -- --
Net realized gain on
investments............. (1,383,085) (356,922) (566,609) (235,511) (151,970) (119,246)
----------- ------------ ----------- ------------ ----------- ------------
Total dividends and
distributions........... (1,383,085) (356,922) (690,797) (286,538) (151,970) (119,246)
----------- ------------ ----------- ------------ ----------- ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares
sold.................... 13,983,260 2,067,601 4,372,695 449,217 569,431 892,137
Dividends reinvested...... 1,262,154 338,028 686,812 286,304 150,879 119,060
Cost of shares redeemed... (3,652,471) (181,994) (1,618,011) (63,296) (506,967) (20,431)
----------- ------------ ----------- ------------ ----------- ------------
Net increase (decrease) in
net assets from capital
share transactions...... 11,592,943 2,223,635 3,441,496 672,225 213,343 990,766
----------- ------------ ----------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN
NET ASSETS................ 11,689,850 2,335,203 3,685,863 891,474 321,228 1,112,165
NET ASSETS:
Beginning of year......... 4,215,053 1,879,850 2,547,674 1,656,200 1,626,657 514,492
----------- ------------ ----------- ------------ ----------- ------------
End of year............... $15,904,903(a) $4,215,053(a) $ 6,233,537(b) $2,547,674(b) $1,947,885(c) $1,626,657(c)
----------- ------------ ----------- ------------ ----------- ------------
----------- ------------ ----------- ------------ ----------- ------------
CAPITAL SHARE TRANSACTIONS:
Shares sold............... 2,138,091 350,288 676,518 80,015 95,566 166,855
Shares issued for
reinvestment of
dividends and
distributions........... 200,980 60,362 115,044 50,053 25,616 21,147
Shares redeemed(e)........ (563,022) (31,052) (243,257) (10,697) (84,524) (3,362)
----------- ------------ ----------- ------------ ----------- ------------
Net increase (decrease) in
shares outstanding...... 1,776,049 379,598 548,305 119,371 36,658 184,640
----------- ------------ ----------- ------------ ----------- ------------
<CAPTION>
Royce Equity
Income Fund
----------------------------
Years ended December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
INVESTMENT OPERATIONS:
Net investment income
(loss).................. $ 1,145,465 $ 2,289,102
Net realized gain on
investments............. 3,859,793 2,816,539
Net change in unrealized
appreciation/depreciation
on investments.......... 584,279 5,050,556
------------ ------------
Net increase in net assets
from investment
operations.............. 5,589,537 10,156,197
------------ ------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income..... (1,241,449) (2,310,331)
Net realized gain on
investments............. (4,051,779) (394,120)
------------ ------------
Total dividends and
distributions........... (5,293,228) (2,704,451)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares
sold.................... 5,786,574 8,488,920
Dividends reinvested...... 4,589,857 1,878,994
Cost of shares redeemed... (30,853,481) (38,773,144)
------------ ------------
Net increase (decrease) in
net assets from capital
share transactions...... (20,477,050) (28,405,230)
------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS................ (20,180,741) (20,953,484)
NET ASSETS:
Beginning of year......... 56,177,182 77,130,666
------------ ------------
End of year............... $ 35,996,441(d) $56,177,182(d)
------------ ------------
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Shares sold............... 987,183 1,556,253
Shares issued for
reinvestment of
dividends and
distributions........... 811,574 336,962
Shares redeemed(e)........ (5,349,055) (7,105,688)
------------ ------------
Net increase (decrease) in
shares outstanding...... (3,550,298) (5,212,473)
------------ ------------
</TABLE>
- ------------
(a) Includes undistributed net investment income of $0 for 1996 and 1995.
(b) Includes undistributed net investment income of $0 in 1996, and $181 in
1995.
(c) Includes undistributed net investment income of $3,357 in 1996 and $0 in
1995.
(d) Includes undistributed net investment income of $14,671 in 1996 and $0 in
1995.
(e) Shares redeemed within one year of purchase are subject to a 1% redemption
fee, payable to the Funds, which is used to offset costs associated with the
redemption.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Royce Low- Royce Total Royce Global
Priced Stock Fund Return Fund Services Fund
----------------- ----------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends........................................................ $ 99,519 $ 110,789 $ 33,439
Interest......................................................... 38,793 39,563 135
----------------- ----------- -------------
Total Income................................................ 138,312 150,352 33,574
----------------- ----------- -------------
Expenses:
Investment advisory fees......................................... 173,873 40,947 29,185
Distribution fees................................................ 29,204 10,236 4,864
Custodian and shareholder servicing fees......................... 34,305 11,051 4,204
Administrative and office facilities expenses.................... 6,451 2,228 1,156
Professional fees................................................ 10,498 3,421 9,754
Trustees' fees................................................... 1,052 -- 234
Other expenses................................................... 40,876 21,394 14,869
----------------- ----------- -------------
Total Expenses.............................................. 296,259 89,277 64,266
Fees Waived by Investment Adviser and Distributor........... (81,032) (38,994) (34,049)
----------------- ----------- -------------
Net Expenses................................................ 215,227 50,283 30,217
----------------- ----------- -------------
Net Investment Income (Loss)................................ (76,915) 100,069 3,357
----------------- ----------- -------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments..................................... 1,678,351 651,408 166,813
Net change in unrealized appreciation/depreciation on investments.... (121,444) 183,687 89,685
----------------- ----------- -------------
Net realized and unrealized gain on investments...................... 1,556,907 835,095 256,498
----------------- ----------- -------------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS................ $ 1,479,992 $ 935,164 $ 259,855
----------------- ----------- -------------
----------------- ----------- -------------
<CAPTION>
Royce Equity
Income Fund
------------
<S> <C>
INVESTMENT INCOME:
Income:
Dividends........................................................ $1,039,088
Interest......................................................... 646,349
------------
Total Income................................................ 1,685,437
------------
Expenses:
Investment advisory fees......................................... 386,487
Distribution fees................................................ --
Custodian and shareholder servicing fees......................... 52,587
Administrative and office facilities expenses.................... 24,112
Professional fees................................................ 29,399
Trustees' fees................................................... 4,351
Other expenses................................................... 68,732
------------
Total Expenses.............................................. 565,668
Fees Waived by Investment Adviser and Distributor........... (25,696)
------------
Net Expenses................................................ 539,972
------------
Net Investment Income (Loss)................................ 1,145,465
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments..................................... 3,859,793
Net change in unrealized appreciation/depreciation on investments.... 584,279
------------
Net realized and unrealized gain on investments...................... 4,444,072
------------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS................ $5,589,537
------------
------------
</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 evaluating the Funds'
performance for the periods presented.
<TABLE>
<CAPTION>
Net
Realized
and Distributions
Net Asset Net Unrealized Dividends from Net Net Asset
Value, Investment Gain (Loss) from Net Realized Gain Value,
Beginning Income on Investment on End of Total
of Period (Loss) Investments Income Investments Period Return
--------- ---------- ----------- ------------- ------------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ROYCE LOW-PRICED STOCK FUND (a)
1996........ $5.62 $(0.03) $ 1.31 $-- $ (0.60) $6.30 22.8%
1995........ 5.07 -- 1.14 -- (0.59) 5.62 22.5%
1994........ 5.01 (0.03) 0.18 -- (0.09) 5.07 3.0%
1993*....... 5.00 -- 0.01 -- -- 5.01 0.02%
ROYCE TOTAL RETURN FUND (b)
1996........ $5.76 $ 0.14 $ 1.28 $ (0.16) $ (0.73) $6.29 25.5%
1995........ 5.12 0.13 1.24 (0.13) (0.60) 5.76 26.9%
1994........ 5.00 0.02 0.24 (0.02) (0.12) 5.12 5.2%
1993*....... 5.00 -- -- -- -- 5.00 0.00%
ROYCE GLOBAL SERVICES FUND (c)
1996........ $5.68 $ 0.01 $ 0.81 $-- $ (0.47) $6.03 14.6%
1995........ 5.06 -- 1.07 -- (0.45) 5.68 21.2%
1994*....... 5.00 -- 0.06 -- -- 5.06 1.2%
ROYCE EQUITY INCOME FUND (d)
1996........ $5.70 $ 0.18 $ 0.73 $ (0.20) $ (0.70) $5.71 16.5%
1995........ 5.12 0.21 0.62 (0.21) (0.04) 5.70 16.4%
1994........ 5.58 0.19 (0.37) (0.18) (0.10) 5.12 (3.3)%
1993........ 5.49 0.21 0.50 (0.21) (0.41) 5.58 13.1%
1992........ 4.93 0.22 0.72 (0.22) (0.16) 5.49 19.4%
<CAPTION>
Ratio of
Net
Ratio of Investment
Expenses Income Average
Net Assets, to (Loss) to Portfolio Commission
End of Period Average Average Turnover Rate
(in thousands) Net Assets Net Assets Rate Paid`D'
-------------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
ROYCE LOW-PRICED STOCK FUND (a)
1996........ $ 15,905 1.88% (0.67)% 137% $ 0.0464
1995........ 4,215 1.97% (1.11)% 114% --
1994........ 1,880 1.89% (1.11)% 95% --
1993*....... 452 0.29%* (.29)%* 0% --
ROYCE TOTAL RETURN FUND (b)
1996........ $ 6,234 1.25% 2.50% 111% $ 0.0605
1995........ 2,548 1.67% 2.42% 68% --
1994........ 1,656 1.96% 0.49% 88% --
1993*....... 451 0.29%* (0.29)%* 0% --
ROYCE GLOBAL SERVICES FUND (c)
1996........ $ 1,948 1.56% 0.17% 81% $ 0.0591
1995........ 1,627 1.97% (0.58)% 106% --
1994*....... 514 1.78%* 0.00% 0% --
ROYCE EQUITY INCOME FUND (d)
1996........ $ 35,996 1.37% 2.91% 36% $ 0.0607
1995........ 56,177 1.24% 3.49% 29% --
1994........ 77,131 1.27% 3.43% 47% --
1993........ 84,661 1.00% 3.79% 100% --
1992........ 54,101 0.99% 4.31% 59% --
</TABLE>
- ------------
(a) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the periods ended December 31, 1996, 1995, 1994 and 1993,
the expense ratios before the waivers would have been 2.59%, 3.47%, 3.63%,
and 2.04%, respectively. The Fund commenced operations on December 15, 1993.
(b) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the periods ended December 31, 1996, 1995, 1994 and 1993,
the expense ratios before the waivers would have been 2.23%, 2.38%, 3.21%,
and 2.04%, respectively. The Fund commenced operations on December 15, 1993.
(c) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the periods ended December 31, 1996, 1995 and 1994, the
expense ratios before the waivers would have been 3.31%, 3.72%, and 3.69%,
respectively. The Fund commenced operations on December 15, 1994.
(d) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the years ended December 31, 1996, 1995, 1994, 1993 and
1992, the expense ratios before the waivers would have been 1.44%, 1.33%,
1.33%, 1.39%, and 1.30%, respectively.
* Annualized.
`D' For fiscal years beginning on or after October 1, 1995, the Funds are
required to disclose average commission rate paid per share for purchases
and sales of investments.
14
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Low-Priced Stock Fund, Royce Total Return Fund, Royce Global Services
Fund, and Royce Equity Income Fund ('Fund' or 'Funds') are four 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 Low-Priced Stock Fund and Royce Total Return Fund
commenced operations on December 15, 1993, Royce Global Services Fund commenced
operations on December 15, 1994, and Royce Equity Income Fund commenced
operations on January 2, 1990.
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. Expenses:
Expenses directly attributable to each fund are charged to that Fund's
operations while expenses applicable to all Funds are allocated in an equitable
manner.
d. Taxes:
As qualified regulated investment companies under Subchapter M of the
Internal Revenue Code, the Funds are not subject to income taxes to the extent
that each Fund distributes substantially all of its taxable income for its
fiscal year. The accompanying Schedules of Investments contain information
regarding income taxes under the caption 'Income Tax Information.'
At December 31, 1996, Royce Equity Income Fund had a net tax basis capital
loss carryforward of approximately $428,844, of which $214,422 may be applied
annually against any realized net taxable capital gains until December 31, 1998,
the expiration date.
e. Distributions:
For Royce Low-Priced Stock Fund, Royce Total Return Fund, and Royce Global
Services Fund, dividends are declared on an annual basis; for Royce Equity
Income Fund, dividends are declared on a quarterly basis. Any 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 and distributions in excess of 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.
f. Repurchase agreements:
The Funds enter into repurchase agreements with respect to portfolio
securities solely with State Street Bank and Trust Company ('SSB&T'), the
custodian of the Funds' assets. Each 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 each Fund to dispose of its underlying securities.
15
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISER AND DISTRIBUTOR:
Under the Trust's investment advisory agreements with Quest Advisory Corp.
('Quest'), Quest is paid a monthly fee calculated daily at an annual rate of
1.5%, 1.0%, 1.5% and 1.0% of the average net assets of Royce Low-Priced Stock
Fund, Royce Total Return Fund, Royce Global Services Fund and Royce Equity
Income Fund, respectively. For the year ended December 31, 1996, Royce Low-
Priced Stock Fund, Royce Total Return Fund, Royce Global Services Fund, and
Royce Equity Income Fund recorded advisory fees of $122,045 (net of voluntary
waivers of $51,828), $12,189 (net of voluntary waivers of $28,758), $0 (net of
voluntary waivers of $29,185), and $360,791 (net of $25,696), respectively.
Quest Distributors, Inc. ('QDI'), the distributor of shares of the Funds,
is an affiliate of Quest. QDI voluntarily waived distribution fees of $29,204,
$10,236, and $4,864, respectively for Royce Low-Priced Stock Fund, Royce Total
Return Fund, and Royce Global Services Fund, for the year ended December 31,
1996. The distribution agreement provides for maximum fees of .25% per annum of
each of these Funds' average net assets.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES:
For the year ended December 31, 1996, the cost of purchases and the
proceeds from sales of investment securities, other than short-term securities,
were as follows:
<TABLE>
<CAPTION>
Royce Low-Priced Royce Total
Stock Fund Return Fund
---------------- ------------
<S> <C> <C>
Purchases....... $ 23,406,211 $5,921,881
Sales........... $ 14,211,287 $3,779,076
</TABLE>
<TABLE>
<CAPTION>
Royce Global Royce Equity
Services Fund Income Fund
---------------- ------------
<S> <C> <C>
Purchases....... $1,686,743 $13,293,140
Sales........... $1,468,221 $36,881,266
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees of The Royce Fund
and Shareholders of Royce Low-Priced Stock Fund, Royce Total Return Fund, Royce
Global Services Fund and Royce Equity Income Fund:
We have audited the accompanying statements of assets and liabilities of
Royce Low-Priced Stock Fund, Royce Total Return Fund, Royce Global Services Fund
and Royce Equity Income Fund, including the schedules of investments,
accompanying the Annual Report, as of December 31, 1996, the related statements
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 periods indicated therein. These financial statements and
financial highlights are the responsibility of the Funds' 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
statments. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by managements, 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 Low-Priced Stock Fund, Royce Total Return Fund, Royce Global Services Fund
and Royce Equity Income Fund, as of December 31, 1996, the results of their
operations for the year then ended, the changes in their net assets for each of
the two years in the period then ended, and the financial highlights for the
periods indicated therein, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 14, 1997
16
<PAGE>
<PAGE>
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ADDITIONAL REPORT COPIES & PROSPECTUS INQUIRIES
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FOR FUND MATERIALS, PERFORMANCE UPDATES,
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FUND.
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as `D'
