THE
ROYCE
FUNDS
Value Investing in Small Companies for More Than 25 Years
ROYCE
SELECT
FUND
1998 Annual Report
<PAGE>
LETTER TO SHAREHOLDERS
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Dear Shareholders:
First of all, we wanted to thank you for being one of the first investors in
Royce Select Fund ("RSF"), our newest offering.
We are very excited about its concentrated portfolio approach and unique
expense structure. RSF invests in a limited number of small- and micro-cap
companies that we believe possess excellent business strengths and/or
prospects, high internal rates of return and low leverage. The Fund uses the
risk-averse value approach that has been central to our work for more than 25
years.
Unique among available mutual funds, RSF's expense structure is an all-
inclusive management fee that varies in direct relation to the Fund's
performance. This performance fee is payable only after negative returns
have been recovered - for any period of negative performance, no fee will be
paid. This fee covers all of the Fund's operating expenses that many funds
normally pay separately. In addition, Royce & Associates, the Fund's
Investment Adviser, has voluntarily committed to waive the performance fee
until RSF has achieved a 15% total return from inception (11/18/98). These
features ensure that management and shareholders share common interests.
The Fund's tenure has been admittedly short, but we believe that we are off
to a solid start, with a 7.9% total return from the Fund's inception through
December 31, 1998. This compares to a 7.8% total return for RSF's benchmark,
the small-cap oriented Russell 2000, for the same period.
The top five positions in the Fund's portfolio as of year end were Curtiss-
Wright Corporation, Denbury Resources, Medical Assurance, Bassett Furniture
Industries and Orion Capital Corporation. Curtiss-Wright makes high-
precision aeronautic components, such as actuators that move wing flaps up
and down, as well as flow control and marine industrial components. Denbury
Resources is an natural gas and oil exploration and development company.
Medical Assurance is a holding company that furnishes liability insurance for
health care providers. Bassett Furniture Industries manufacturers and
markets living room, dining room and bedroom furniture. Orion Capital is a
special property and casualty insurer that also offers workmen's compensation
and non-standard automobile insurance. We are very enthusiastic about these
initial core holdings, as well as the long-term prospects for small- and
micro-cap stocks in general and Royce Select Fund in particular.
We thank you for your support, especially at this early stage of the Fund's
development.
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
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. Investment return and principal value will fluctuate so that
shares may be worth more or less than their original cost when redeemed.
Royce Select Fund invests primarily in securities of small- and micro-cap
companies that may involve considerably more risk than investments in
securities of larger-cap companies (see "Investment Risks" in the
prospectus). The Russell 2000 is an unmanaged index of domestic small-cap
stocks.
<PAGE>
ROYCE SELECT FUND
SCHEDULE OF INVESTMENTS December 31, 1998
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<TABLE>
<CAPTION>
COMMON STOCKS-72.3%
SHARES VALUE
------ -----
<S> <C> <C>
Consumer Products-13.1%
Home Furnishing/Appliances-4.4%
Bassett Furniture Industries 2,000 $48,250
------
Publishing-2.1%
Franklin Electronic Publishers* 2,000 23,500
------
Sports and Recreation-1.9%
Sturm, Ruger & Company 1,700 20,294
------
Other Consumer Products-4.7%
Lazare Kaplan International* 3,000 21,000
Velcro Industries 200 29,800
------
50,800
------
142,844
------
Consumer Services-3.0%
Retail Stores-3.0%
Charming Shoppes* 7,500 32,344
------
Financial Intermediaries-10.8%
Insurance-10.8%
Medical Assurance* 1,650 54,553
Orion Capital Corporation 900 35,831
Zenith National Insurance 1,200 27,750
------
118,134
-------
Health-2.2%
Commercial Service-2.2%
Young Innovations* 1,800 23,625
------
Industrial Products-10.3%
Building Systems and Components-2.2%
Falcon Products 2,000 24,000
------
Construction Materials-2.8%
Florida Rock Industries 1,000 31,000
------
Specialty Chemicals and Materials-2.7%
CFC International* 2,000 16,000
Hauser* 3,000 13,313
------
29,313
------
Other Industrial Products-2.6%
BHA Group Holdings 2,000 27,750
------
112,063
-------
SHARES VALUE
------ -----
<S> <C> <C>
Industrial Services-3.3%
Commercial Services-2.3%
Business Resource Group* 7,500 $25,312
------
Transportation and Logistics-1.0%
The Pittston BAX Group 1,000 11,125
------
36,437
------
Natural Resources-12.5%
Energy Services-4.2%
Carbo Ceramics 1,500 26,250
Helmerich & Payne 1,000 19,375
------
45,625
------
Oil and Gas-8.3%
Denbury Resources* 14,000 56,875
Devon Energy Corporation 1,100 33,756
------
90,631
------
136,256
-------
Technology-17.1%
Aerospace/Defense-8.4%
Curtiss-Wright Corporation 1,800 68,625
Special Metals Corporation* 2,500 22,344
------
90,969
------
Hardware-6.5%
Industrial Scientific Corporation 1,000 23,250
National Instruments* 900 30,712
PCD* 1,300 16,900
------
70,862
------
Software/Services-2.2%
JDA Software Group* 2,500 24,219
------
186,050
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TOTAL COMMON STOCKS
(Cost $736,083) 787,753
-------
TOTAL INVESTMENTS-72.3%
(Cost $736,083) 787,753
CASH AND OTHER ASSETS
LESS LIABILITIES-27.7% 302,220
-------
NET ASSETS- 100.0% $1,089,973
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</TABLE>
* Non-income producing.
INCOME TAX INFORMATION- The cost of total investments for Federal income tax
purposes was $736,083. At December 31, 1998, net unrealized appreciation for
all securities was $51,670, consisting of aggregate gross unrealized
appreciation of $62,707 and aggregate gross unrealized depreciation of $11,037.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE SELECT FUND
Statement of Assets and Liabilities at December 31, 1998
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<TABLE>
ASSETS:
Investments at value (identified cost $736,083) $787,753
Cash 343,921
Receivable for investments sold 21,609
Receivable for capital shares sold 10,000
Receivable for dividends and interest 242
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Total Assets 1,163,525
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LIABILITIES:
Payable for investments purchased 73,552
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Total Liabilities 73,552
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Net Assets $1,089,973
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ANALYSIS OF NET ASSETS:
Accumulated net realized gain on investments $26,702
Net unrealized appreciation on investments 51,670
Capital shares 10
Additional paid-in capital 1,011,591
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Net Assets $1,089,973
===============================================================================
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares authorized) 10,112
===============================================================================
NET ASSET VALUE (Net Assets / Shares Outstanding):
(offering and redemption price* per share) $107.79
===============================================================================
* Shares redeemed within three years of purchase are subject to a 2%
redemption fee, payable to the Fund.
<CAPTION>
Statement of Changes in Net Assets
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Period ended
INVESTMENT OPERATIONS: December 31, 1998 (a)
---------------------
<S> <C>
Net investment income $582
Net realized gain on investments 26,721
Net change in unrealized appreciation on investments 51,670
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Net increase in net assets from investment operations 78,973
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DISTRIBUTIONS:
Net investment income (601)
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Total distributions (601)
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CAPITAL SHARE TRANSACTIONS:
Value of shares sold 1,011,000
Distributions reinvested 601
Value of shares redeemed --
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Net increase in net assets from capital share transactions 1,011,601
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NET INCREASE IN NET ASSETS 1,089,973
NET ASSETS:
Beginning of period --
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End of period $1,089,973
===============================================================================
CAPITAL SHARE TRANSACTIONS (in shares):
Shares sold 10,106
Shares issued for reinvestment of distributions 6
Shares redeemed --
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Net increase in shares outstanding 10,112
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</TABLE>
(a) The Fund commenced operations on November 18, 1998.
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROYCE SELECT FUND
Statement of Operations for the period ended December 31, 1998
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<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends $582
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Total Income 582
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Expenses:
Investment advisory fees 9,966
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Total Expenses 9,966
Fees Waived by Investment Adviser (9,966)
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Net Expenses 0
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Net Investment Income 582
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REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 26,721
Net change in unrealized appreciation on investments 51,670
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Net realized and unrealized gain on investments 78,391
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NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $78,973
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FINANCIAL HIGHLIGHTS
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This table is presented to show selected data for a share outstanding
throughout the period, and to assist shareholders in evaluating the Fund's
performance for the period presented.
===============================================================================
Period ended
December 31, 1998 (a)
---------------------
Net Asset Value, Beginning of Period $100.00
Investment Operations:
Net investment income 0.06
Net realized and unrealized gain on investments 7.79
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Total from investment operations 7.85
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Distributions:
Net investment income (0.06)
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Total distributions (0.06)
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Net Asset Value, End of Period $107.79
===================================================================
Total Return: 7.9%
Ratios Based on Average Net Assets:
Total expenses (a) 0.00% *
Net investment income 0.06% *
Supplemental Data:
Net Assets, End of Period (in thousands) $1,090
Portfolio Turnover Rate 27%
(a) Expense ratio is shown after fee waiver by the investment
adviser. For the period ended December 31, 1998,
the expense ratio before the waiver would have been 1.03%.
The Fund commenced operations on November 18, 1998.
* Not Annualized
<PAGE>
ROYCE SELECT FUND
Notes to Financial Statements
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Summary of Significant Accounting Policies:
Royce Select Fund (the "Fund") is a series of The Royce Fund (the
"Trust"), a diversified open-end management investment company organized as
a Delaware business trust. The Fund commenced operations on November 18,
1998.
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 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. Dividend
income is recorded on the ex-dividend date and any non-cash dividend income
is recorded at the fair market value of the securities received. Interest
income is recorded on the accrual basis. Realized gains and losses from
investment transactions are determined on the basis of identified cost for
book and tax purposes.
Taxes:
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal
year. The Schedule of Investments includes information regarding income
taxes under the caption "Income Tax Information".
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 that may differ from
generally accepted accounting principles. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications within the capital accounts. 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
undistributed at fiscal year end is distributed in the following year.
<PAGE>
ROYCE SELECT FUND
Notes to Financial Statements (continued)
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Investment Adviser:
Under the Trust's investment advisory agreement with Royce & Associates,
Inc. ("Royce"), Royce is entitled to receive from the Fund a performance fee
of 12.5% of the Fund's pre-fee total return. The agreement provides that all
expenses of the Fund, except brokerage commissions, taxes, interest and
extraordinary expenses, will be paid by Royce. This fee is calculated and
accrued daily, based on the Fund's then current net assets. The fee for the
period from commencement date through December 31, 1999 is payable on
December 31, 1999. Royce has voluntarily committed to waive performance fees
until the Fund achieves a 15% total return since inception of the Fund. For
the period ended December 31, 1998, Royce waived $9,966 of performance fees.
Purchases and Sales of Investment Securities:
For the period ended December 31, 1998, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
securities, were $846,937 and $137,575, respectively.
<PAGE>
Report of Independent Accountants
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To the Board of Trustees of The Royce Fund and the Shareholders of Royce
Select Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Royce Select
Fund (the "Fund") at December 31, 1998, and the results of its operations,
the changes in its net assets and the financial highlights for the period
indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of investments owned at December 31, 1998 by correspondence with
the custodian and brokers, provides a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 1999
