Value Investing in Small Companies For Over 20 Years
THE
ROYCE
FUNDS
Royce Total Return Fund
Royce Low-Priced Stock Fund
1997 Semi-Annual Report
<PAGE>
THE ROYCE FUNDS ROAD MAP
________________________________________________________________________________
For over twenty years, Royce & Associates has focused exclusively on small and
micro-cap investing. While we offer a variety of funds, we remain committed to a
risk-averse investment style. Since 1990, the firm has devoted its energies to
two portfolio strategies.
[Triangle] TWO CORE PORTFOLIO STRATEGIES
CONCENTRATED SMALL-CAP MICRO-CAP
ROYCE PREMIER ROYCE MICRO-CAP
Small-Cap Orientation Micro-Cap Orientation
Concentrated Portfolio Broadly Diversified Portfolio
Portfolios revolve around two main criteria: CAPITALIZATION (small or micro-cap)
and CONCENTRATION. The small-cap universe (companies with market caps between
$300 million and $1 billion) is no longer small, unknown or under-owned;
therefore, WE BELIEVE THAT THIS GREATER LEVEL OF EFFICIENCY REQUIRES GREATER
PORTFOLIO CONCENTRATION. The micro-cap universe (companies with market caps
between $5 million and $300 million) provides more choices (approximately 7,000
companies), yet greater trading difficulties; therefore, WE BELIEVE THAT BROAD
DIVERSIFICATION IS REQUIRED GIVEN THE LIQUIDITY CONSTRAINTS OF THIS SECTOR.
[Triangle] OPPORTUNISTIC THEMES
ROYCE TOTAL RETURN ROYCE LOW-PRICED
Dividend-Paying Securities Stocks Below $15
We have identified two other attributes for delivering strong risk-adjusted
returns -- one has low-risk characteristics (dividends) and the other
(low-priced stocks) has the potential for high returns. When these attributes
are found in stocks we selected for our core portfolios, we designate them for
our specific theme funds. Performance and volatility may be substantially
different for each of these portfolios.
[Triangle] COMBINED PORTFOLIOS - OUR FLAGSHIP APPROACH
PENNSYLVANIA MUTUAL PMF II ROYCE GIFTSHARES
Combine Small and Micro-Cap Companies
The combined portfolios encompass approximately EQUAL WEIGHTINGS of each core
strategy. Two of our portfolios, including our flagship fund Pennsylvania
Mutual, are suitable for both individuals and institutions, while GiftShares
offers a unique gifting and estate planning portfolio.
<PAGE>
SEMI-ANNUAL REPORT REFERENCE GUIDE
ROYCE TOTAL RETURN SUBSTANTIALLY OUTPERFORMED
THE RUSSELL 2000 ON BOTH AN ABSOLUTE AND RISK
ADJUSTED BASIS OVER THE LAST TEN YEARS. 8
ROYCE TOTAL RETURN'S RISK RANKINGS WERE AMONG THE
LOWEST VERSUS ITS SMALL-CAP MUTUAL FUND PEERS.
ROYCE LOW-PRICED STOCK FUND HAS PROVIDED A 15.5%
AVERAGE ANNUAL TOTAL RETURN SINCE ITS INCEPTION. 10
CONSUMER PRODUCTS, INDUSTRIAL SERVICES AND RETAIL WERE
ROYCE LOW-PRICED STOCK FUND'S TOP THREE INDUSTRY SECTORS. 11
SCHEDULES OF INVESTMENT AND FINANCIAL STATEMENTS. 14-20
POSTSCRIPT: ALL THAT JAZZ. INSIDE BACK COVER.
FOR OVER TWENTY YEARS, OUR RISK-AVERSE APPROACH HAS FOCUSED ON EVALUATING A
COMPANY'S "PRIVATE WORTH" -- WHAT WE BELIEVE AN ENTERPRISE WOULD SELL FOR IN A
PRIVATE TRANSACTION BETWEEN RATIONAL PARTIES. THIS REQUIRES A THOROUGH
UNDERSTANDING OF THE FINANCIAL AND OPERATING DYNAMICS OF A BUSINESS, AS THOUGH
WE WERE PURCHASING THE ENTIRE COMPANY. THE PRICE WE WILL PAY FOR A SECURITY MUST
BE SIGNIFICANTLY LOWER THAN OUR APPRAISAL OF ITS PRIVATE WORTH.
<TABLE>
<CAPTION>
_______________________________________________________________________________
PERFORMANCE RESULTS
YEAR-TO-DATE SINCE
FUND (INCEPTION) RETURN 1-YEAR INCEPTION
- ---------------- --------------------------------------
<S> <C> <C> <C>
Royce Total Return Fund (12/15/93) 12.7% 23.8% 19.6%
- ----------------------------------------------------------------------------
Royce Low-Priced Stock Fund (12/15/93) 7.3% 8.3% 15.5%
_______________________________________________________________________________
</TABLE>
<PAGE>
LETTER TO OUR STOCKHOLDERS
_______________________________________________________________________________
(photo of Charles M. Royce)
Charles M. Royce, President
[sidebar] 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.
(graphic:comic strip)
BIGGER WAS BETTER . . .
In light of 1997's results to date, investors in small-cap 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.
2| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
...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 PAGES 8-11.
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.
(graphic: Dad & son) 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.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 |3
<PAGE>
[sidebar]
Within 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.
[callout]
...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.
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.
WHAT DO YOU LOOK FOR IN A COMPANY? Essentially, we are interested in three
things--strong balance sheets, strong evidence of success and strong prospects.
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.
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
[callout]
ONE OF THE MOST IMPORTANT AND UNDER APPRECIATED SOURCES OF INFORMATION IS THE
ANNUAL REPORT.
4|THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
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.
[callout]
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.
[callout]
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.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 |5
<PAGE>
[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.
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.
[callout]
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.
[callout]
IT'S ONLY THROUGH DOING YOUR
OWN WORK THAT YOU'RE ABLE TO
DEVELOP CONFIDENCE AND
CONVICTION.
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.
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
6| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
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.
THE ROAD AHEAD
(graphic: two lane road with rising sun and clouds) 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 photo of Jack Fockler,
lower returns. We believe that activemanagement Whitney George, and
and a value orientation are especially appropriate Chuck Royce)
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.
============================================================================
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 | 7
<PAGE>
ROYCE TOTAL RETURN FUND
____________________________________________________________________________
WHAT WE DO ROYCE TOTAL RETURN FUND ("Total Return") uses a disciplined value
approach to invest primarily in dividend-paying small-cap companies. We believe
that this combination of capital appreciation potential and current income
offers a highly effective method for capturing above average returns.
HOW WE DID ROYCE TOTAL RETURN FUND combined a solid first quarter showing with a
strong second quarter effort to finish the first six months of 1997 up 12.7%.
This compares favorably to the Russell 2000 index of small-cap companies, which
was up 10.2% for the same period. The Fund's focus on dividend paying small-cap
companies contributed to its outperformance relative to the index. In addition,
Total Return enjoyed a performance edge over the Russell 2000 in the one year
(23.8% vs. 16.3%), three-year (23.7% vs. 20.1%) and since inception periods
(19.6% vs. 15.7%) as well.
The Fund, with three and one half years of performance history, has $65
million in net assets and a 5-star (*****) rating from Morningstar; out of
1,997 equity funds as of June 30, 1997. The Fund's increased asset base is
directly attributable to its recent merger with Royce Equity Income Fund. We
remain encouraged about this under-appreciated segment of the small-cap market.
Since the small-cap sector has always been more volatile, we believe that
paying attention to risk is critical to delivering above-average, long-term
returns. Risk is typically evaluated in terms of uncertainty, by measuring fund
volatility through standard deviation and beta, and also in terms of possibility
of loss, by measuring actual down market performance. Total Return's risk-averse
orientation has resulted in low risk rankings and superior down market
performance versus the Russell 2000 and its small-cap peers.
<TABLE>
<CAPTION>
TOTAL RETURNS DOWN MARKET [BAR GRAPH]
THROUGH 6/30/97 PERFORMANCE
________________________ COMPARISON
<S> <C>
1997 (through 6/30) 12.7% ALL DOWN PERIODS OF 5% OR GREATER
1-Year 23.8% IN PERCENTAGES(%)
3-Year Average Annual 23.7%
Since Inception(12/15/93) Royce Total Russell 2000
Average Annual 19.6% Return
<S> <C> <C>
3/18/94- 1.8 -13.3
12/9/94
5/22/96- -0.5 -15.6
7/24/96
1/22/97- 0.2 -9.2
4/25/97
The Fund's opportunistic, total
return approach has resulted in
strong relative returns in down
markets.
RISK/RETURN COMPARISON
THREE-YEAR PERIOD ENDED 6/30/97
Average Annual Standard
Total Return Deviation RUR
<S> <C> <C> <C>
Royce Total Return 23.7% 6.4 3.69
Russell 2000 20.1% 13.2 1.52
Over the last three years,
ROYCE TOTAL RETURN HAS
SUBSTANTIALLY
OUTPERFORMED
THE RUSSELL 2000
on BOTH an absolute and
a risk-adjusted basis.
ROYCE TOTAL RETURN
VERSUS RUSSELL 2000
VALUE OF $10,000 INVESTED ON 12/15/93*
[line chart]
Royce Total Return Russell 2000
<S> <C> <C>
1993 $10,000 $10,000
1994 9,960 9,683
1995 12,010 11,627
1996 15,234 14,406
1997 18,861 16,757
</TABLE>
*Current year returns through June 30.
Includes reinvestment of distributions.
8| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
PERFORMANCE & PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET CAP EXPOSURE [BAR GRAPH]
% OF PORTFOLIO
IN MILLIONS
<S> <C>
[greater than] $1,000 5%
$500-$1,000 26%
$300-$500 36%
[less than] $300 33%
TOP TEN
POSITIONS
% OF NET ASSETS
<S> <C> <C>
1. Stanhome 3.8
2. Bassett Furniture Industries 3.6
3. Paul Mueller Company 3.6
4. Charming Shoppes Cv. Note 3.3
5. Arthur J. Gallagher & Co. 3.2
6. The Commerce Group 3.1
7. Central Steel & Wire Company 3.0
8. Sturm, Ruger & Company 2.8
9. Zenith National Insurance 2.8
10. New England Business Service 2.8
</TABLE>
Top 35 holdings represented 82% of
equity portfolio as of 6/30/97.
PORTFOLIO INDUSTRY
BREAKDOWN
% OF NET ASSETS*
[pie chart]
Industrial Products 24
Consumer Products 16
Industrial Services 14
Financial Intermediaries 13
Financial Services 13
Retail 10
Technology 5
Natural Resources 4
Consumer Services 1
*Excludes cash and cash equivalents.
<TABLE>
<CAPTION>
PORTFOLIO
DIAGNOSTICS
<S> <C>
Median Market Cap $438 million
Weighted Average P/E Ratio 14.6x
Weighted Average P/B Ratio 1.3x
Weighted Average Yield 2.6%
Net Assets $65 million
Turnover Rate 13%
Symbol RYTRX
The Fund's P/E and P/B ratios remained low and
its yield remained above average.
GOOD IDEAS THAT WORKED
<S> <C>
SECURITY REALIZED AND UNREALIZED GAIN
New England Business Service $516,729
Woodward Governor Company 483,996
Bassett Furniture Industries 399,916
The Standard Register Company 383,520
Stanhome 371,473
</TABLE>
During 1997's first half, the above companies made the largest
positive contributions, in dollar terms, to our overall performance.
Among these winners, there were no examples of hot
new issues, high-priced takeovers or momentum miracles.
Rather, our top five performers emerged from a series of
long-term investment decisions. We built our positions when
business conditions were difficult and other investors had voted
negatively on future prospects.
<TABLE>
<CAPTION>
GOOD IDEAS AT THE TIME
<S> <C>
SECURITY REALIZED AND UNREALIZED LOSS
Ennis Business Forms $198,316
The Pioneer Group 25,000
BGS Systems, Inc. 16,159
American Filtrona 11,956
International Semi-Tech 7,000
</TABLE>
Even the best small-cap companies can have periods of declining
performance. We believe 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 market price rebounds can take longer than we anticipated.
Occasionally, we elect to redeploy the assets into other
opportunities. The above companies had the largest negative
impact on the Fund's performance in the first half of 1997.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 | 9
<PAGE>
ROYCE LOW-PRICED STOCK FUND
_______________________________________________________________________________
WHAT WE DO ROYCE LOW-PRICED STOCK FUND ("Low-Priced") invests primarily in
small and micro-cap companies whose market prices are below $15 at the time
of purchase. These securities attract less institutional attention, thus
providing potentially rewarding investment opportunities.
HOW WE DID ROYCE LOW-PRICED STOCK FUND'S current micro-cap orientation was
a hindrance to its performance in the first six months of 1997--a market
which favored larger, more well known companies. After posting a small loss
in the first quarter, the Fund rallied nicely in the second quarter
producing a 7.3% first half return. This compares to a 10.2% gain for the
Russell 2000 index of small-cap stocks. While the Fund's near-term
performance was below the Russell 2000, its longer term returns parallel
the index; 19.9% vs. 20.1% for the three years, and 15.5% vs. 15.7% since
the Fund's inception.
Royce Low-Priced Stock Fund has $16 million in net assets and
three and one-half years of performance history. It remains one of only
three funds which focuses on low-priced securities. We remain confident
about the potential rewards of this volatile sector of small-cap.
We strongly believe that managing risk is a key component to
delivering above average returns in this volatile sector of the
small-cap market. Risk is typically evaluated in terms of uncertainty,
by measuring fund volatility through standard deviation and beta, and
also in terms of possibility of loss, by measuring actual down market
performance. Royce Low-Priced Stock Fund's risk-averse orientation has
resulted in below average risk rankings and solid down market
performance versus the Russell 2000 and its small-cap peers.
<TABLE>
<CAPTION>
TOTAL RETURNS
THROUGH 6/30/97
___________________
<S> <C>
1997 (through 6/30) 7.3%
1-Year 8.3%
3-Year Average Annual 19.9%
Since Inception (12/15/93)
Average Annual 15.5%
</TABLE>
DOWN MARKET [BAR GRAPH]
PERFORMANCE
COMPARISON
(All Down Periods of 7.5% or Greater)
In Percentages (%)
Royce Low-Priced
Stock Russell 2000
3/18/94- -2.7 -13.3
12/9/94
5/22/96- -10.5 -15.6
7/24/96
1/22/97- -4.8 -9.2
4/25/97
Royce Low-Priced Stock's value orientation has resulted in better relative
returns in down markets.
<TABLE>
<CAPTION>
RISK/RETURN COMPARISON
THREE-YEAR PERIOD ENDED 6/30/97
Average Annual Standard
Total Return Deviation RUR
<S> <C> <C> <C>
Royce Low-Priced
Stock 19.9% 12.7 1.57
Russell 2000 20.1% 13.2 1.52
</TABLE>
Over the last three years, ROYCE LOW-PRICED STOCK HAS PROVIDED COMPARABLE
RETURNS VERSUS THE RUSSELL 2000 without greater volatility.
ROYCE LOW-PRICED STOCK [LINE GRAPH]
VERSUS RUSSELL 2000
VALUE OF $10,000 INVESTED ON 12/15/93*
Royce Low-Priced
Stocks Russell 2000
1993 $10,000 $10,000
1994 9,659 9,683
1995 12,131 11,627
1996 15,388 14,406
1997 16,660 16,757
*Current year returns through June 30.
Includes reinvestment of distributions.
Royce Low-Priced Stock
Russell 2000
10| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
PERFORMANCE & PORTFOLIO REVIEW
________________________________________________________________________________
<TABLE>
<CAPTION>
MARKET CAP EXPOSURE TOP TEN POSITIONS
% OF PORTFOLIO % OF NET ASSETS
[BAR GRAPH]
<S> <C> <C>
in millions 1. Charming Shoppes 3.4
(grater than)$1,000 0 2. Frozen Food Express
$500-$1,000 7 Industries 3.0
$300-$500 9 3. Arnold Industries 2.9
(less than)$300 84 4. Phoenix Duff & Phelps 2.8
5. The Topps Company 2.8
6. Insituform Technologies
Cl. A 2.8
7. Sevenson Environmental
Services 2.7
8. Pizza Inn 2.6
9. Oshkosh B'Gosh Cl. A 2.4
10. Buffets 2.3
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO INDUSTRY
DIAGNOSTICS BREAKDOWN* [PIE CHART]
_________________________ % OF NET ASSETS
__________________________________
<S> <C>
Median Market Cap $121 million
Weighted Average P/E Ratio 15.7x Consumer Products 24
Weighted Average P/B Ratio 1.3x Industrial Services 20
Weighted Average Yield 0.6% Retail 14
Net Assets $16 million Technology 11
Turnover Rate 56% Consumer Services 9
Symbol RYLPX Industrial Products 9
__________________________________________ Financial Services 6
The Fund's P/E and P/B ratios remained low. Financial Intermediaries 3
Health 2
Natural Resources 2
________________________________
*Excludes cash and cash equivalents.
</TABLE>
<TABLE>
<CAPTION>
GOOD IDEAS THAT WORKED
________________________________
SECURITY REALIZED AND UNREALIZED GAIN
- ---------------------------------------------------------------------------
<S> <C>
J. Baker $180,639
MovieFone Cl. A 180,624
Pentech International 113,794
Oshkosh B'Gosh Cl. A 111,476
Willbros Group 101,383
</TABLE>
During 1997's first half, the above companies made the largest positive
contributions, in dollar terms, to our overall performance. Among these winners,
there were no examples of hot new issues, high-priced takeovers or momentum
miracles. Rather, our top five performers emerged from a series of long-term
investment decisions. We built our positions when business conditions were
difficult and other investors had voted negatively on future prospects.
<TABLE>
<CAPTION>
GOOD IDEAS AT THE TIME
____________________________________
SECURITY REALIZED AND UNREALIZED LOSS
- -----------------------------------------------------------------------------
<S> <C>
Rush Enterprises $143,750
Sagebrush 104,475
Catherines Stores Corporation 96,350
Open Plan Systems 85,525
Technical Communications 71,156
</TABLE>
Even the best small-cap companies can have periods of declining performance.
We believe 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 market price rebounds can take
longer than we anticipated. Occasionally, we elect to redeploy the assets
into other opportunities. The above companies had the largest negative impact
on the Fund's performance in the first half of 1997.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 | 11
<PAGE>
UPDATES & NOTES TO PERFORMANCE AND RISK INFORMATION
_______________________________________________________________________________
THE
ROYCE
FUNDS
(graphic
of THE ROYCE FUNDS UNVEILS AN UPDATED WEB SITE
computer)
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. Please read the prospectus
carefully before investing or sending money.
Morningstar proprietary ratings reflect historical risk-adjusted
performance as of 6/30/97 and are subject to change monthly. The rating is
calculated from a fund's three-, five- and ten-year average annual returns with
appropriate fee adjustments and a risk factor that reflects performance relative
to three-month Treasury bill returns. Ten percent of the funds in an investment
category receive five stars. Beta and standard deviation are measures of a
fund's relative risk and are calculated for the trailing 36-month period. 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 indices
referred to in this report are unmanaged indices of domestic common stocks.
12| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
FINANCIAL STATEMENTS
SCHEDULES OF INVESTMENTS 14-15
STATEMENTS OF ASSETS AND LIABILITIES 16
STATEMENTS OF CHANGES IN NET ASSETS 17
STATEMENTS OF OPERATIONS AND
FINANCIAL HIGHLIGHTS 18
NOTES TO FINANCIAL STATEMENTS 19-20
<PAGE>
SCHEDULES OF INVESTMENTS
- --------------------------------------------------------------------------
ROYCE TOTAL RETURN FUND JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------
COMMON STOCKS -- 79.4%
<TABLE>
<CAPTION>
SHARES VALUE
------------ ------------
<S> <C> <C>
CONSUMER PRODUCTS -- 13.7%
Bassett Furniture Industries 82,600 $ 2,338,613
Garan Incorporated 82,500 1,660,312
Juno Lighting 38,300 622,375
La-Z-Boy 16,900 608,400
Skyline Corporation 33,700 829,863
Sturm, Ruger & Company 93,100 1,827,087
Universal Corporation 30,000 952,500
------------
8,839,150
------------
CONSUMER SERVICES -- 0.7%
Sbarro 15,500 430,125
------------
Financial Intermediaries -- 10.9%
The Commerce Group 80,700 1,987,238
PXRE Corporation 26,700 821,025
Pennsylvania Manufacturers Cl. A 64,780 1,004,090
Trenwick Group 36,950 1,385,625
Zenith National Insurance 67,000 1,809,000
------------
7,006,978
------------
FINANCIAL SERVICES -- 10.8%
E.W. Blanch Holdings 26,100 696,544
Crawford & Company Cl. A 65,200 1,002,450
Arthur J. Gallagher & Co. 54,100 2,042,275
The John Nuveen Company Cl. A 22,200 693,750
Phoenix Duff & Phelps 131,600 970,550
Willis Corroon Group ADR+ 141,300 1,580,794
------------
6,986,363
------------
INDUSTRIAL PRODUCTS -- 20.3%
American Filtrona 10,000 410,000
Central Steel & Wire Company 3,114 1,961,820
Curtiss-Wright Corporation 6,800 396,100
Fab Industries 15,000 469,687
P. H. Glatfelter Company 38,800 776,000
International Aluminum 38,000 1,007,000
Lilly Industries Cl. A 45,700 919,713
Minuteman International 58,400 540,200
*Paul Mueller Company 60,800 2,318,000
Oregon Steel Mills 25,000 498,437
Oshkosh Truck Corporation Cl. B 52,000 741,000
The Standard Register Company 37,000 1,133,125
Synalloy Corporation 30,600 539,325
Woodward Governor Company 39,400 1,418,400
------------
13,128,807
------------
INDUSTRIAL SERVICES -- 11.2%
Arnold Industries 94,100 1,599,700
DIMON Incorporated 58,300 1,544,950
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------------ ------------
<S> <C> <C>
Ennis Business Forms 136,200 $ 1,310,925
Lufkin Industries 12,800 336,000
New England Business Service 67,700 1,781,356
Sevenson Environmental Services 34,000 663,000
------------
7,235,931
------------
NATURAL RESOURCES -- 3.7%
CalMat 70,400 1,513,600
Florida Rock Industries 20,400 828,750
------------
2,342,350
------------
RETAIL -- 5.1%
Sotheby's Holdings Cl. A 52,100 879,188
Stanhome 74,300 2,442,612
------------
3,321,800
------------
TECHNOLOGY -- 3.0%
BGS Systems, Inc. 16,200 445,500
Helix Technology 16,500 668,250
Landauer 13,400 310,712
Tech/Ops Sevcon 41,200 540,750
------------
1,965,212
------------
TOTAL COMMON STOCKS
(Cost $43,764,908) 51,256,716
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
CORPORATE BONDS -- 4.9%
Charming Shoppes 7.50%
Conv. Sub. Note due 7/15/06 $2,100,000 2,121,000
Richardson Electronics 8.25% Sr.
Conv. Sub. Deb. due 6/15/06 710,000 610,600
Standard Commercial 7.25%
Conv. Sub. Deb. due 3/31/07 500,000 459,375
------------
TOTAL CORPORATE BONDS
(Cost $3,006,189) 3,190,975
------------
REPURCHASE AGREEMENT -- 15.5%
State Street Bank & Trust Company,
5.15% dated 6/30/97, due 7/01/97,
maturity value $10,001,431,
(collateralized by U.S. Treasury
Notes, 6.25% due 6/30/98
valued at $10,202,607)
(Cost $10,000,000) 10,000,000
------------
TOTAL INVESTMENTS -- 99.8%
(Cost $56,771,097) 64,447,691
CASH AND OTHER ASSETS LESS
LIABILITIES -- 0.2% 159,526
------------
NET ASSETS -- 100.0% $64,607,217
============
</TABLE>
- --------------------------------------------------------------------------
+ AMERICAN DEPOSITORY RECEIPT.
* AT JUNE 30, 1997 THE FUND OWNED 5% OR MORE OF THE COMPANY'S OUTSTANDING
SHARES THEREBY MAKING THE COMPANY AN AFFILIATED PERSON AS THAT TERM IS
DEFINED IN THE INVESTMENT COMPANY ACT OF 1940.
INCOME TAX INFORMATION: THE COST OF TOTAL INVESTMENTS FOR FEDERAL INCOME TAX
PURPOSES WAS $56,771,097. AT JUNE 30, 1997, NET UNREALIZED APPRECIATION FOR ALL
SECURITIES AMOUNTED TO $7,676,594, CONSISTING OF AGGREGATE GROSS UNREALIZED
APPRECIATION OF $7,884,104 AND AGGREGATE GROSS UNREALIZED DEPRECIATION OF
$207,510.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
SCHEDULES OF INVESTMENTS
- --------------------------------------------------------------------------
ROYCE LOW-PRICED STOCK FUND JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------
COMMON STOCKS -- 88.4%
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
CONSUMER PRODUCTS -- 19.9%
Aldila* 46,800 $ 260,325
J & J Snack Foods Corp.* 10,900 167,588
Jean-Philippe Fragrances* 54,200 338,750
Johnson Worldwide Associates Cl. A* 28,100 361,787
Lifetime Hoan Corporation* 29,370 256,988
Lund International Holdings* 11,900 133,875
Mackie Designs* 20,900 182,875
Midwest Grain Products* 20,000 265,000
Oakley* 8,500 119,531
Oshkosh B'Gosh Cl. A 18,200 395,850
Pentech International* 86,700 216,750
The Sirena Apparel Group* 32,000 96,000
The Topps Company* 110,100 461,044
------------
3,256,363
------------
CONSUMER SERVICES -- 7.8%
Bertucci's* 30,000 204,375
Buffets* 45,000 379,687
MovieFone Cl. A* 35,900 249,056
Sagebrush* 39,800 203,975
Shoney's* 40,450 240,172
------------
1,277,265
------------
FINANCIAL INTERMEDIARIES -- 2.9%
Intercargo Corporation 13,500 158,625
Pennsylvania Manufacturers Cl. A 20,000 310,000
------------
468,625
------------
FINANCIAL SERVICES -- 4.6%
Phoenix Duff & Phelps 62,900 463,887
Willis Corroon Group ADR+ 26,000 290,875
------------
754,762
------------
HEALTH -- 2.1%
Global Pharmaceutical* 11,000 44,000
Hauser* 30,000 161,250
Nitinol Medical Technologies* 9,200 139,150
------------
344,400
------------
INDUSTRIAL PRODUCTS -- 7.0%
BHA Group 4,411 81,603
CFC International* 20,100 195,975
DeVlieg-Bullard* 105,000 360,938
Sun Hydraulics Corporation 25,000 290,625
Synalloy Corporation 12,100 213,262
------------
1,142,403
------------
INDUSTRIAL SERVICES -- 17.4%
AirNet Systems* 17,700 289,838
Arnold Industries 27,500 467,500
Frozen Food Express Industries 57,100 492,487
Insituform Technologies Cl. A* 73,500 450,188
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Open Plan Systems* 21,000 $ 84,000
Rush Enterprises* 25,000 156,250
Sevenson Environmental Services 22,600 440,700
Standard Commercial* 12,241 212,687
Willbros Group* 15,000 238,125
------------
2,831,775
------------
NATURAL RESOURCES -- 1.4%
MK Gold Company* 143,200 223,750
------------
Retail -- 12.6%
J. Baker 15,000 118,125
Catherines Stores Corporation* 65,600 246,000
Cato Corporation Cl. A 15,000 81,563
Charming Shoppes* 104,900 547,447
Deb Shops 40,100 160,400
Lechters* 74,600 326,375
Pizza Inn* 108,100 432,400
Suzy Shier 22,000 143,380
------------
2,055,690
------------
TECHNOLOGY -- 8.4%
ILC Technology* 30,500 327,875
MacNeal-Schwendler 27,700 301,237
Newport Corporation 23,000 258,750
Richardson Electronics 40,400 335,825
Technical Communications* 16,500 147,469
------------
1,371,156
------------
MISCELLANEOUS -- 4.3% 706,626
------------
TOTAL COMMON STOCKS
(Cost $13,982,886) 14,432,815
------------
REPURCHASE AGREEMENT -- 6.1%
State Street Bank & Trust Company,
5.15% dated 6/30/97, due 7/01/97,
maturity value $1,000,143,
(collateralized by U.S. Treasury
Notes, 6.25% due 6/30/98
valued at $1,024,782)
(Cost $1,000,000) 1,000,000
------------
TOTAL INVESTMENTS -- 94.5%
(Cost $14,982,886) 15,432,815
CASH AND OTHER ASSETS LESS
LIABILITIES -- 5.5% 902,490
------------
NET ASSETS -- 100.0% $16,335,305
============
</TABLE>
- --------------------------------------------------------------------------
* NON-INCOME PRODUCING.
+ AMERICAN DEPOSITORY RECEIPT.
INCOME TAX INFORMATION: THE COST OF TOTAL INVESTMENTS FOR FEDERAL INCOME TAX
PURPOSES WAS $14,982,886. AT JUNE 30, 1997, NET UNREALIZED APPRECIATION FOR ALL
SECURITIES AMOUNTED TO $449,929, CONSISTING OF AGGREGATE GROSS UNREALIZED
APPRECIATION OF $1,573,387 AND AGGREGATE GROSS UNREALIZED DEPRECIATION OF
$1,123,458.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 |15
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
ROYCE ROYCE
TOTAL RETURN LOW-PRICED
FUND STOCK FUND
-------------- ----------------
ASSETS:
<S> <C> <C>
Investments at value (identified cost $46,771,097 and $13,982,886, respectively) $54,447,691 $ 14,432,815
Repurchase agreements (at cost and value) 10,000,000 1,000,000
Cash 100,098 555,783
Receivable for investments sold -- 300,108
Receivable for capital shares sold 412,758 102,730
Receivable for dividends and interest 205,408 5,591
Prepaid expenses and other assets 3,862 3,636
- --------------------------------------------------------------------------------- ------------ ------------
Total Assets 65,169,817 16,400,663
- --------------------------------------------------------------------------------- ------------ ------------
LIABILITIES:
Payable for investments purchased 360,669 --
Payable for capital shares redeemed 133,472 34,519
Payable for investment advisory fees 19,722 13,230
Accrued expenses 48,737 17,609
- --------------------------------------------------------------------------------- ------------ ------------
Total Liabilities 562,600 65,358
- --------------------------------------------------------------------------------- ------------ ------------
Net Assets $64,607,217 $ 16,335,305
- --------------------------------------------------------------------------------- ------------ ------------
ANALYSIS OF NET ASSETS:
Undistributed net investment income $ 239,599 $ --
Net investment loss -- (72,122)
Accumulated net realized gain on investments 470,321 1,028,379
Net unrealized appreciation on investments 7,676,594 449,929
Capital shares 9,117 2,416
Additional paid-in capital 56,211,586 14,926,703
- --------------------------------------------------------------------------------- ------------ ------------
Net Assets $64,607,217 $ 16,335,305
- --------------------------------------------------------------------------------- ------------ ------------
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares authorized for each Fund) 9,116,738 2,415,675
- --------------------------------------------------------------------------------- ------------ ------------
NET ASSET VALUE:
(offering and redemption price per share) $ 7.09 $ 6.76
- --------------------------------------------------------------------------------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
ROYCE TOTAL RETURN FUND
--------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
INVESTMENT OPERATIONS: ------------------ -------------------
<S> <C> <C>
Net investment income (loss) $ 239,599 $ 100,069
Net realized gain on investments 413,944 651,408
Net change in unrealized appreciation (depreciation) on
investments 2,050,284 183,687
- ---------------------------------------------------------------------- --------------- --------------
Net increase in net assets from investment operations 2,703,827 935,164
- ----------------------------------------------------------------------- --------------- --------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income -- (124,188)
Net realized gain on investments -- (566,609)
- ----------------------------------------------------------------------- --------------- --------------
Total dividends and distributions -- (690,797)
- ----------------------------------------------------------------------- --------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares sold 24,287,877 4,372,695
Value of shares issued in connection with the merger of
Royce Equity Income Fund 34,543,545 --
Dividends reinvested -- 686,812
Cost of shares redeemed (3,161,569) (1,618,011)
- ----------------------------------------------------------------------- --------------- --------------
Net increase (decrease) in net assets from capital share transactions 55,669,853 3,441,496
- ----------------------------------------------------------------------- --------------- --------------
NET INCREASE IN NET ASSETS 58,373,680 3,685,863
NET ASSETS:
Beginning of period 6,233,537 2,547,674
- ----------------------------------------------------------------------- --------------- --------------
End of period $ 64,607,217(a) $ 6,233,537(a)
- ----------------------------------------------------------------------- --------------- --------------
CAPITAL SHARE TRANSACTIONS:
Shares sold 3,672,796 676,518
Shares issued in connection with the merger of
Royce Equity Income Fund 4,913,733 --
Shares issued for reinvestment of dividends and distributions -- 115,044
Shares redeemed (b) (460,668) (243,257)
- ----------------------------------------------------------------------- --------------- --------------
Net increase (decrease) in shares outstanding 8,125,861 548,305
- ----------------------------------------------------------------------- --------------- --------------
</TABLE>
<TABLE>
<CAPTION>
ROYCE LOW-PRICED STOCK FUND
----------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
INVESTMENT OPERATIONS: ------------------ ---------------
<S> <C> <C>
Net investment income (loss) $ (72,122) $ (76,915)
Net realized gain on investments 666,538 1,678,351
Net change in unrealized appreciation (depreciation) on
investments 549,573 (121,444)
- ---------------------------------------------------------------------- ------------- -------------
Net increase in net assets from investment operations 1,143,989 1,479,992
- ----------------------------------------------------------------------- ------------- -------------
DIVIDENDS AND DISTRIBUTIONS:
Net investment income -- --
Net realized gain on investments -- (1,383,085)
- ----------------------------------------------------------------------- ------------- -------------
Total dividends and distributions -- (1,383,085)
- ----------------------------------------------------------------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from shares sold 2,688,893 13,983,260
Value of shares issued in connection with the merger of
Royce Equity Income Fund -- --
Dividends reinvested -- 1,262,154
Cost of shares redeemed (3,402,480) (3,652,471)
- ----------------------------------------------------------------------- ------------- -------------
Net increase (decrease) in net assets from capital share transactions (713,587) 11,592,943
- ----------------------------------------------------------------------- ------------- -------------
NET INCREASE IN NET ASSETS 430,402 11,689,850
NET ASSETS:
Beginning of period 15,904,903 4,215,053
- ----------------------------------------------------------------------- ------------- -------------
End of period $ 16,335,305 $ 15,904,903
- ----------------------------------------------------------------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS:
Shares sold 424,190 2,138,091
Shares issued in connection with the merger of
Royce Equity Income Fund -- --
Shares issued for reinvestment of dividends and distributions -- 200,980
Shares redeemed (b) (534,613) (563,022)
- ----------------------------------------------------------------------- ------------- -------------
Net increase (decrease) in shares outstanding (110,423) 1,776,049
- ----------------------------------------------------------------------- ------------- -------------
</TABLE>
- --------------------------------------------------------------------------
(a) INCLUDES NET INVESTMENT INCOME OF $239,599 IN 1997 AND $0 IN 1996.
(b) 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.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997| 17
<PAGE>
STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
ROYCE TOTAL ROYCE LOW-PRICED
RETURN FUND STOCK FUND
INVESTMENT INCOME: ------------- -----------------
INCOME:
<S> <C> <C>
Dividends $ 233,482 $ 52,005
Interest 124,066 10,398
- ----------------------------------------------------- ---------- ----------
Total Income 357,548 62,403
- ------------------------------------------------------ ---------- ----------
EXPENSES:
Investment advisory fees 81,049 119,397
Distribution fees 23,515 19,900
Custodian and shareholder servicing fees 23,801 21,356
Administrative and office facilities expenses 5,007 5,385
Professional fees 10,069 4,574
Trustees' fees 1,019 1,169
Other expenses 30,307 22,822
- ------------------------------------------------------ ---------- ----------
Total Expenses 174,767 194,603
Fees Waived by Investment Adviser and Distributor (56,818) (60,078)
- ------------------------------------------------------ ---------- ----------
Net Expenses 117,949 134,525
- ------------------------------------------------------ ---------- ----------
Net Investment Income (Loss) 239,599 (72,122)
- ------------------------------------------------------ ---------- ----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 413,944 666,538
Net change in unrealized appreciation on investments 2,050,284 549,573
- ------------------------------------------------------ ---------- ----------
Net realized and unrealized gain on investments 2,464,228 1,216,111
- ------------------------------------------------------ ---------- ----------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $2,703,827 $1,143,989
- ------------------------------------------------------ ---------- ----------
</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 each Funds'
performance for the periods presented.
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET VALUE, NET INVESTMENT NET REALIZED AND DIVIDENDS FROM
BEGINNING INCOME UNREALIZED GAIN ON NET INVESTMENT
OF PERIOD (LOSS) INVESTMENTS INCOME
------------------ ---------------- -------------------- ----------------
ROYCE TOTAL RETURN FUND (a)
<S> <C> <C> <C> <C> <C>
[dbldag] 1997 $6.29 $ 0.03 $0.77 $ --
1996 5.76 0.14 1.28 (0.16)
1995 5.12 0.13 1.24 (0.13)
1994 5.00 0.02 0.24 (0.02)
1993 5.00 -- -- --
ROYCE LOW-PRICED STOCK FUND (b)
[dbldag] 1997 $6.30 $ (0.03) $0.49 $ --
1996 5.62 (0.03) 1.31 --
1995 5.07 -- 1.14 --
1994 5.01 (0.03) 0.18 --
1993 5.00 -- 0.01 --
</TABLE>
<TABLE>
<CAPTION>
RATIO OF RATIO OF NET
DISTRIBUTIONS FROM NET ASSET NET ASSETS, EXPENSES INVESTMENT PORTFOLIO AVERAGE
NET REALIZED GAIN VALUE, END TOTAL END OF PERIOD TO AVERAGE INCOME (LOSS) TO TURNOVER COMMISSION
ON INVESTMENTS OF PERIOD RETURN (IN THOUSANDS) NET ASSETS AVERAGE NET ASSETS RATE RATE PAID(dag)
-------------------- ------------ -------- ---------------- ------------ -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ROYCE TOTAL RETURN FUND (a)
[dbldag] $ -- $7.09 12.7% $64,607 1.25%* 2.55%* 13% $0.0653
(0.73) 6.29 25.5% 6,234 1.25% 2.50% 111% 0.0605
(0.60) 5.76 26.9% 2,548 1.67% 2.42% 68% --
(0.12) 5.12 5.2% 1,656 1.96% 0.49% 88% --
-- 5.00 0.0% 451 0.29%* (0.29)%* 0% --
ROYCE LOW-PRICED STOCK FUND (b)
[dbldag] $ -- $6.76 7.3% $16,335 1.69%* (0.91)%* 56% $0.0559
(0.60) 6.30 22.8% 15,905 1.88% (0.67)% 137% 0.0464
(0.59) 5.62 22.5% 4,215 1.97% (1.11)% 114% --
(0.09) 5.07 3.0% 1,880 1.89% (1.11)% 95% --
-- 5.01 0.2% 452 0.29%* (0.29)%* 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, 1994 AND 1993, THE EXPENSE RATIOS BEFORE THE WAIVERS
WOULD HAVE BEEN 1.86%, 2.23%, 2.38%, 3.21%, 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 JUNE 30, 1997, AND DECEMBER
31, 1996, 1995, 1994 AND 1993, THE EXPENSE RATIOS BEFORE THE WAIVERS
WOULD HAVE BEEN 2.44%, 2.59%, 3.47%, 3.63%, AND 2.04%, RESPECTIVELY.
THE FUND COMMENCED OPERATIONS ON DECEMBER 15, 1993.
* ANNUALIZED.
(dag)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.
[DBLDAG] SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED).
18| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Royce Total Return Fund and Royce Low-Priced Stock Fund ("Fund" or "Funds")
are two series of The Royce Fund (the "Trust"). The Trust, a Delaware business
trust, is a diversified open-end management investment company.
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 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 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 Schedules of Investments include information regarding income
taxes under the caption "Income Tax Information."
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 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.
THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997 |19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------
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 1.0% and 1.5% of the average net assets of Royce Total Return
Fund and Royce Low-Priced Stock Fund, respectively. For the six months ended
June 30, 1997, Royce Total Return Fund and Royce Low-Priced Stock Fund accrued
and paid Royce fees of $47,746 (net of voluntary waivers of $33,303), and
$79,219 (net of voluntary waivers of $40,178), respectively.
Royce Fund Services, Inc. ("RFS") (formerly Quest Distributors, Inc.), the
distributor of shares of the Royce Total Return Fund and Royce Low-Priced Stock
Fund, is an affiliate of Royce. RFS voluntarily waived each Fund's distribution
fees of $23,515 and $19,900, respectively, for the six months ended June 30,
1997. The distribution agreement provides for maximum fees of .25% per annum of
each Fund's average net assets.
PURCHASES AND SALES OF INVESTMENT SECURITIES:
ROYCE TOTAL RETURN FUND ROYCE LOW-PRICED STOCK FUND
------------------------- ----------------------------
PURCHASES $19,641,905 $ 8,419,092
- ---------- ------------ ------------
SALES $ 2,276,427 $10,062,495
- ------------------------------------------------------------------------
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:
TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES:
An "Affiliated Company", as defined in the Investment Company Act of 1940,
is a company in which the Fund owns at least 5% of the company's outstanding
voting securities. The Royce Total Return Fund effected the following
transactions in shares of such companies for the six months ended June 30,
1997.
<TABLE>
<CAPTION>
Purchases Sales
----------------------- -----------------
Realized Dividend
Affiliated Company Shares Cost Shares Cost Gain/Loss Income
- ------------------------ -------- ------------ -------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Paul Mueller Company 58,300 $2,209,923 -- -- -- $14,990
</TABLE>
MERGER INFORMATION:
On June 17, 1997, Royce Total Return Fund acquired all of the assets and
assumed all of the liabilities of Royce Equity Income Fund. Based on the
opinion of Fund counsel, the acquisition, which was approved by the
shareholders of Royce Equity Income Fund on May 28, 1997, qualifies as a
tax-free reorganization for federal income tax purposes with no gain or loss
recognized to the Funds or their shareholders. Royce Equity Income Fund's net
assets, including $5,201,557 of unrealized appreciation, were combined with
Royce Total Return Fund for total net assets after the acquisition of
$63,558,350. Costs associated with the acquisition were borne by the Investment
Adviser.
20| THE ROYCE FUNDS SEMI-ANNUAL REPORT 1997
<PAGE>
So while the "bulls" of both
basketball and the market may
reach dazzling new heights
this year, we will continue to
hone our approach and
emphasize building returns
over the long term.
Postscript
- --------------------------------------------------------------------------------
ALL THAT JAZZ
[photo of basketball over 1st 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 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.
<PAGE>
--------------------------------------------------------
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)
Web address: www.roycefunds.com 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.
