PROSPECTUS
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TheRoyceFund
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VALUE INVESTING IN SMALL COMPANIES FOR MORE THAN 25 YEARS
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Royce Premier Fund
Royce Micro-Cap Fund
Pennsylvania Mutual Fund
Royce Select Fund
Royce Trust & GiftShares Fund
Royce Total Return Fund
Royce Low-Priced Stock Fund
Royce Opportunity Fund
Investment Class Shares
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PROSPECTUS
May 1, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities, or determined that the information
in this prospectus is accurate or complete. It is a crime to represent
otherwise.
<PAGE>
PROSPECTUS
TABLE OF CONTENTS
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Overview 1
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Royce Premier Fund 2
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Royce Micro-Cap Fund 4
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Pennsylvania Mutual Fund 6
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Royce Select Fund 8
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Royce Trust & GiftShares Fund 10
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Royce Total Return Fund 12
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Royce Low-Priced Stock Fund 14
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Royce Opportunity Fund 16
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Investing in Small-Company Stocks 18
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Management of the Funds 20
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General Shareholder Information 22
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Investing in Royce Select Fund 26
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Investing in Royce Trust &GiftShares Fund 27
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<PAGE>
OVERVIEW
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"At Royce & Associates, Inc. ("Royce"), the Funds' investment adviser, we
attempt to invest in equity securities of small- and micro-cap companies that
are trading significantly below our assessment of their current worth. We base
our assessment on either what we believe a knowledgeable buyer might pay to
acquire the entire company, or what we think the value of the company should be
in the stock market. This analysis takes into consideration a number of relevant
factors, including the company's future growth prospects. We select securities
using a risk-averse value approach, with the expectation that their market
prices should increase toward our estimate of their current worth, resulting in
capital appreciation for Fund investors.
"Our Funds' ability to achieve their goals will depend largely on our
skill in selecting their portfolio companies using our risk-averse value
approach. It will also rest on the degree to which the markets eventually
recognize our assessment of the current worth of these companies."
- Chuck Royce
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This Prospectus relates only to the Investment Class of shares of the
Funds, which are offered by The Royce Funds without sales charges or
commissions. Shares of other Fund classes are generally offered only through
certain broker-dealers and/or financial intermediaries.
The information on pages 2-17 about each Fund's investment goals and
principal strategies and about the primary risks for a Fund's investors is based
on, and should be read in conjunction with, the information on pages 18-19 of
this Prospectus. This section includes information about the investment and risk
characteristics of small- and micro-cap companies, the market for their
securities and Royce's risk-averse value approach to investing.
The performance information presented in this Prospectus is current to
December 31, 1999. For more recent information, please visit our website at
www.roycefunds.com or contact The Royce Fund through any of the methods listed
on the back cover of this Prospectus.
The Funds included in this Prospectus may be a suitable investment as part
of your overall investment plan if you want to include a fund (or funds) that
focuses on small- and/or micro-cap companies.
THE ROYCE FUNDS PROSPECTUS | 1
<PAGE>
ROYCE PREMIER FUND
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INVESTMENT GOALS AND PRINCIPAL STRATEGIES
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Royce Premier Fund's primary investment goal is long-term growth of capital and
its secondary goal is current income. Royce invests the Fund's assets primarily
in a limited number of equity securities issued by small companies with stock
market capitalizations between $300 million and $1.5 billion. Royce generally
looks to invest in companies that it considers "premier" -- those that have
excellent business strengths and/or prospects for growth, high internal rates of
return and low leverage, and that are trading significantly below its estimate
of their "current worth."
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of such "premier" companies. At least 65% of
these securities will be issued by companies with stock market capitalizations
of less than $1.5 billion at the time of investment and/or will produce income
for the Fund. Royce expects the Fund's portfolio to have a median market cap
below $1.5 billion.
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PORTFOLIO DIAGNOSTICS (12/31/99)
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Number of Securities 50
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Median Market Capitalization $945 Million
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PRIMARY RISKS FOR FUND INVESTORS
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As with any mutual fund that invests in common stocks, Royce Premier Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of small-cap securities are generally more volatile and their
markets are less liquid relative to larger-cap securities. Therefore, the Fund
may involve more risk of loss and its returns may differ significantly from
funds investing in larger-cap companies or other asset classes. The Fund's
limited number of portfolio securities may also involve more risk to investors
than a more broadly diversified portfolio of small-cap securities because it may
be more susceptible to any single corporate, economic, political, regulatory or
market event.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance does not indicate how the Fund will perform in the
future.
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CALENDAR YEAR RETURNS - in Percentages (%)
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[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ----
11.49 6.74 18.41 18.12 17.82 3.28 19.03 15.80
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ANNUALIZED RETURNS - in Percentages (%)
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From Inception
1 Year 3 Year 5 Year 12/31/91
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RPR 11.49 12.11 14.42 13.69
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Russell 2000 21.26 13.08 16.69 14.66
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During the period shown in the bar chart, the highest return for a calendar
quarter was 21.04% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -14.51% (quarter ended 9/30/98).
2 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYPRX
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FEES AND EXPENSES OF THE FUND
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The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
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Maximum deferred sales charge None
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Maximum sales charge (load) imposed on reinvested dividends None
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Early redemption fee
On purchases held for six months or more None
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On purchases held for less than six months 1.00%
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ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.00%
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Distribution (12b-1) fees None
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Other expenses 0.23%
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Total Annual Fund Operating Expenses 1.23%
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EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$ 125 $ 390 $ 676 $1,489
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FINANCIAL HIGHLIGHTS INFORMATION
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The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.14 $ 8.70 $ 7.81 $ 7.12 $ 6.48
- --------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income 0.01 0.05 0.09 0.10 0.10
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Net gains on securities (both realized and unrealized) 1.00 0.53 1.35 1.18 1.05
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.01 0.58 1.44 1.28 1.15
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income (0.01) (0.05) (0.09) (0.10) (0.09)
- --------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.58) (0.09) (0.46) (0.49) (0.42)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (0.14) (0.55) (0.59) (0.51)
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Net Asset Value, End of Period $ 9.56 $ 9.14 $ 8.70 $ 7.81 $ 7.12
- --------------------------------------------------------------------------------------------------------------------------
Total Return 11.5% 6.7% 18.4% 18.1% 17.8%
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Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 568 $ 569 $ 533 $ 317 $ 302
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Ratio of Expenses to Average Net Assets 1.23% 1.23% 1.24% 1.25%* 1.25%
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Ratio of Net Investment Income to Average Net Assets 0.11% 0.55% 1.20% 1.25% 1.48%
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Portfolio Turnover Rate 48% 46% 18% 34% 39%
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</TABLE>
* For 1996, this ratio would have been 1.28% before fee waivers by Royce.
THE ROYCE FUNDS PROSPECTUS | 3
<PAGE>
ROYCE MICRO-CAP FUND
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INVESTMENT GOAL AND PRINCIPAL STRATEGIES
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Royce Micro-Cap Fund's investment goal is long-term growth of capital. Royce
invests the Fund's assets primarily in a broadly diversified portfolio of equity
securities issued by micro-cap companies (companies with stock market
capitalizations less than $300 million). Royce selects these securities from a
universe of more than 6,200 micro-cap companies, generally focusing on companies
that it believes are trading considerably below its estimate of their current
worth.
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of small-cap (companies with stock market
capitalizations below $1.5 billion) and micro-cap companies. At least 65% of its
assets will be in micro-cap securities at the time of investment. Royce expects
the Fund's portfolio to have a median market cap below $300 million.
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PORTFOLIO DIAGNOSTICS (12/31/99)
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Number of Securities 134
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Median Market Capitalization $175 Million
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PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Micro-Cap Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of micro-cap securities are generally even more volatile and
their markets are even less liquid relative to both small-cap and large-cap
securities. Therefore, the Fund may involve considerably more risk of loss and
its returns may differ significantly from funds investing in small- or
larger-cap companies or other asset classes.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance does not indicate how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ----
13.65 -3.34 24.69 15.54 19.06 3.55 23.67 29.41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
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From Inception
1 Year 3 Year 5 Year 12/31/91
- --------------------------------------------------------------------------------
RMC 13.65 11.06 13.51 15.30
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 16.69 14.66
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 25.59% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -20.70% (quarter ended 9/30/98).
4 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYOTX
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FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Early redemption fee
On purchases held for six months or more None
- --------------------------------------------------------------------------------
On purchases held for less than six months 1.00%
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.50%
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Distribution (12b-1) fees None
- --------------------------------------------------------------------------------
Other expenses 0.36%
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Total Annual Fund Operating Expenses 1.86%
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Fee Waiver (0.37)%
- --------------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- --------------------------------------------------------------------------------
Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49% through
December 31, 2000.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's total operating expenses (net of fee waiver for year 1) remain the same.
Although your actual costs may be higher or lower, based on the assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$ 152 $ 549 $ 971 $2,150
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FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.55 $ 9.40 $ 8.14 $ 7.53 $ 6.48
- -----------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income (loss) (0.08) (0.05) -- (0.01) --
- -----------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on securities (both realized and unrealized) 1.24 (0.29) 2.01 1.17 1.24
- -----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.16 (0.34) 2.01 1.16 1.24
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- (0.01) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.21) (0.50) (0.75) (0.55) (0.19)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.21) (0.51) (0.75) (0.55) (0.19)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.50 $ 8.55 $ 9.40 $ 8.14 $ 7.53
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 13.7% (3.3)% 24.7% 15.5% 19.1%
- -----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 112 $ 165 $ 200 $ 141 $ 98
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.49% 1.49% 1.49% 1.79% 1.94%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income (loss) to Average Net Assets (0.72)% (0.57)% 0.04% (0.20)% 0.10%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 56% 38% 70% 25%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For 1999, 1998, 1997, 1996 and 1995, these ratios would have been 1.86%,
1.81%, 1.80%, 1.87% and 1.97%, respectively, before fee waivers by Royce.
THE ROYCE FUNDS PROSPECTUS | 5
<PAGE>
PENNSYLVANIA MUTUAL FUND
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INVESTMENT GOAL AND PRINCIPAL STRATEGIES
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Pennsylvania Mutual Fund's investment goal is long-term growth of capital. Royce
invests the Fund's assets primarily in a broadly diversified portfolio of equity
securities issued by both small- and micro-cap companies that it believes are
trading significantly below its estimate of their current worth. In the upper
end of the small-cap market (companies with stock market capitalizations from
$300 million to $1.5 billion), the Fund generally invests in securities of
companies that Royce believes have excellent business strengths, high internal
rates of return and low leverage. In the micro-cap sector (market
capitalizations less than $300 million), the Fund invests in securities,
selected by Royce from a universe of more than 6,200 micro-cap companies, that
it believes are trading significantly below its estimate of their current worth.
Normally, the Fund will invest at least 65% of its assets in the common
stocks and convertible securities of such small- and micro-cap companies. Royce
expects the Fund's portfolio to have a median market cap below $1 billion.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 188
- --------------------------------------------------------------------------------
Median Market Capitalization $412 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Pennsylvania Mutual Fund
is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year over the
last 10 years, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance does not indicate how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5.96 4.17 24.96 12.85 18.72 -0.72 11.25 16.19 31.83 -11.54
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year 10 Year 20 Year
================================================================================
PMF 5.96 11.31 13.07 10.71 14.13
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 16.69 13.40 13.96
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.24% (quarter ended 3/31/91) and the lowest return for a calendar
quarter was -16.55% (quarter ended 9/30/90).
6 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: PENNX
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FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Early redemption fee
On purchases held for six months or more None
- --------------------------------------------------------------------------------
On purchases held for less than six months 1.00%
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 0.78%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees None
- --------------------------------------------------------------------------------
Other expenses 0.26%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.04%
- --------------------------------------------------------------------------------
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$106 $331 $574 $1,271
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.35 $ 7.82 $ 7.11 $ 7.71 $ 7.41
- ---------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income 0.04 0.05 0.07 0.11 0.11
- ---------------------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 0.38 0.24 1.70 0.84 1.27
- ---------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.42 0.29 1.77 0.95 1.38
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income (0.04) (0.05) (0.06) (0.11) (0.11)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.45) (0.71) (1.00) (1.44) (0.97)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.49) (0.76) (1.06) (1.55) (1.08)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.28 $ 7.35 $ 7.82 $ 7.11 $ 7.71
- ---------------------------------------------------------------------------------------------------------------------
Total Return 6.0% 4.2% 25.0% 12.8% 18.7%
- ---------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 371 $ 467 $ 508 $ 457 $ 630
- ---------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.04% 1.01% 1.05% 0.99%* 0.98%*
- ---------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 0.49% 0.62% 0.88% 1.05% 1.18%
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 29% 18% 29% 10%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* For 1996 and 1995, these ratios would have been 1.03% and 0.99%, respectively,
before fee waivers by Royce.
THE ROYCE FUNDS PROSPECTUS | 7
<PAGE>
ROYCE SELECT FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL AND PRINCIPAL STRATEGIES
- --------------------------------------------------------------------------------
The investment goal of Royce Select Fund, a fund designed for "qualified
clients," is long-term growth of capital. Royce invests the Fund's assets
primarily in a limited number of equity securities issued by small- and
micro-cap companies. Royce selects these securities from a universe of more than
8,000 companies, generally focusing on companies that it believes are trading
significantly below its estimate of their current worth. In its selection
process, Royce puts primary emphasis on balance sheet quality, cash flows and
various internal returns indicative of profitability, and the relationships that
these factors have to the price of a given security.
Normally, the Fund will invest at least 80% of its assets in common stocks
and convertible securities of small-cap (less than $1.5 billion in market
capitalization) and micro-cap (less than $300 million in market capitalization)
companies. Royce expects the Fund's portfolio to have a median market cap below
$1 billion.
The only ordinary operating expense of the Fund will be a performance fee
paid to Royce equal to 12.5% of the Fund's pre-fee total return. Only persons
who are qualified clients (within the meaning of the Securities and Exchange
Commision rule permitting such a performance fee) may invest in the Fund.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 45
- --------------------------------------------------------------------------------
Median Market Capitalization $387 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Select Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes. The Fund's limited portfolio may also involve more risk to investors
than a more broadly diversified portfolio of small- and micro-cap securities
because it may be more susceptible to any single corporate, economic, political,
regulatory or market event.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance in 1999, and by showing how
the Fund's average annual total returns for various periods compare with those
of the Russell 2000, the Fund's benchmark index. Past performance does not
indicate how the Fund will perform in the future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999
----
35.42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
From Inception
1 Year 11/18/98
================================================================================
RSF 35.42 40.34
- --------------------------------------------------------------------------------
Russell 2000 21.26 27.03
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 27.67% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -4.17% (quarter ended 3/31/99).
8 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYSFX
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Early redemption fee
On purchases held for three years or more None
- --------------------------------------------------------------------------------
On purchases held for less than three years 2.00%
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Performance fees* 5.38%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees None
- --------------------------------------------------------------------------------
Other expenses None
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 5.38%
- --------------------------------------------------------------------------------
* Based on 12.5% of the Fund's pre-fee return of 43.0% in 1999. Actual
performance fees will depend on the Fund's future returns. Other expenses are
shown as "none" because Royce is responsible for paying them. See p.26 for more
information.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 43.0% return for the first year
and a 5% pre-fee return for each subsequent year. Although your actual costs may
be higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$914 $820 $1,017 $1,591
- --------------------------------------------------------------------------------
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
================================================================================
$639 $820 $1,017 $1,591
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since its inception and reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned each period on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
Period Ended December 31, 1999 1998*
================================================================================
Net Asset Value, Beginning of Period $ 107.79 $ 100.00
- --------------------------------------------------------------------------------
Income from Investment Operations
Net investment income (loss) (2.84) 0.06
- --------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 40.71 7.79
- --------------------------------------------------------------------------------
Total from Investment Operations 37.87 7.85
- --------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- (0.06)
- --------------------------------------------------------------------------------
Distributions from capital gains (4.62) --
- --------------------------------------------------------------------------------
Total Distributions (4.62) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 141.04 $ 107.79
- --------------------------------------------------------------------------------
Total Return 35.4% 7.9%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 10 $ 1
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets** 4.61% 0.00%
- --------------------------------------------------------------------------------
Ratio of Net Investment Income (loss) to Average
Net Assets (3.94)% 0.50%
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 136% 27%
- --------------------------------------------------------------------------------
* The Fund commenced operations on November 18, 1998.
** For 1999 and 1998, these ratios would have been 5.38% and 1.03%,
respectively, before fee waivers by Royce.
*** Annualized.
THE ROYCE FUNDS PROSPECTUS | 9
<PAGE>
ROYCE TRUST & GIFTSHARES FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL AND PRINCIPAL STRATEGIES
- --------------------------------------------------------------------------------
The investment goal of Royce Trust & GiftShares Fund, a special-purpose fund, is
long-term growth of capital. Royce invests the Fund's assets primarily in a
limited number of equity securities issued by small- and micro-cap companies.
Royce selects these securities from a universe of more than 8,000 companies,
generally focusing on companies that it believes are trading significantly below
its estimate of their current worth.
The Fund is designed to enable investors to make long-term gifts that may
qualify for the Federal annual gift tax exclusion and that may also be used to
help pay for the beneficiary's college and other post-secondary education. See
p. 27 for more informations.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities. At least 75% of these securities will be issued by
small-cap companies (those less than $1.5 billion in market capitalization).
Royce expects the Fund's portfolio to have a median market cap below $1 billion.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 48
- --------------------------------------------------------------------------------
Median Market Capitalization $383 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Trust &GiftShares
Fund is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of an
investment in the Fund will fluctuate with the market, and a Fund trust account
could lose money over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes. The Fund's limited portfolio may also involve more risk to investors
than a more broadly diversified portfolio of small- and micro-cap securities
because it may be more susceptible to any single corporate, economic, political,
regulatory or market event.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance does not indicate how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996
---- ---- ---- ----
41.75 19.48 26.02 25.55
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
From Inception
1 Year 3 Year 12/27/95
================================================================================
RTG 41.75 28.75 27.90
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 14.05
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 33.70% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -17.77% (quarter ended 9/30/98).
10 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RGFAX
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fee None
- --------------------------------------------------------------------------------
Annual Trustee's Fee $ 50
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees 0.25%
- --------------------------------------------------------------------------------
Other expenses 0.87%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.12%
- --------------------------------------------------------------------------------
Fee Waiver (0.63)%
- --------------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- --------------------------------------------------------------------------------
* Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49% through
December 31, 2000.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's total operating expenses (net of fee waiver in year 1)remain the same.
Although your actual costs may be higher or lower, based on the assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$152 $603 $1,081 $2,402
Exclusive of $50 annual trustee's fee per trust account. For trust accounts
opened prior to 2001, Royce will pay that portion of the currently effective
annual trustee's fee in excess of $50 per account and the trustee's fees for
establishing and terminating the trusts.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception and reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Period Ended December 31, 1999 1998 1997 1996 1995*
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.24 $ 6.91 $ 5.83 $ 5.01 $ 5.00
- ----------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income (loss) (0.04) (0.02) (0.01) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 3.35 1.37 1.52 1.27 0.01
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.31 1.35 1.51 1.27 0.01
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (1.45) (0.02) (0.43) (0.45) --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.45) (0.02) (0.43) (0.45) --
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.10 $ 8.24 $ 6.91 $ 5.83 $ 5.01
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 41.8% 19.5% 26.0% 25.6% 0.2%
- ----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 15 $ 8 $ 4 $ 1 $ 1
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.49% 1.49% 1.49% 1.49% 0.70%***
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income (loss) to Average Net Assets (0.60)% (0.35)% (0.32)% (0.05)% 0.00%***
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 152% 153% 64% 93% 0%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on December 27, 1995.
** For 1999, 1998, 1997, 1996 and 1995, these ratios would have been 2.12%,
2.45%, 3.82%, 6.53% and 1.95%, respectively, before fee waivers and
expense reimbursement by Royce.
*** Annualized
THE ROYCE FUNDS PROSPECTUS | 11
<PAGE>
ROYCE TOTAL RETURN FUND
- --------------------------------------------------------------------------------
INVESTMENT GOALS AND PRINCIPAL STRATEGIES
- --------------------------------------------------------------------------------
The investment goals of Royce Total Return Fund are both long-term growth of
capital and current income. Royce invests the Fund's assets primarily in a
diversified portfolio of dividend-paying securities issued by small- and
micro-cap companies. Of the more than 8,000 small- and micro-cap companies,
approximately 2,100 currently pay common stock dividends. Investing in such
securities may tend to stabilize the volatility inherent in the prices of
small-cap securities.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities. At least 90% of these securities will produce
dividend or interest income to the Fund, and at least 65% will be issued by
companies with stock market capitalizations of less than $1.5 billion at the
time of investment. Royce expects the Fund's portfolio to have a median market
cap below $1 billion. It may also invest up to 35% of the Fund's assets in
non-convertible debt securities.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 143
- --------------------------------------------------------------------------------
Median Market Capitalization $362 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Total Return Fund
is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve more risk of loss and its returns may differ significantly
from funds investing in larger-cap companies or other asset classes.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance does not indicate how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
1.55 4.75 23.69 25.48 26.85 5.13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
From Inception
1 Year 3 Year 5 Year 12/15/93
================================================================================
RTR 1.55 9.58 15.93 13.95
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 16.69 13.92
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.33% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -10.53% (quarter ended 9/30/98).
12 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYTRX
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Early redemption fee
On purchases held for six months or more None
- --------------------------------------------------------------------------------
On purchases held for less than six months 1.00%
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees None
- --------------------------------------------------------------------------------
Other expenses 0.31%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.31%
- --------------------------------------------------------------------------------
Fee Waiver (0.06)%
- --------------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.25%
- --------------------------------------------------------------------------------
* Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.25% through
December 31, 2000.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's total operating expenses (net of fee waiver in year 1) remain the same.
Although your actual costs may be higher or lower, based on the assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$127 $409 $712 $1,574
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended on December 31, 1999 1998 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.56 $ 7.52 $ 6.29 $ 5.76 $ 5.12
- -----------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income 0.17 0.15 0.11 0.14 0.13
- -----------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on securities (both realized and unrealized) (0.07) 0.20 1.38 1.28 1.24
- -----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.10 0.35 1.49 1.42 1.37
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income (0.16) (0.15) (0.11) (0.16) (0.13)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.35) (0.16) (0.15) (0.73) (0.60)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.31) (0.26) (0.89) (0.73)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.15 $ 7.56 $ 7.52 $ 6.29 $ 5.76
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 1.6% 4.8% 23.7% 25.5% 26.9%
- -----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 248 $ 245 $ 120 $ 6 $ 3
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.25% 1.25% 1.25% 1.25% 1.67%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 2.32% 2.75% 3.15% 2.50% 2.42%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 39% 66% 26% 111% 68%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For 1999, 1998, 1997, 1996 and 1995, these ratios would have been 1.31%,
1.35%, 1.67%, 2.23% and 2.38%, respectively, before fee waivers by Royce.
THE ROYCE FUNDS PROSPECTUS | 13
<PAGE>
ROYCE LOW-PRICED STOCK FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL AND PRINCIPAL STRATEGIES
- --------------------------------------------------------------------------------
WWhitney George, Senior Portfolio Manager of Royce, manages Royce Low-Priced
Stock Fund. The Fund's investment goal is long-term growth of capital. Royce
invests the Fund's assets primarily in equity securities of small- and micro-cap
companies trading for less than $15 per share. Institutional investors generally
do not make such securities an area of their focus, and they receive only
limited broker research coverage. These conditions create opportunities to find
securities trading significantly below Royce's estimate of their current worth.
Normally, the Fund will invest at least 65% of its assets in the common
stocks and convertible securities of companies whose shares trade for less than
$15 at the time of investment. At least 65% of these securities will be issued
by small- and micro-cap companies with market capitalizations of less than $1.5
billion. Royce expects the Fund's portfolio to have a median market cap below $1
billion.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 64
- --------------------------------------------------------------------------------
Median Market Capitalization $400 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Low-Priced Stock
Fund is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of low-priced and small- and micro-cap securities are generally
even more volatile and their markets are even less liquid than for securities
with higher share prices or securities of larger-cap companies. Therefore, the
Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in higher-priced small-caps, larger-cap
companies or other asset classes. Some issuers of low-priced securities may be
financially distressed or involved in bankruptcy, liquidation, reorganization or
recapitalization proceedings. Specifically because of their lower prices
relative to other companies, low-priced stocks may be subject to even more
abrupt or erratic market movements.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance does not indicate how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
29.78 2.37 19.48 22.80 22.53 2.98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
From Inception
1 Year 3 Year 5 Year 12/15/93
================================================================================
RLP 29.78 16.65 19.02 16.08
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 16.69 13.92
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.59% (quarter ended 6/30/99) and the lowest return for a quarter
was -21.50% (quarter ended 9/30/98).
14 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYLPX
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Early redemption fee
On purchases held for six months or more None
- --------------------------------------------------------------------------------
On purchases held for less than six months 1.00%
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.50%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees 0.25%
- --------------------------------------------------------------------------------
Other expenses 0.53%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.28%
- --------------------------------------------------------------------------------
Fee Waiver (0.79)%
- --------------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- --------------------------------------------------------------------------------
Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49% through
December 31, 2000.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's total operating expenses (net of fee waiver in year 1) remain the same.
Although your actual costs may be higher or lower, based on the assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$152 $637 $1,148 $2,554
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 6.95 $ 6.82 $ 6.30 $ 5.62 $ 5.07
- -------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income (loss) (0.03) (0.01) (0.03) (0.03) (0.04)
- -------------------------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 2.03 0.17 1.26 1.31 1.18
- -------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.00 0.16 1.23 1.28 1.14
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.79) (0.03) (0.71) (0.60) (0.59)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.79) (0.03) (0.71) (0.60) (0.59)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 8.16 $ 6.95 $ 6.82 $ 6.30 $ 5.62
- -------------------------------------------------------------------------------------------------------------------------
Total Return 29.8% 2.4% 19.5% 22.8% 22.5%
- -------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 25 $ 21 $ 18 $ 16 $ 4
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.49% 1.49% 1.49% 1.88% 1.97%
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income (loss) to Average Net Assets (0.49)% (0.11)% (0.47)% (0.67)% (1.11)%
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 103% 111% 99% 137% 114%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For 1999, 1998, 1997, 1996 and 1995, these ratios would have been 2.28%,
2.31%, 2.38%, 2.59% and 3.47%, respectively, before fee waivers by Royce.
THE ROYCE FUNDS PROSPECTUS | 15
<PAGE>
ROYCE OPPORTUNITY FUND
- --------------------------------------------------------------------------------
INVESTMENT GOAL AND PRINCIPAL STRATEGIES
- --------------------------------------------------------------------------------
Boniface A. Zaino, Senior Portfolio Manager of Royce, manages Royce Opportunity
Fund. The Fund's investment goal is long-term growth of capital. Royce invests
the Fund's assets primarily in a diversified portfolio of equity securities
issued by small and micro-cap companies in an attempt to take advantage of what
it believes are opportunistic situations for undervalued securities.
Such opportunistic situations may include turnarounds, emerging growth
companies with interrupted earnings patterns, companies with unrecognized asset
values or undervalued growth companies. Although the Fund normally focuses on
the securities of companies with market capitalizations less than $1.5 billion,
it may, in certain market environments, invest an equal or greater percentage of
its assets in securities of larger-cap companies.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 177
- --------------------------------------------------------------------------------
Median Market Capitalization $203 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Opportunity Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you could lose money
over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. Past
performance does not indicate how the Fund will perform in the future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997
---- ---- ----
32.34 4.91 20.83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
From Inception
1 Year 3 Year 11/19/96
================================================================================
ROF 32.34 18.82 20.00
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 14.26
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 31.19% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -20.09% (quarter ended 9/30/98).
16 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYPNX
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge None
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Early redemption fee
On purchases held for six months or more None
- --------------------------------------------------------------------------------
On purchases held for less than six months 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees None
- --------------------------------------------------------------------------------
Other expenses 0.46%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.46%
- --------------------------------------------------------------------------------
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's total operating expenses remain the same. Although your actual costs may
be higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$149 $462 $797 $1,746
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception and reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996*
====================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 6.02 $ 5.92 $ 5.26 $ 5.00
- --------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income (loss) -- (0.01) 0.07 --
- --------------------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 1.91 0.29 1.03 0.26
- --------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.91 0.28 1.10 0.26
- --------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- -- (0.08) --
- --------------------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.74) (0.18) (0.36) --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.74) (0.18) (0.44) --
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.19 $ 6.02 $ 5.92 $ 5.26
- --------------------------------------------------------------------------------------------------------------------
Total Return 32.3% 4.9% 20.8% 5.2%
- --------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $ 60 $ 34 $ 22 $ 18
- --------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets** 1.46% 1.25% 0.99% 0.97%***
- --------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income (loss) to Average Net Assets (0.07)% (0.16)% 1.23% 0.83%***
Portfolio Turnover Rate 122% 120% 77% 1%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on November 19, 1996.
** For 1998, 1997 and 1996, these ratios would have been 1.54%, 1.56% and
1.97%, respectively, before fee waivers by Royce.
*** Annualized
THE ROYCE FUNDS PROSPECTUS | 17
<PAGE>
INVESTING IN SMALL-COMPANY STOCKS
- --------------------------------------------------------------------------------
Small-capitalization stocks or Small-caps are stocks with market capitalizations
of $1.5 billion or less.
Market capitalization is the number of a company's outstanding shares of stock
multiplied by its most recent closing price per share.
The Russell 2000 is an unmanaged index of U.S. small-company common stocks that
Royce and others use to benchmark the performance of small- and micro-cap funds.
It includes the smallest 2,000 companies (based on market capitalization) among
the largest 3,000 companies tracked by Frank Russell Company.
Small- and Micro-Cap Stocks
Royce views the large and diverse universe of small-cap companies as having two
investment segments or tiers. While small-caps are generally defined as those
companies with market capitalizations of less than $1.5 billion, Royce refers to
the segment of small-cap companies with market capitalizations below $300
million as micro-cap.
Small-and micro-cap companies offer investment opportunities and
additional risks. They may not be well known to the investing public, may not be
significantly owned by institutional investors and may not have steady earnings
growth. In addition, the securities of such companies may be more volatile in
price, have wider spreads between their bid and ask prices and have
significantly lower trading volumes than larger capitalization stocks. As a
result, the purchase or sale of more than a limited number of shares of a small-
or micro-cap security may affect its market price. Royce may need a considerable
amount of time to purchase or sell its positions in these securities,
particularly when other Royce-managed accounts or other investors are also
seeking to purchase or sell them. Accordingly, Royce's investment focus on
small- and micro-cap securities generally requires it to have a long-term (at
least three years) investment outlook for a portfolio security.
The micro-cap segment consists of more than 6,200 companies with market
caps below $300 million. These companies are followed by relatively few, if any,
securities analysts, and there tends to be less publicly available information
about them. Their securities generally have even more limited trading volumes
and are subject to even more abrupt or erratic market price movements than are
the securities in the upper tier, and Royce may be able to deal with only a few
market-makers when purchasing and selling these securities. Such companies may
also have limited product lines, markets or financial resources, may lack
management depth and may be more vulnerable to adverse business or market
developments. These conditions, which create greater opportunities to find
securities trading well below Royce's estimate of the company's current worth
but also involve increased risk, lead Royce to more broadly diversify most of
the Funds investing in the micro-cap tier by holding proportionately smaller
positions in more companies.
The upper tier of the small-cap universe of securities consists of
approximately 1,700 companies with market caps between $300 million and $1.5
billion. In this segment, there is a relatively higher level of ownership by
institutional investors and more research coverage by brokers than generally
exists for micro-cap companies. This greater attention makes the market for
these securities more efficient compared to micro-cap securities in that they
have somewhat greater trading volumes and narrower bid/ask spreads. As a result,
Royce normally employs a more concentrated approach when investing in the upper
tier of small-caps, holding proportionately larger positions in a relatively
limited number of securities (generally fewer than 60).
18 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
Value Investing
Royce uses a "value" method in managing the Funds' assets. In selecting
securities for the Funds, Royce evaluates the quality of a company's balance
sheet, the level of its cash flows and various measures of a company's
profitability. Royce then uses these factors to assess the company's current
worth. Royce bases this assessment on either what it believes a knowledgeable
buyer might pay to acquire the entire company or what it thinks the value of the
company should be in the stock market, taking into consideration a number of
relevant factors, including the company's future growth prospects.
Royce attempts to identify and invest in securities of companies that are
trading significantly below its estimate of the company's current worth, with
the expectation that the market price of its securities should increase over a
three- to five-year period towards this estimate, resulting in capital
appreciation for Fund investors.
Royce's value approach strives to reduce some of the risks of investing in
small- and micro-cap securities for each Fund's portfolio taken as a whole. In
addition to focusing on companies trading significantly below its estimate of
their current worth to reduce valuation risk, Royce evaluates various other risk
factors in selecting securities for the Funds. Royce attempts to lessen
financial risk by buying companies that combine strong balance sheets with low
leverage. Other than for Royce Select Fund and Royce Trust &GiftShares Fund,
which limit the number of securities in their portfolios, Royce attempts to
decrease portfolio risk in the micro-cap segment of the small-cap universe by
broadly diversifying portfolio holdings.
While there can be no assurance that this risk-averse value approach will
be successful, Royce believes that it can reduce some of the risks of investing
in small- and micro-cap companies, which are inherently fragile in nature and
whose securities have substantially greater market price volatility.
Additionally, although Royce's approach to security selection seeks to
reduce downside risk to Fund portfolios during periods of broad small-cap market
declines, it may also reduce gains in strong small-cap up markets.
Temporary Investments
Each of the Funds may invest in short-term fixed income securities for
temporary defensive purposes, to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. If a Fund should implement a
temporary investment policy, may not achieve its investment goal while that
policy is in effect.
THE ROYCE FUNDS PROSPECTUS | 19
<PAGE>
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
Royce attempts to invest in equity securities of small- and micro-cap companies
that are trading significantly below our assessment of their current worth, with
the expectation that their market prices should increase toward this estimate,
resulting in capital appreciation for Fund investors.
[PHOTOS OMITTED]
(l-r) Jack Fockler, Whitney George,
Chuck Royce, Charlie Dreifus, Buzz Zaino
Royce & Associates Inc. is the Funds' investment adviser and is responsible for
the management of their assets. Royce has been investing in small-cap securities
with a value approach for more than 25 years. Its offices are located at 1414
Avenue of the Americas, New York, NY 10019. Charles M. Royce has been the firm's
President and Chief Investment Officer since 1973. He is also the primary
portfolio manager of the Funds' portfolios, with the exception of Royce
Low-Priced Stock Fund, which W. Whitney George began to manage in January 2000,
and Royce Opportunity Fund, which Boniface A. Zaino began to manage in April
1998.
Mr. Royce is assisted by Royce's investment staff, which includes Mr.
George, Managing Director, Vice President and Senior Portfolio Manager; Mr.
Zaino, Managing Director and Senior Portfolio Manager; and Charles R. Dreifus,
Principal and Senior Portfolio Manager; and by Jack E. Fockler, Jr., Managing
Director and Vice President. Mr. George has been employed by Royce since 1991.
Mr. Zaino joined Royce in April 1998 and previously was Group Managing Director
at Trust Company of the West (since 1984). Mr. Dreifus joined Royce in February
1998 and previously was Managing Director (since June 1995) and General Partner
(from 1983 until June 1995) of Lazard Freres & Co. LLC. Mr. Fockler has been
employed by Royce since 1989.
Royce Fund Services, Inc. ("RFS") distributes the Funds' shares. The Royce
Fund has adopted a distribution plan for Royce Low-Priced Stock Fund and Royce
Trust & GiftShares Fund under Rule 12b-1. Under the plan, these Funds are
obligated to pay a fee to RFS at the annual rate of 0.25% of their average net
assets of their Investment Class. RFS would use these fees to cover
sales-related and shareholder servicing costs and to pay sales commissions and
other fees to broker-dealers who introduce investors to the Funds. RFS has
agreed to waive its fees through December 2000.
20 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
- --------------------------------------------------------------------------------
Royce receives advisory fees monthly as compensation for its services to the
Funds. (See page 26 for information about the performance fees payable to Royce
from Royce Select Fund.) The annual rates of these fees, before any waiver to
cap the expense ratios of certain Funds at specified levels as shown in the Fees
and Expenses tables, are:
- --------------------------------------------------------------------------------
o 1% of the average net assets of Royce Premier Fund, Royce Trust
&GiftShares Fund, Royce Total Return Fund and Royce Opportunity Fund.
o 1.5% of the average net assets of Royce Micro-Cap Fund and Royce
Low-Priced Stock Fund.
o 1% of the first $50 million of Pennsylvania Mutual Fund's average net
assets, 0.875% of the next $50 million of its average net assets and 0.75%
of its average net assets in excess of $100 million.
For 1999, the actual net fees, after waivers, paid to Royce on average net
assets were 1.00% for Royce Premier Fund, 1.13% for Royce Micro-Cap Fund, 0.78%
for Pennsylvania Mutual Fund, 4.61% for Royce Select Fund, 0.62% for Royce Trust
& GiftShares Fund, 0.94% for Royce Total Return Fund, 0.96% for Royce Low-Priced
Stock Fund and 1.00% for Royce Opportunity Fund.
State Street Bank & Trust Company is the custodian of the Funds'
securities, cash and other assets. State Street's agent, National Financial Data
Services ("NDFS"), is the Funds' transfer agent.
THE ROYCE FUNDS PROSPECTUS | 21
<PAGE>
GENERAL SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
Net Asset Value (NAV) is the value of the Fund's net assets divided by the
number of its outstanding shares.
For more detailed discussion of The Royce Fund policies regarding direct
ownership of Fund shares, including information on opening accounts, buying,
redeeming, exchanging and transferring ownership of Fund shares, please refer to
The Royce Fund's Shareholder Guide dated May 1, 2000.
Purchasing Shares
The Funds offered through this Prospectus are no-load, meaning that you
pay no sales fees or commissions to buy shares directly from The Royce Fund. The
Funds do pay their own management fees and other operating expenses as outlined
in this Prospectus.
If you purchase Fund shares through a third party, such as a discount or
full-service broker-dealer, bank or other financial intermediary, investment
minimums, commisions, fees, policies and procedures may differ from those
described in this Prospectus. If you purchase Fund shares through a third party,
the shares may be held in the name of the third party on the Fund's books. RFS,
Royce and/or the Funds may compensate broker-dealers, financial intermediaries
and other service providers who introduce investors to the Funds and/or provide
certain administrative services to their customers who own Fund shares.
For the year ended December 31, 1999, Royce made payments for distribution
services to broker-dealers out of its own resources in the amount of $1,290,415.
- --------------------------------------------------------------------------------
PURCHASING SHARES
- --------------------------------------------------------------------------------
Minimum initial investments for shares purchased directly from The Royce Fund,
other than Royce Trust & GiftShares and Royce Select Funds:
Account Type Minimum
================================================================================
Regular Account $ 2,000
- --------------------------------------------------------------------------------
IRA 500
- --------------------------------------------------------------------------------
Automatic Investment or
Direct Deposit Plan Accounts 500
- --------------------------------------------------------------------------------
403(b)(7) or 401(k) Accounts None
- --------------------------------------------------------------------------------
The subsequent investment minimum is $50, regardless of account type.
The Royce Fund reserves the right both to suspend the offering of any Fund's
shares to new investors and to reject any specific purchase request.
- --------------------------------------------------------------------------------
Redeeming Shares
Early Redemption Fee (not applicable to Royce Trust & GiftShares Fund)
You may redeem shares in your account at any time. In order to discourage
short-term trading, The Royce Fund assesses an early redemption fee of 1% on
redemptions of shares of any Fund (other than Royce Select Fund) that you held
for less than six months. A fee of 2%
22 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
is assessed on redemptions of any Royce Select Fund shares held for less than
three years. Each fee is payable to the Fund out of the proceeds otherwise
payable to you.
The "first-in, first-out" method is used to determine the holding period
by comparing the date of the redemption with the earliest dates of the share
purchases in an account. For accounts registered on the books of the Funds'
transfer agent, the anniversary month of an account determines the six-month
holding period, so that if you purchased a Fund's shares in June 2000, these
shares would be subject to the fee if you were to redeem them prior to December
2000 (June 2003 for Royce Select Fund). If you were to redeem the shares on or
after December 1, 2000 (June 1, 2003 for Royce Select Fund), they would not be
subject to the fee.
You will incur no fee on shares that you acquire through distribution
reinvestment or that you exchange into another Royce Fund. The following types
of shareholders and accounts are exempt from the early redemption fee: employees
of The Royce Fund, Royce or RFS or members of their immediate families or
employee benefit plans for them; participants in an Automatic Investment or
Withdrawal Plan; certain pre-approved group investment plans and charitable
organizations; profit-sharing trusts, corporations or other institutional
investors who are investment advisory clients of Royce; omnibus or similar
account customers of certain pre-approved broker-dealers and other institutions;
and Royce Trust & GiftShares Fund shareholders.
Other Redemption Information
The Royce Fund may suspend redemption privileges or postpone payment for
the Funds when the New York Stock Exchange is closed or during what the
Securities and Exchange Commission determines are emergency circumstances.
The Funds will normally make redemptions in cash, but The Royce Fund
reserves the right to satisfy a Fund shareholder's redemption request by
delivering selected shares or units of portfolio securities -- redemption in
kind -- under certain circumstances.
The Royce Fund reserves the right to involuntarily redeem Fund shares in
any account that falls below the minimum initial investment due to redemptions
by the shareholder. If at any time the balance in an account does not have a
value at least equal to the minimum initial investment, you may be notified that
the value of your account is below the Fund's minimum account balance
requirement. You would have 60 days to increase your account balance before the
account is closed. Proceeds would be paid promptly to the shareholder.
The Royce Fund also reserves the right to revise or suspend the exchange
privilege at any time.
Net Asset Value per Share
The price of shares that you purchase or redeem will be at their net asset
value. The net asset value per share (NAV) for each Fund is calculated at the
close of regular trading on the New York Stock Exchange (generally 4 p.m.
Eastern Time) and is determined every day that the Exchange is open. Net asset
value per share is calculated by dividing the value of a
THE ROYCE FUNDS PROSPECTUS | 23
<PAGE>
Fund's net assets by the number of its outstanding shares. Each Fund's
investments are valued based on market value or, if market quotations are not
readily available, at their fair value as determined in good faith under
procedures established by The Royce Fund's Board of Trustees.
The date on which your purchase, redemption or exchange of shares is
processed is the trade date, and the price used for the transaction is based on
the next calculation of net asset value after the order is processed.
Reports
The Royce Fund mails shareholder reports semi-annually and, to reduce
expenses, may mail only one copy to shareholders with the same last name and
sharing the same address. You can choose to receive separate report copies for
accounts registered to different members of the same household by calling
Investor Services at (800) 221-4268. Please allow 30 days for your request to be
processed. Please call Investor Services if you need additional report copies.
Dividends, Distributions and Taxes
Royce Total Return Fund pays dividends from its net investment income on a
quarterly basis and makes any distributions from net realized capital gains
annually in December. The other Funds pay any dividends from net investment
income and make any distributions from net realized capital gains each year in
December. Unless the shareholder chooses otherwise, dividends and distributions
will be reinvested automatically in additional shares of the Fund.
Selling or exchanging shares is a taxable event, and a shareholder may
realize a
- --------------------------------------------------------------------------------
TAXATION OF DISTRIBUTIONS
- --------------------------------------------------------------------------------
Each year, shareholders receive important tax information about the
distributions received in their account(s) for the prior calendar year. Unless
your account is an IRA or is otherwise exempt from taxation, all Fund
distributions are subject to Federal income tax regardless of whether you
receive them in cash or reinvest them in additional shares.
The taxation of distributions is not related to how long you have owned a Fund's
shares. The following table describes in general how distributions are taxed at
the Federal level. Except for Royce Total Return Fund, the Funds' distributions
normally consist primarily of capital gains:
Rate for 15% Rate for 28% and
Distribution tax bracket higher tax bracket
investors investors
================================================================================
Income dividend Ordinary Ordinary
income rate income rate
- --------------------------------------------------------------------------------
Short-term Ordinary Ordinary
capital gains income rate income rate
- --------------------------------------------------------------------------------
Long-term
capital gains 10% 20%
- --------------------------------------------------------------------------------
24 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
taxable gain or loss. Each Fund will report to shareholders the proceeds of
their redemption(s). The tax consequences of a redemption also depend on the
shareholder's cost basis, so shareholders should retain all account statements
for use in determining the tax consequences of redemptions.
The Internal Revenue Service will treat any loss you may have on the
redemption of a Fund's shares held for six months or less as a long-term capital
loss, up to the amount of any capital gain distributions you received from the
Fund during the time you held the shares.
You should carefully consider the tax implications of purchasing shares
shortly prior to a distribution. At the time of purchase, a Fund's net asset
value may include undistributed income or capital gains. When the Fund
subsequently distributes these amounts, they are taxable to the shareholder,
even though the distribution is economically a return of part of the
shareholder's investment.
The IRS requires that a Fund withhold 31% of taxable dividends, capital
gain distributions and redemptions paid to non-corporate shareholders who have
not complied with IRS regulations regarding taxpayer identification.
The above is only a summary of certain Federal income tax consequences of
investing in a Fund. Always consult a tax advisor with questions about Federal,
state or local tax consequences. The Statement of Additional Information
includes a more detailed discussion of Federal tax matters that may be relevant
to a shareholder.
THE ROYCE FUNDS PROSPECTUS | 25
<PAGE>
INVESTING IN ROYCE SELECT FUND
- --------------------------------------------------------------------------------
Who May Invest in the Fund
Royce Select Fund is designed primarily for clients of registered investment
advisors, and only those who meet the Securities and Exchange Commission's
definition of the term "qualified client" may purchase shares of the Fund. The
term qualified client includes:
(a) an individual who, or a corporation, partnership, trust or other
company that, Royce (and any person acting on its behalf) reasonably
believes, immediately prior to the purchase, has a net worth
(together, in the case of an individual, with assets jointly with a
spouse) of more than $1,500,000 at the time of the purchase; or
(b) an individual who, or a company that, immediately after the purchase
owns Fund shares having a net asset value of at least $750,000.
The requirement that Fund shares be purchased only by qualified clients
applies to both initial and subsequent investments in the Fund. Qualified
clients (or any persons acting on their behalf) must represent to The Royce Fund
and Royce in writing that they are investing in the Fund for their own accounts
and not with a view to transferring their Fund shares or any interest in them to
another person. The Royce Fund has imposed restrictions on transfers of the
Fund's shares in order to prevent persons who are not qualified clients from
purchasing them.
Performance Fee
As compensation for its services to the Fund and for paying the Fund's
other ordinary operating expenses as set forth below, Royce is entitled to
receive from the Fund a performance fee of 12.5% of the Fund's pre-fee total
return. For this purpose, total return is defined as total investment income
plus net realized and unrealized gains on investments. The fee, payable monthly,
is calculated and accrued daily, based on the value of the Fund's then current
assets.
Fees are subject to a high watermark test. Fund shares will not bear a fee
for any day on which the Fund's pre-fee cumulative total return does not exceed
its pre-fee cumulative total return as of the day on which a fee was last
accrued. However, Royce will not reimburse previously accrued fees because of
any negative total returns occurring after their accrual.
Responsibility for Payment of Other Operating Expenses
Royce is responsible for paying all of the Fund's other operating
expenses, except for brokerage commissions, taxes, interest, litigation expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business.
26 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
To Invest in Royce Select Fund
To open a new account directly with the Fund, please call Investor
Services at (800) 221-4268 for an Account Application. Investments in the Fund
may also be made through a registered investment advisor, broker-dealer, trust
company or other financial intermediary who has previously established a
relationship with Royce for this Fund. The minimum initial investment is
$50,000. The minimum subsequent investment is $1,000.
INVESTING IN ROYCE TRUST & GIFTSHARES FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The account options available to a donor under the Royce Trust &GiftShares Fund
trust adoption agreement are:
- --------------------------------------------------------------------------------
Withdrawal Option (Annual Exclusion):
A donor will use this option primarily to make a gift that may qualify for the
annual Federal gift tax exclusion and/or as a means to pay for the beneficiary's
college or other post-secondary education.
o The donor may design the trust to permit withdrawals to help pay for the
beneficiary's college or other post-secondary education; the trustee will
distribute the balance of the assets, if any, to the beneficiary at the
termination of the trust.
o The beneficiary will be taxed on all of the trust's income and capital
gains and may request that the trustee redeem Fund shares necessary to pay
any applicable taxes.
o The trustee will send an information statement to the beneficiary
annually, which shows the amount of income and capital gains that must be
reported on the beneficiary's tax returns for that year.
Accumulation Option (Unified Credit):
A donor will use this option primarily to make a gift while restricting access
to the gifted assets. This option does not allow the donor to use the Federal
annual gift tax exclusion, and there can be no distributions, to fund
educational expenses or otherwise, before the trust terminates.
o The trustee is responsible for filing all Federal and state income tax
returns and may redeem Fund shares necessary to pay any applicable taxes;
the trust will be taxed on all of its income and capital gains in excess
of $100 per year.
o The trustee will distribute assets to the beneficiary at the termination
of the trust.
An investment in Royce Trust &GiftShares Fund offers a unique way to make a
long-term gift to a child (minor or adult) or another individual. (You may not
open an account in Royce Trust &GiftShares Fund for yourself or your spouse.) A
Royce Trust &GiftShares Fund investment may qualify for the annual Federal gift
tax exclusion and may also help pay for a beneficiary's college or other
post-secondary education. To receive additional information or to open a Royce
Trust & GiftShares Fund account, call Investor Services at (800) 221-4268 for a
free information packet, which includes a trust adoption agreement. (A trustee
for an individual or organization may also open a Royce Trust & GiftShares Fund
account if the trust has a long-term duration, the provisions of the trust are
acceptable to The Royce Fund and the trustee has his, her or its own tax
advisor.) The minimum initial investment in Royce Trust &GiftShares Fund is
$5,000. An investor may make subsequent investments of $100 or more at any time
during the existence of the trust.
As independent trustee, State Street Bank & Trust Company will hold the
shares of a Royce Trust & GiftShares Fund account in trust until the termination
date you, the donor, specify. The duration of the trust may be as long as you
wish, but must be at least 10 years from the time you make the first
contribution to the Royce Trust &GiftShares Fund trust or until the beneficiary
reaches the age of majority, whichever is later. A Royce Trust & GiftShares Fund
trust is irrevocable; neither the donor nor the beneficiary may amend its terms
in any way. When the trust terminates, the benficiary will receive the shares in
the account. The beneficiary may then continue to own the shares, but may not
purchase additional shares with the exception of reinvested distributions.
THE ROYCE FUNDS PROSPECTUS | 27
<PAGE>
Tax Information
The opening of a Royce Trust & GiftShares Fund trust account, as well as
any additional investments made to an existing account, will be subject to the
reporting requirements of Federal gift tax law. In general, the law requires
that an individual file a Federal gift tax return, which reports all gifts made
during the calendar year, except gifts of present interests in property that
qualify for, and do not exceed, the amount of the Federal annual gift tax
exclusion (currently $10,000). The option that the donor selects in the trust
adoption agreement will determine whether or not a particular gift of Fund
shares qualifies for the annual exclusion. A gift of Fund shares may also be
subject to state gift tax reporting under the laws of the state in which the
donor resides.
There is additional information about these and other tax matters
applicable to an investment in Royce Trust &GiftShares Fund in the Statement of
Additional Information under "Taxation - Royce Trust & GiftShares Fund." Due to
the complexity of Federal and state laws pertaining to all gifts in trust,
prospective donors should consider consulting with an attorney or other
qualified tax advisor before investing in Royce Trust & GiftShares Fund.
Redemption Information
Until a Royce Trust &GiftShares Fund trust terminates, only the
independent trustee, as the legal owner of the shares, may redeem them. The
trustee's capacity and ability to redeem shares, and the beneficiary's right to
compel redemption, are subject to the terms and conditions of the Royce Trust &
GiftShares Fund Trust Instrument.
28 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
For More Information
TheRoyceFund
More information on The Royce Fund is available free upon request, including the
following:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about a Fund's investments, together with a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance, is available in the Funds' annual and semi-annual reports to
shareholders.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
Provides more details about The Royce Fund and its policies. A current SAI is on
file with the Securities and Exchange Commission ("SEC") and is incorporated by
reference (is legally considered part of this prospectus).
To obtain more information:
By telephone
Call (800) 221-4268
By mail
Write to:
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
By E-mail
Send your request to:
[email protected]
Through the Internet
Prospectuses, applications, IRA forms and additional information are available
through our website at http://www.roycefunds.com
Text only versions of the Funds' prospectus, SAI and other documents filed with
the SEC can be viewed online or downloaded from: http://www.sec.gov
You can also obtain copies of documents filed with the SEC by visiting the SEC's
Public Reference Room in Washington, DC (telephone (800) SEC-0330) or by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009.
A separate Shareholder Guide has been prepared for direct shareholders and is
available free upon request. The Guide contains important shareholder
information, including how to purchase and redeem shares of the Funds.
SEC File # 811-03599
<PAGE>
PROSPECTUS
================================================================================
TheRoyceFund
---------------------------------------------------------
VALUE INVESTING IN SMALL COMPANIES FOR MORE THAN 25 YEARS
---------------------------------------------------------
Royce Micro-Cap Fund
Pennsylvania Mutual Fund
Royce Trust & GiftShares Fund
Consultant Class Shares
================================================================================
PROSPECTUS
May 1, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities, or determined that the information
in this prospectus is accurate or complete. It is a crime to represent
otherwise.
<PAGE>
PROSPECTUS
TABLE OF CONTENTS
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Overview 1
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Royce Micro-Cap Fund 2
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Pennsylvania Mutual Fund 4
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Royce Trust & GiftShares Fund 6
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Investing in Small-Company Stocks 8
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Management of the Funds 10
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General Shareholder Information 12
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Investing in Royce Trust & GiftShares Fund 15
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<PAGE>
OVERVIEW
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"At Royce & Associates, Inc. ("Royce"), the Funds' investment adviser, we
attempt to invest in equity securities of small- and micro-cap companies that
are trading significantly below our assessment of their current worth. We base
our assessment on either what we believe a knowledgeable buyer might pay to
acquire the entire company, or what we think the value of the company should be
in the stock market. This analysis takes into consideration a number of relevant
factors, including the company's future growth prospects. We select securities
using a risk-averse value approach, with the expectation that their market
prices should increase toward our estimate of their current worth, resulting in
capital appreciation for Fund investors.
"Our Funds' ability to achieve their goals will depend largely on our
skill in selecting their portfolio companies using our risk-averse value
approach. It will also rest on the degree to which the markets eventually
recognize our assessment of the current worth of these companies."
- Chuck Royce
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This Prospectus relates only to the Consultant Class of shares of The
Royce Funds, which are generally offered only through certain broker-dealers
and/or financial intermediaries.
The information on pages 2-7 about each Fund's investment goals and
principal strategies and about the primary risks for a Fund's investors is based
on, and should be read in conjunction with, the information on pages 8-9 of this
Prospectus. This section includes information about the investment and risk
characteristics of small- and micro-cap companies, the market for their
securities and Royce's risk-averse value approach to investing.
The performance information presented in this Prospectus is current to
December 31, 1999. For more recent information, please visit our web site at
www.roycefunds.com or contact The Royce Fund through any of the methods listed
on the back cover of this Prospectus.
The Funds included in this Prospectus may be a suitable investment as part
of your overall investment plan if you want to include a fund (or funds) that
focuses on small- and/or micro-cap companies.
THE ROYCE FUNDS PROSPECTUS | 1
<PAGE>
ROYCE MICRO-CAP FUND
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INVESTMENT GOAL AND PRINCIPAL STRATEGIES
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Royce Micro-Cap Fund's investment goal is long-term growth of capital. Royce
invests the Fund's assets primarily in a broadly diversified portfolio of equity
securities issued by micro-cap companies (companies with stock market
capitalizations less than $300 million). Royce selects these securities from a
universe of more than 6,200 micro-cap companies, generally focusing on companies
that it believes are trading considerably below its estimate of their current
worth.
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of small-cap (companies with stock market
capitalizations below $1.5 billion) and micro-cap companies. At least 65% of its
assets will be in micro-cap securities at the time of investment. Royce expects
the Fund's portfolio to have a median market cap below $300 million.
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PORTFOLIO DIAGNOSTICS (12/31/99)
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Number of Securities 134
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Median Market Capitalization $175 Million
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PRIMARY RISKS FOR FUND INVESTORS
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As with any mutual fund that invests in common stocks, Royce Micro-Cap Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you may lose money
over short or even long periods of time.
The prices of micro-cap securities are generally even more volatile and
their markets are less liquid relative to both small-cap and large-cap
securities. Therefore, the Fund may involve considerably more risk of loss and
its returns may differ significantly from funds investing in small- or
larger-cap companies or other asset classes.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. The sale of Consultant Class shares commenced on May 4, 1998. The
performance information prior to that date is for Investment Class shares that
have no 12b-1 fees or deferred sales charge. If Consultant Class's 12b-1 fees
had been reflected, total returns prior to May 4, 1998 would have been lower.
Past performance does not indicate how the Fund will perform in the future.
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CALENDAR YEAR RETURNS - in Percentages (%)
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[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ----
12.67 -3.87 24.69 15.54 19.06 3.55 23.67 29.41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
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From Inception
1 Year 3 Year 5 Year 12/31/91
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RMC 12.67 10.53 13.19 15.09
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Russell 2000 21.26 13.08 16.69 14.66
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During the period shown in the bar chart, the highest return for a calendar
quarter was 22.36% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -20.84% (quarter ended 9/30/98).
2 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
TICKER: RYMCX
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FEES AND EXPENSES OF THE FUND
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The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
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Maximum deferred sales charge 1.00%
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Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fee None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.50%
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Distribution (12b-1) fees 1.00%
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Other expenses 1.49%
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Total Annual Fund Operating Expenses 3.99%
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Fee waiver and expense reimbursement (1.50)%
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Net Annual Fund Operating Expenses 2.49%
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Royce has contractually agreed to waive its fees and reimburse expenses to the
extent necessary to maintain the Fund's Net Annual Operating Expense ratio at or
below 2.49% through December 31, 2000 and 2.99% through December 31, 2009.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's net operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$252 $878 $1,528 $3,273
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FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception of the Class and reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Period Ended December 31, 1999 1998*
=================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $8.50 $10.58
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Income from Investment Operations
Net investment loss (0.16) (0.07)
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Net gains (losses) on securities (both realized and unrealized) 1.23 (1.50)
- -------------------------------------------------------------------------------------------------
Total from Investment Operations 1.07 (1.57)
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Less Distributions
Dividends from net investment income -- (0.01)
- -------------------------------------------------------------------------------------------------
Distributions from capital gains (0.12) (0.50)
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Total Distributions (0.12) (0.51)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.45 $8.50
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Total Return 12.7% (14.6)%
- -------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (thousands) $1,163 $751
- -------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets** 2.49% 2.49%***
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Ratio of Net Investment Loss to Average Net Assets (1.71)% (1.62)%***
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 56%
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</TABLE>
* The Class commenced operations on May 4, 1998.
** For 1999 and 1998, these ratios would have been 3.99% and 4.52%,
respectively, before fee waivers and expense reimbursements by Royce.
*** Annualized
THE ROYCE FUNDS PROSPECTUS | 3
<PAGE>
PENNSYLVANIA MUTUAL FUND
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INVESTMENT GOAL AND PRINCIPAL STRATEGIES
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Pennsylvania Mutual Fund's investment goal is long-term growth of capital. Royce
invests the Fund's assets primarily in a broadly diversified portfolio of equity
securities issued by both small- and micro-cap companies that it believes are
trading significantly below its estimate of their current worth. In the upper
end of the small-cap range (companies with stock market capitalizations from
$300 million to $1.5 billion), the Fund generally invests in securities of
companies that Royce believes have excellent business strengths, high internal
rates of return and low leverage. In the lower end of the range (market
capitalizations less than $300 million), the Fund invests in securities,
selected by Royce from a universe of more than 6,200 micro-cap companies, that
it believes are trading significantly below its estimate of their current worth.
Normally, the Fund will invest at least 65% of its assets in the common
stocks and convertible securities of such small- and micro-cap companies. Royce
expects the Fund's portfolio to have a median market cap below $1 billion.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
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Number of Securities 188
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Median Market Capitalization $412 Million
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PRIMARY RISKS FOR FUND INVESTORS
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As with any mutual fund that invests in common stocks, Pennsylvania Mutual Fund
is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will fluctuate with the market, and you may lose money
over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year over the
last 10 years, and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. The sale of Consultant Class shares commenced on June 18, 1997. The
performance information prior to that date is for Investment Class shares that
have no 12b-1 fees or deferred sales charge. If Consultant Class's 12b-1 fees
had been reflected, total returns prior to June 18, 1997 would have been lower.
Past performance does not indicate how the Fund will perform in the future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5.26 3.35 24.96 12.85 18.72 -0.72 11.25 16.19 31.83 -11.54
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
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1 Year 3 Year 5 Year 10 Year 20 Year
- --------------------------------------------------------------------------------
PMF 5.26 10.68 12.65 10.50 14.02
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 16.69 13.40 13.96
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.24% (quarter ended 3/31/91) and the lowest return for a calendar
quarter was -16.55% (quarter ended 9/30/90).
4 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
FEES AND EXPENSES OF THE FUND TICKER: RYPCX
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge 1.00 %
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fee None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 0.78%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.24%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.02%
- --------------------------------------------------------------------------------
Fee Waiver (0.25)%
- --------------------------------------------------------------------------------
Net Fund Operating Expenses 1.77%
- --------------------------------------------------------------------------------
The Fund's distributor has contractually agreed to waive 0.25% of its fee
through December 31, 2000.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's total operating expenses (net of fee waiver in year 1) remain the same.
Although your actual costs may be higher or lower, based on the assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$180 $609 $1,065 $2,328
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception of the Class and reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned each period on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Period Ended December 31, 1999 1998 1997*
=======================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $7.34 $7.81 $7.90
- -------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income (loss) (0.02) (0.01) 0.02
- -------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 0.39 0.24 0.93
- -------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.37 0.23 0.95
- -------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- -- (0.04)
- -------------------------------------------------------------------------------------------------------
Distributions from capital gains (0.43) (0.70) (1.00)
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.43) (0.70) (1.04)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.28 $7.34 $7.81
- -------------------------------------------------------------------------------------------------------
Total Return 5.3% 3.4% 12.0%
- -------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $129 $140 $152
- -------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets** 1.77% 1.74% 1.65%***
- -------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income (loss) to Average Net Assets (0.24)% (0.11)% 0.29%***
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 29% 18%
- -------------------------------------------------------------------------------------------------------
</TABLE>
* The Class commenced operations on June 18, 1997.
** For 1999, 1998 and 1997, these ratios woud have been 2.02%, 1.99%, and 2.00%,
respectively, before fee waiver and expense reimbursments by Royce.
*** Annualized
THE ROYCE FUNDS PROSPECTUS | 3
<PAGE>
ROYCE TRUST & GIFTSHARES FUND
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INVESTMENT GOAL AND PRINCIPAL STRATEGIES
- --------------------------------------------------------------------------------
The investment goal of Royce Trust & GiftShares Fund, a special-purpose fund, is
long-term growth of capital. Royce invests the Fund's assets primarily in a
limited number of equity securities issued by small- and micro-cap companies.
Royce selects these securities from a universe of more than 8,000 companies,
generally focusing on companies that it believes are trading significantly below
its estimate of their current worth.
The Fund is designed to enable investors to make long-term gifts that may
qualify for the Federal annual gift tax exclusion and that may also may be used
to help pay for the beneficiary's college and other post-secondary education.
See p.15 for more information.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities. At least 75% of these securities will be issued by
small-cap companies (less than $1.5 billion in market capitalization). Royce
expects the Fund's portfolio to have a median market cap below $1 billion.
- --------------------------------------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/99)
- --------------------------------------------------------------------------------
Number of Securities 48
- --------------------------------------------------------------------------------
Median Market Capitalization $383 Million
- --------------------------------------------------------------------------------
PRIMARY RISKS FOR FUND INVESTORS
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Trust & GiftShares
Fund is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of an
investment in the Fund will fluctuate with the market, and a Fund trust account
could lose money over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their markets are less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes. The Fund's limited portfolio may also involve more risk to investors
than a more broadly diversified portfolio of small- and micro-cap securities
because it may be more susceptible to any single corporate, economic, political,
regulatory or market event.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. The
sale of Consultant Class shares commenced on September 26, 1997. The performance
information prior to that date is for Investment Class shares that have no 12b-1
fees or deferred sales charge. If Consultant Class's 12b-1 fees and deferred
sales charge had been reflected, total returns prior to September 26, 1997 would
have been lower. Past performance does not indicate how the Fund will perform in
the future.
- --------------------------------------------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996
---- ---- ---- ----
40.34 18.54 25.51 25.55
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 33.19% (quarter ended 6/30/99) and the lowest return for a calendar
quarter was -18.15% (quarter ended 9/30/98).
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
From Inception
1 Year 3 Year 12/27/95
================================================================================
RTG 35.84 27.11 26.91
- --------------------------------------------------------------------------------
Russell 2000 21.26 13.08 14.05
- --------------------------------------------------------------------------------
Unlike the bar chart, the annualized returns reflect the maximum applicable
deferred sales charge if shares had been redeemed on 12/31/99.
6 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
FEES AND EXPENSES OF THE FUND TICKER: RGFCX
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
================================================================================
Maximum sales charge (load) imposed on purchases None
- --------------------------------------------------------------------------------
Maximum deferred sales charge 5.00%
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- --------------------------------------------------------------------------------
Redemption fee None
- --------------------------------------------------------------------------------
Annual Trustee's Fee $50
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
================================================================================
Management fees 1.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) fees 1.00%
- --------------------------------------------------------------------------------
Other expenses 1.53%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.53%
- --------------------------------------------------------------------------------
Fee waiver (1.04)%
- --------------------------------------------------------------------------------
Net Annual Fund Operating Expenses 2.49%
- --------------------------------------------------------------------------------
* Royce has contractually agreed to waive its fees and reimburse expenses to the
extent necessary to maintain the Fund's Net Annual Operating Expense ratio at or
below 2.49% through December 31, 2000 and 2.99% through December 31, 2009.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's net operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$713 $1,251 $1,695 $3,068
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
================================================================================
$252 $878 $1,528 $3,068
Exclusive of $50 annual trustee's fee per trust account. For trust accounts
opened prior to or during 1999, Royce will pay that portion of the currently
effective annual trustee's fee in excess of $50 per account and the trustee's
fees for establishing and terminating the trusts.
- --------------------------------------------------------------------------------
Financial Highlights Information
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception of the Class and reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned each period on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Period Ended December 31, 1999 1998 1997*
======================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $8.14 $6.88 $7.21
- ------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment loss (0.09) (0.06) (0.01)
- ------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 3.25 1.34 0.11
- ------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.16 1.28 0.10
- ------------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment income -- -- --
- ------------------------------------------------------------------------------------------------------
Distributions from capital gains (1.39) (0.02) (0.43)
- ------------------------------------------------------------------------------------------------------
Total Distributions (1.39) (0.02) (0.43)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.91 $8.14 $6.88
- ------------------------------------------------------------------------------------------------------
Total Return 40.3% 18.5% 1.5%
- ------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (thousands) $3,469 $1,276 $107
- ------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets** 2.49% 2.49% 2.49%***
- ------------------------------------------------------------------------------------------------------
Ratio of Net Investment Loss to Average Net Assets (1.60)% (1.39)% (1.35)%***
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 152% 153% 64%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* The Class commenced operations on September 26, 1997.
** For 1999, 1998 and 1997, these ratios would have been 3.53%, 4.70% and
30.28%, respectively, before fee waivers and expense reimbursements by Royce.
*** Annualized
THE ROYCE FUNDS PROSPECTUS | 7
<PAGE>
INVESTING IN SMALL-COMPANY STOCKS
- --------------------------------------------------------------------------------
Small-capitalization stocks or Small-caps are stocks with market capitalizations
of $1.5 billion or less.
Market capitalization is the number of a company's outstanding shares of stock
multiplied by its most recent closing price per share.
The Russell 2000 is an unmanaged index of U.S. small-company common stocks that
Royce and others use to benchmark the performance of small- and micro-cap funds.
It includes the smallest 2,000 companies (based on market capitalization) among
the largest 3,000 companies tracked by Frank Russell Company.
Small- and Micro-Cap Stocks
Royce views the large and diverse universe of small-cap companies as having two
investment segments or tiers. While small-caps are generally defined as those
companies with market capitalizations of less than $1.5 billion, Royce refers to
the segment of small-cap companies with market capitalizations below $300
million as micro-cap.
Small-and micro-cap companies offer investment opportunities and
additional risks. They may not be well known to the investing public, may not be
significantly owned by institutional investors and may not have steady earnings
growth. In addition, the securities of such companies may be more volatile in
price, have wider spreads between their bid and ask prices and have
significantly lower trading volumes than larger capitalization stocks. As a
result, the purchase or sale of more than a limited number of shares of a small-
or micro-cap security may affect its market price. Royce may need a considerable
amount of time to purchase or sell its positions in these securities,
particularly when other Royce-managed accounts or other investors are also
seeking to purchase or sell them. Accordingly, Royce's investment focus on
small- and micro-cap securities generally requires it to have a long-term (at
least three years) investment outlook for a portfolio security.
The micro-cap segment consists of more than 6,200 companies with market
caps below $300 million. These companies are followed by relatively few, if any,
securities analysts, and there tends to be less publicly available information
about them. Their securities generally have even more limited trading volumes
and are subject to even more abrupt or erratic market price movements than are
the securities in the upper tier, and Royce may be able to deal with only a few
market-makers when purchasing and selling these securities. Such companies may
also have limited product lines, markets or financial resources, may lack
management depth and may be more vulnerable to adverse business or market
developments. These conditions, which create greater opportunities to find
securities trading well below Royce's estimate of the company's current worth
and involve increased risk, lead Royce to more broadly diversify most of the
Funds investing in the micro-cap tier by holding proportionately smaller
positions in more companies.
The upper tier of the small-cap universe of securities consists of
approximately 1,700 companies with market caps between $300 million and $1.5
billion. In this segment, there is a relatively higher level of ownership by
institutional investors and more research coverage by brokers than generally
exists for micro-cap companies. This greater attention makes the market for
these securities more efficient compared to micro-cap securities in that they
have somewhat greater trading volumes and narrower bid/ask spreads. As a result,
Royce normally employs a more concentrated approach when investing in the upper
tier of small-caps, holding proportionately larger positions in a relatively
limited number of securities (generally fewer than 60).
8 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
Value Investing
Royce uses a "value" method in managing the Funds' assets. In selecting
securities for the Funds, Royce evaluates the quality of a company's balance
sheet, the level of its cash flows and various measures of a company's
profitability. Royce then uses these factors to assess the company's current
worth. Royce bases this assessment on either what it believes a knowledgeable
buyer might pay to acquire the entire company or what it thinks the value of the
company should be in the stock market, taking into consideration a number of
relevant factors, including the company's future growth prospects.
Royce attempts to identify and invest in securities of companies that are
trading significantly below its estimate of the company's current worth, with
the expectation that the market price of its securities should increase over a
three- to five-year period towards this estimate, resulting in capital
appreciation for Fund investors.
Royce's value approach strives to reduce some of the risks of investing in
small and micro-cap securities for each Fund's portfolio taken as a whole. In
addition to focusing on companies trading significantly below its estimate of
their current worth, to reduce valuation risk, Royce evaluates various other
risk factors in selecting securities for the Funds. Royce attempts to lessen
financial risk by buying companies that combine strong balance sheets with low
leverage. Other than for Royce Trust & GiftShares Fund, which limits the number
of securities in its portfolio, Royce attempts to decrease portfolio risk in the
micro-cap segment of the small-cap universe by broadly diversifying portfolio
holdings.
While there can be no assurance that this risk-averse value approach will
be successful, Royce believes that it can reduce some of the risks of investing
in small- and micro-cap companies, which are inherently fragile in nature and
whose securities have substantially greater market price volatility.
Additionally, although Royce's approach to security selection seeks to
reduce downside risk to Fund portfolios during periods of broad small-cap market
declines, it may also reduce gains in strong small-cap up markets.
Temporary Investments
Each of the Funds may invest in short-term fixed income securities for
temporary defensive purposes, to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. If a Fund should implement a
temporary investment policy, it may not achieve its investment goal while that
policy is in effect.
THE ROYCE FUNDS PROSPECTUS | 9
<PAGE>
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
Royce attempts to invest in equity securities of small- and micro-cap companies
that are trading significantly below our assessment of their current worth, with
the expectation that their market prices should increase toward this estimate,
resulting in capital appreciation for Fund investors.
[PHOTOS OMITTED]
(l-r) Jack Fockler, Whitney George,
Chuck Royce, Charlie Dreifus, Buzz Zaino
Royce & Associates Inc. is the Funds' investment adviser and is responsible for
the management of their assets. Royce has been investing in small-cap securities
with a value approach for more than 25 years. Its offices are located at 1414
Avenue of the Americas, New York, NY 10019. Charles M. Royce has been the firm's
President and Chief Investment Officer since 1973. He is also the primary
portfolio manager of the Funds' portfolios.
Mr. Royce is assisted by Royce's investment staff, which includes Mr.
George, Managing Director, Vice President and Senior Portfolio Manager; Mr.
Zaino, Managing Director and Senior Portfolio Manager; and Charles R. Dreifus,
Principal and Senior Portfolio Manager; and by Jack E. Fockler, Jr., Managing
Director and Vice President. Mr. George has been employed by Royce since 1991.
Mr. Zaino joined Royce in April 1998 and previously was Group Managing Director
at Trust Company of the West (since 1984). Mr. Dreifus joined Royce in February
1998 and previously was Managing Director (since June 1995) and General Partner
(from 1983 until June 1995) of Lazard Freres & Co. LLC. Mr. Fockler has been
employed by Royce since 1989.
Royce Fund Services, Inc. ("RFS") distributes the Funds' shares. The Royce
Fund has adopted a distribution plan for the Consultant Class shares of Royce
Micro-Cap Fund, Pennsylvania Mutual Fund and Royce Trust & GiftShares Fund under
Rule 12b-1. Under this plan, the Funds are obligated to pay a fee to RFS of up
to 1.00% per year of their respective average net assets. RFS uses this fee to
cover sales-related and shareholder servicing costs and to pay sales commissions
and other fees to broker-dealers who introduce investors to the Funds. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
State Street Bank & Trust Company is the custodian of the Funds'
securities, cash and other assets. State Street's agent, National Financial Data
Services ("NFDS"), is the Funds' transfer agent.
10 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
- --------------------------------------------------------------------------------
Royce receives advisory fees monthly as compensation for its services to the
Funds. The annual rates of these fees, before any waiver required to cap the
expense ratios of certain Funds at specified levels as shown in the Fees and
Expenses table, are:
- --------------------------------------------------------------------------------
o 1.5% of the average net assets of Royce Micro-Cap Fund.
o 1% of the first $50 million of Pennsylvania Mutual Fund's average net
assets, 0.875% of the next $50 million of its average net assets and 0.75%
of its average net assets in excess of $100 million.
o 1% of the average net assets of Royce Trust & GiftShares Fund.
For 1999, the fees paid to Royce on average net assets were 1.13% for Royce
Micro-Cap Fund, 0.78% for Pennsylvania Mutual Fund and 0.62% for Royce Trust &
GiftShares Fund.
- --------------------------------------------------------------------------------
THE ROYCE FUNDS PROSPECTUS | 11
<PAGE>
GENERAL SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
Net Asset Value (NAV) is the value of the Fund's net assets divided by the
number of its outstanding shares.
For more detailed discussion of The Royce Fund policies regarding direct
ownership of Fund shares, including information on opening accounts, buying,
redeeming, exchanging and transferring ownership of Fund shares, please refer to
The Royce Fund's Shareholder Guide dated May 1, 2000.
Purchasing Shares
If you purchase Fund shares through a third party, such as a discount or
full-service broker-dealer, bank or other financial intermediary, investment
minimums, commissions, fees, policies and procedures may differ from those
described in this Prospectus. If you purchase Fund shares through a third party,
the shares may be held in the name of the third party on the Fund's books. RFS,
Royce and/or the Funds may compensate broker-dealers, financial intermediaries
and other service providers who introduce investors to the Funds and/or provide
certain administrative services to their customers who own Fund shares.
For the year ended December 31, 1999, Royce made payments for distribution
services to broker-dealers out of its own resources in the amount of $1,290,415.
- --------------------------------------------------------------------------------
PURCHASING SHARES
- --------------------------------------------------------------------------------
Minimum initial investments for shares purchased directly from The Royce Fund,
other than Royce Trust & GiftShares and Royce Select Funds:
Account Type Minimum
================================================================================
Regular Account $ 2,000
- --------------------------------------------------------------------------------
IRA 500
- --------------------------------------------------------------------------------
Automatic Investment or
Direct Deposit Plan Accounts 500
- --------------------------------------------------------------------------------
403(b)(7) or 401(k) Accounts None
- --------------------------------------------------------------------------------
The subsequent investment minimum is $50, regardless of account type.
The Royce Fund reserves the right both to suspend the offering of any Fund's
shares to new investors and to reject any specific purchase request.
- --------------------------------------------------------------------------------
Redeeming Shares
Contingent Deferred Sales Charge
The Funds offer Consultant Class shares at net asset value with no
front-end sales charge. However, the shares are subject to a 1.00% 12b-1
distribution fee. After approximately eight years Royce Trust & GiftShares Fund
accounts automatically convert into Investment Class shares that are identical
to Consultant Class shares, but that bear only a 0.25% 12b-1 distribution fee
and are not subject to any contingent deferred sales charges. Consultant Class
shares of
12 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
the Funds also bear declining contingent deferred sales charges on shares
redeemed within a specified period following their purchase (see table below).
The contingent deferred sales charge is a percentage of the purchase price of
the shares being redeemed, and the fee is paid to RFS.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
YEARS AFTER PURCHASE
- ---------------------------------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 5-6 6-7
=======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Royce Micro-Cap Fund 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
- ---------------------------------------------------------------------------------------
Pennsylvania Mutual Fund 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
- ---------------------------------------------------------------------------------------
Royce Trust & GiftShares Fund 5.00% 4.50% 4.00% 3.50% 2.50% 1.50% 0.00%
- ---------------------------------------------------------------------------------------
</TABLE>
The 0-1-year period ends on the day before the one-year anniversary date of the
purchase and so on for the other time periods. Redemptions of shares acquired
through reinvestment of distributions, shares that you exchange between
Consultant Class Shares of Royce Micro-Cap Fund and Pennsylvania Mutual Fund or
redemptions of shares to pay taxes or trustee fees in Royce Trust & GiftShares
Fund accounts do not bear the contingent deferred sales charge.
Other Redemption Information
The Royce Fund may suspend redemption privileges or postpone payment for
the Funds when the New York Stock Exchange is closed or during what the
Securities and Exchange Commission determines are emergency circumstances.
The Funds will normally make redemptions in cash, but The Royce Fund
reserves the right to satisfy a Fund shareholder's redemption request by
delivering selected shares or units of portfolio securities -- redemption in
kind -- under certain circumstances.
The Royce Fund reserves the right to involuntarily redeem Fund shares in
any account that falls below the minimum initial investment due to redemptions
by the shareholder. If at any time the balance in an account does not have a
value at least equal to the minimum initial investment, you may be notified that
the value of your account is below the Fund's minimum account balance
requirement. You would have 60 days to increase your account balance before the
account is closed. Proceeds would be paid promptly to the shareholder.
The Royce Fund also reserves the right to revise or suspend the exchange
privilege at any time.
Net Asset Value per Share
The net asset value per share (NAV) for each Fund is calculated at the
close of regular trading on the New York Stock Exchange (generally 4 p.m.
Eastern Time) and is determined every day that the Exchange is open. Net asset
value per share is calculated by dividing the value of a Fund's net assets by
the number of its outstanding shares. Each Fund's investments are valued based
on market value or, if market quotations are not readily available, at their
fair value as determined in good faith under procedures established by The Royce
Fund's Board of Trustees.
The date on which your purchase, redemption or exchange of shares is
processed is the trade date, and the price used for the transaction is based on
the next calculation of net asset value after the order is processed.
THE ROYCE FUNDS PROSPECTUS | 13
<PAGE>
Reports
The Royce Fund mails shareholder reports semi-annually and, to reduce
expenses, may mail only one copy to shareholders with the same last name and
sharing the same address. You can choose to receive separate report copies for
accounts registered to different members of the same household by calling
Investor Services at (800) 221-4268. Please allow 30 days for your request to be
processed. Please call Investor Services if you need additional report copies.
Dividends, Distributions and Taxes
The Funds pay any dividends from net investment income and make any
distributions from net realized capital gains each year in December. Unless the
shareholder chooses otherwise, dividends and distributions will be reinvested
automatically in additional shares of the Fund.
Selling or exchanging shares is a taxable event, and a shareholder may
realize a taxable gain or loss. Each Fund will report to shareholders the
proceeds of their redemption(s). The tax consequences of a redemption also
depend on the shareholder's cost basis, so shareholders should retain all
account statements for use in determining the tax consequences of redemptions.
The Internal Revenue Service will treat any loss you may have on the
redemption of a Fund's shares held for six months or less as a long-term capital
loss, up to the amount of any capital gain distributions you received from the
Fund during the time you held the shares.
You should carefully consider the tax implications of purchasing shares
shortly prior to a distribution. At the time of purchase, a Fund's net asset
value may include undistributed income or capital gains. When the Fund
subsequently distributes these amounts, they are
- --------------------------------------------------------------------------------
TAXATION OF DISTRIBUTIONS
- --------------------------------------------------------------------------------
Each year, shareholders receive important tax information about the
distributions received in their account(s) for the prior calendar year. Unless
your account is an IRA or is otherwise exempt from taxation, all Fund
distributions are subject to Federal income tax regardless of whether you
receive them in cash or reinvest them in shares.
The taxation of distributions is not related to how long you have owned a Fund's
shares. The following table describes in general how distributions are taxed at
the Federal level. The Funds' distributions normally consist primarily of
capital gains:
Rate for 15% Rate for 28% and
Distribution tax bracket higher tax bracket
investors investors
================================================================================
Income dividend Ordinary Ordinary
income rate income rate
- --------------------------------------------------------------------------------
Short-term Ordinary Ordinary
capital gains income rate income rate
- --------------------------------------------------------------------------------
Long-term
capital gains 10% 20%
- --------------------------------------------------------------------------------
14 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
taxable to the shareholder, even though the distribution is economically a
return of part of the shareholder's investment.
The IRS requires that a Fund withhold 31% of taxable dividends, capital
gain distributions and redemptions paid to non-corporate shareholders who have
not complied with IRS regulations regarding taxpayer identification.
The above is only a summary of certain federal income tax consequences of
investing in a fund. Always consult a tax advisor with questions about Federal,
state or local tax consequences. The Statement of Additional Information
includes a more detailed discussion of Federal tax matters that may be relevant
to a shareholder.
INVESTING IN ROYCE TRUST & GIFTSHARES FUND
- --------------------------------------------------------------------------------
An investment in Royce Trust & GiftShares Fund offers a unique way to make a
long-term gift to a child (minor or adult) or another individual. (You may not
open an account in Royce Trust & GiftShares Fund for yourself or your spouse.) A
Royce Trust & GiftShares Fund investment may qualify for the Federal annual gift
tax exclusion and may also help pay for a beneficiary's college or other
post-secondary education. To receive additional information or to open a Royce
Trust & GiftShares Fund account, call Investor Services at (800) 221-4268 for a
free information packet, which includes a trust adoption agreement. (A trustee
for an individual or organization may also open a Royce Trust & GiftShares Fund
account if the trust has a long-term duration, the provisions of the trust are
acceptable to The Royce Fund and the trustee has his, her or its own tax
advisor.) The minimum initial investment in Royce Trust & GiftShares Fund is
$5,000. An investor may make subsequent investments of $100 or more at any time
during the existence of the trust.
As independent trustee, State Street Bank & Trust Company will hold the
shares of a Royce Trust & GiftShares Fund account in trust until the termination
date you, the donor, specify. The duration of the trust may be as long as you
wish, but must be at least 10 years from the time you make the first
contribution to the Royce Trust & GiftShares Fund trust or until the beneficiary
reaches the age of majority, whichever is later. A Royce Trust & GiftShares Fund
trust is irrevocable; neither the donor nor the beneficiary may amend its terms
in any way. When the trust terminates, the beneficiary will receive the shares
in the account. The beneficiary may then continue to own the shares, but may not
purchase additional shares with the exception of reinvested distributions.
Tax Information
The opening of a Royce Trust & GiftShares Fund trust account, as well as
any additional investments made to an existing account, will be subject to the
reporting requirements of Federal gift tax law. In general, the law requires
that an individual file a Federal gift tax return, which reports all gifts made
during the calendar year, except gifts of present interests in property that
qualify for, and do not exceed, the amount of the Federal annual gift tax
exclusion (currently $10,000). The option that the donor selects in the trust
adoption agreement
THE ROYCE FUNDS PROSPECTUS | 15
<PAGE>
will determine whether or not a particular gift of Fund shares qualifies for the
annual exclusion. A gift of Fund shares may also be subject to state gift tax
reporting under the laws of the state in which the donor resides.
There is additional information about these and other tax matters
applicable to an investment in Royce Trust & GiftShares Fund in the Statement of
Additional Information under "Taxation - Royce Trust & GiftShares Fund." Due to
the complexity of Federal and state laws pertaining to all gifts in trust,
prospective donors should consider consulting with an attorney or other
qualified tax advisor before investing in Royce Trust & GiftShares Fund.
- --------------------------------------------------------------------------------
The account options available to a donor under the Royce Trust & GiftShares Fund
trust adoption agreement are:
- --------------------------------------------------------------------------------
Withdrawal Option (Annual Exclusion):
A donor will use this option primarily to make a gift that may qualify for the
Federal annual gift tax exclusion and/or as a means to pay for the beneficiary's
college or other post-secondary education.
o The donor may design the trust to permit withdrawals to help pay for the
beneficiary's college or other post-secondary education; the trustee will
distribute the balance of the assets, if any, to the beneficiary at the
termination of the trust.
o The beneficiary will be taxed on all of the trust's income and capital
gains and may request that the trustee redeem Fund shares necessary to pay
any applicable taxes.
o The trustee will send an information statement to the beneficiary
annually, which shows the amount of income and capital gains that must be
reported on the beneficiary's tax returns for that year.
Accumulation Option (Unified Credit):
A donor will use this option primarily to make a gift while restricting access
to the gifted assets. This option does not allow the donor to use the Federal
annual gift tax exclusion, and there can be no distributions, to fund
educational expenses or otherwise, before the trust terminates.
o The trustee is responsible for filing all Federal and state income tax
returns and may redeem Fund shares necessary to pay any applicable taxes;
the trust will be taxed on all of its income and capital gains in excess
of $100 per year.
o The trustee will distribute assets to the beneficiary at the termination
of the trust.
Redemption Information
Until a Royce Trust & GiftShares Fund trust terminates, only the
independent trustee, as the legal owner of the shares, may redeem them. The
trustee's capacity and ability to redeem shares, and the beneficiary's right to
compel redemption, are subject to the terms and conditions of the Royce Trust &
GiftShares Fund Trust Instrument.
16 | THE ROYCE FUNDS PROSPECTUS
<PAGE>
For More Information
TheRoyceFund
More information on The Royce Fund is available free upon request, including the
following:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about a Fund's investments, together with a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance, is available in the Funds' annual and semi-annual reports to
shareholders.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
Provides more details about The Royce Fund and its policies. A current SAI is on
file with the Securities and Exchange Commission ("SEC") and is incorporated by
reference (is legally considered part of this prospectus).
To obtain more information:
By telephone
Call (800) 221-4268
By mail
Write to:
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
By E-mail
Send your request to:
[email protected]
Through the Internet
Prospectuses, applications, IRA forms and additional information are available
through our website at http://www.roycefunds.com
Text only versions of the Funds' prospectus, SAI and other documents filed with
the SEC can be viewed online or downloaded from: http://www.sec.gov
You can also obtain copies of documents filed with the SEC by visiting the SEC's
Public Reference Room in Washington, DC (telephone (800) SEC-0330) or by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009.
A separate Shareholder Guide has been prepared for direct shareholders and is
available free upon request. The Guide contains important shareholder
information, including how to purchase and redeem shares of the Funds.
SEC File # 811-03599
<PAGE>
ROYCE SPECIAL EQUITY FUND
Value Investing in Small Companies for More Than 25 Years
Prospectus
May 1, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities, or determined that the
information in this prospectus is accurate or complete. It is a crime to
represent otherwise.
<PAGE>
Table of Contents
Overview 1
Royce Special Equity Fund 2
Investing in Small Company Stocks 5
General Shareholder Information 6
Management of the Fund 9
<PAGE>
OVERVIEW
- -------------------------------------------------------------------------------
"At Royce & Associates, Inc. ("Royce"), the Fund's investment adviser, we
attempt to invest in equity securities of small- and micro-cap companies that
are trading significantly below our assessment of their current worth. We
base this assessment on either what we believe a knowledgeable buyer might
pay to acquire the entire company, or what we think the value of the company
should be in the stock market. This analysis takes into consideration a
number of relevant factors, including the company's future prospects. We
select these securities using a risk-averse value approach, with the
expectation that their market prices should increase toward our estimate of
the current worth resulting in capital appreciation for Fund investors."
- Chuck Royce
- -------------------------------------------------------------------------------
The information on pages 2-4 about the Fund's investment goal and principal
strategies and about the primary risks for FundFund investors is based on,
and should be read in conjunction with, the information on pages 5 - 6 of
this Prospectus. These pages include information about the investment and
risk characteristics of small- and micro-cap companies, the market for their
securities and Royce's risk-averse value approach to investing for the Fund.
The performance information presented in this Prospectus is current to
December 31, 1999. For more recent information, you can contact The Royce
Fund through any of the methods listed on the back cover of this Prospectus.
Royce Special Equity Fund may be a suitable investment as part of your
overall investment plan if you want to include a fund that focuses on
securities of small- and micro-cap companies.
<PAGE>
ROYCE SPECIAL EQUITY FUND TICKER: N/A
- -------------------------------------------------------------------------------
Investment Goal and Principal Strategies
The investment objective of Royce Special Equity Fund, managed by Charlie
Dreifus, is long-term growth of capital. Royce invests the Fund's assets
primarily in a limited number of equity securities of small- and micro-cap
companies with market capitalizations less than $500 million. The portfolio
manager applies an intensive value discipline in managing the Fund's assets.
This approach, which combines classic value analysis with accounting
cynicism, has its roots in the teachings of Benjamin Graham and Abraham
Briloff.
Normally, the Fund will invest at least 80% of its assets in common stocks
and convertible securities. At least 65% of these securities will be issued
by companies with stock market capitalizations less than $500 million.
Primary Risks for Fund Investors
As with any mutual fund that invests in common stocks, Royce Special Equity
Fund is subject to market risk - the possibility that common stock prices
will decline over short or extended periods of time. As a result, the value
of your investment in the Fund will fluctuate with the market, and you may
lose money over short or even long periods of time.
The prices of small- and micro-cap securities are generally even more
volatile and their markets are even less liquid relative to large-cap
securities. Therefore, the Fund may involve considerably more risk of loss
and its returns may differ significantly from funds investing in larger-cap
companies or other asset classes. The Fund's limited number of portfolio
securities may also involve more risk to investors than a more broadly
diversified portfolio because it may be more susceptible to any single
corporate, economic, political, regulatory or market event.
In addition, the Fund's ability to achieve its goal will depend largely on
Mr. Dreifus' skill in selecting the Fund's portfolio companies using his
intensive value discipline and on the degree to which the market eventually
recognizes the then current worth of these companies.
<PAGE>
Performance Bar Chart and Table
The following information provides some indication of the past rewards and
risks of investing in the Fund by showing the Fund's how the Fund's total
return since its inception compares with that of the Russell 2000, the Fund's
benchmark index. The Fund's past performance is not an indication of how the
Fund will perform in the future.
[BAR CHART]
CALENDAR YEAR RETURNS - in Percentages (%)
1999 -9.63%
[END BAR CHART]
[PULLQUOTE]
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.31% (quarter ended 6/30/99) and the lowest return for a
calendar quarter was -9.03% (quarter ended 3/31/99).
[END PULLQUOTE]
Annualized Returns - in Percentages (%)
One-Year From Inception (5/01/98)
-------- ------------------------
Royce Special Equity Fund -9.63 -9.80
Russell 2000 21.26 3.74
Fees and Expenses of the Fund
The following table presents the fees and expenses that you may pay if you
buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge None
Maximum sales charge (load) imposed on reinvested dividends None
Early redemption fee (as a % of the amount redeemed, if applicable)
On purchases held for six months or more None
On purchases held for less than six months 1%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management fees 1.00%
Distribution (12b-1) fees None
Other expenses 1.12
----
Total Annual Fund Operating Expenses 2.12
----
Fee Waiver (0.63)
----
Net Annual Fund Operating Expenses 1.49%
----
Royce has contractually agreed to waive its fees and reimburse expenses to
the extent necessary to maintain the Fund's Net Annual Operating Expense
ratio at or below 1.49% through December 31, 2000.
Example:
This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and
that the Fund's total operating expenses (net of fee waiver in year one)
remain the same. Although your actual costs may be higher or lower, based on
the assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$152 $603 $1,081 $2,402
<PAGE>
Portfolio Diagnostics 12/31/99
Number of securities 30
Median market capitalization $122 million
Financial Highlights Information
The financial highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception and reflects financial
results for a single Fund share. The total returns in the table represent
the rate that an investor would have earned on an investment in the Fund
(assuming reinvestment of all distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1999 Annual Report to
Shareholders, which is available upon request.
1999 1998*
---- -----
Net Asset Value, Beginning of Period $9.30 $10.00
Income from Investment Operations
- ---------------------------------
Net investment income 0.09 0.02
Net gains (losses) on securities
(both realized and unrealized) (0.98) (0.70)
---- -----
Total from Investment Operations (0.89) (0.68)
---- -----
Less Distributions
- ------------------
Dividends (from net investment income) (0.10) (0.02)
Distributions (from capital gains) - -
Total Distributions (0.10) (0.02)
---- -----
Net Asset Value, End of Period $8.31 $9.30
==== ====
Total Return -9.6% -6.8%**
Ratios/Supplemental Data
Net Assets, End of Period (millions) $2.57 $3.08
Ratio of Expenses to Average Net Assets*** 1.49% 1.49%****
Ratio of Net Investment Income to Average Net Assets 0.96% 0.33%****
Portfolio Turnover Rate 57% 13%
- -----------------------------------------------------------------------------
* The Fund commenced operations on May 1, 1998.
** Not annualized.
*** For the periods ended December 31, 1999 and 1998, these ratios would
have been 2.12% and 2.20%, respectively, before fee waivers by Royce.
**** Annualized.
<PAGE>
Investing in Small Company Stocks
Small- and Micro-Cap Stocks
Royce views the large and diverse universe of small-cap companies as having
two investment segments or tiers. While small-caps are generally defined as
those companies with market capitalizations of less than $1.5 billion, Royce
refers to the segment of small-cap companies with market capitalizations
below $300 million as micro-cap.
Small- and micro-cap companies offer investment opportunities and additional
risks. They may not be well known to the investing public, may not be
significantly owned by institutional investors and may not have steady
earnings growth. In addition, the securities of such companies may be more
volatile in price, have wider spreads between their bid and ask prices and
have significantly lower trading volumes than larger capitalization stocks.
As a result, the purchase or sale of more than a limited number of shares of
a small- or micro-cap security may affect its market price. Royce may need a
considerable amount of time to purchase or sell its positions in these
securities, particularly when other Royce-managed accounts or other investors
are also seeking to purchase or sell them. Accordingly, Royce's investment
focus on small- and micro-cap securities generally requires it to have a long-
term (at least three years) investment outlook for a portfolio security.
The micro-cap segment consists of more than 6,200 companies with market caps
below $300 million. These companies are followed by few, if any, securities
analysts, and there tends to be less publicly available information about
them. Their securities generally have even more limited trading volumes and
are subject to even more abrupt or erratic market price movements than are
the securities in the upper tier, and Royce may be able to deal with only a
few market-makers when purchasing and selling these securities. Such
companies may also have limited product lines, markets or financial
resources, may lack management depth and may be more vulnerable to adverse
business or market developments. These conditions, which create greater
opportunities to find securities trading well below Royce's estimate of the
company's current worth, also involve increased risk.
The upper tier of the small-cap universe of securities consists of
approximately 1,700 companies with market caps between $300 million and $1.5
billion. In this segment, there is a relatively higher level of
institutional investor ownership and more research coverage by brokers than
generally exists for micro-cap companies. This greater attention makes the
market for such securities more efficient compared to micro-cap securities in
that they have somewhat greater trading volumes and narrower bid/ask prices.
[SIDE BAR]
Small-capitalization stocks or Small-caps are stocks with market
capitalizations of $1.5 billion or less.
Market capitalization is the number of a company's outstanding shares of
stock multiplied by its most recent closing price per share.
The Russell 2000 is an unmanaged index of U.S. small-company common stocks
that Royce and others use to benchmark the performance of small- and micro-
cap funds. It includes the smallest 2,000 companies (based on market
capitalization) among the top 3,000 companies tracked by Frank Russell
Company.
[END SIDE BAR]
<PAGE>
Value Investing
Royce uses an intensive value discipline in managing the Fund's assets. This
approach, which has its roots in the teachings of Benjamin Graham and Abraham
Briloff, combines classic value analysis with accounting cynicism. Royce
attempts to invest in equity securities of companies that have one or more of
the following characteristics:
- - Assets whose value is unrecognized or under-recognized by the market;
- - A low return on equity or assets employed, but with the potential to
earn a higher return by either improving the profitability of these
assets or disposing of them;
- - The ability to operate effectively in an adverse environment;
- - The burden of an unprofitable subsidiary or business segment that may
have been recently reduced or eliminated;
- - Recent changes in management or control (including through merger or
acquisition) and the potential for a turnaround in earnings;
- - Profitability or other financial characteristics that make their
securities undervalued when compared to the market in general or to a
specified industry;
- - A level of net current assets that compares favorably to the aggregate
market value of the company's securities;
- - Substantial or growing cash flow;
- - A management team that is committed, due to their own stockholdings or
otherwise, to managing the company in a way that increases stock values
and enhances stockholder wealth; or
- - Financial reporting policies, which, viewed from the outside, appear
conservative.
In summary, Royce attempts to invest in companies where the market's
perception and, therefore, price is significantly lower than Royce's
assessment of its current worth, with the expectation that its market price
should increase over a three- to five-year period towards this estimate, and
thereby provide capital appreciation for Fund investors. While there can be
no assurance that this risk-averse value approach will be successful, Royce
believes that it can reduce some of the risks of investing in small- and
micro-cap companies.
Additionally, although Royce's approach to security selection seeks to reduce
downside risk to the portfolio taken as a whole during periods of broad
securities market declines, it may also reduce gains in strong up markets.
Temporary Investments
The Fund may invest in short-term fixed income securities for temporary
defensive purposes, to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. If the Fund should implement a
temporary investment policy, it may not achieve its investment goal while
that policy is in effect.
[PULL QUOTE]
Current worth is what a knowledgeable buyer might pay to acquire the entire
company or what the value of the company should be in the stock market,
taking into consideration a number of relevant factors, including the
company's future prospects
[END PULL QUOTE]
GENERAL SHAREHOLDER INFORMATION
For more detailed discussion of The Royce Fund policies regarding direct
ownership of Fund shares, including information on opening accounts, buying,
redeeming, exchanging and transferring ownership of Fund shares, please refer
to The Royce Fund's Shareholder Guide dated May 1, 2000.
Royce Special Equity Fund is offered with no-load, meaning that you pay no
sales fees or commissions to buy shares directly through The Royce Fund. The
Fund does pay its own management fees and other expenses as outlined in this
Prospectus.
If you purchase Fund shares through a third party, such as a discount or full-
service broker-dealer, bank or other financial intermediary, account
minimums, fees, policies and procedures may differ from those described in
this Prospectus. If you purchase Fund shares through a third party, the
shares may be held in the name of the third party on the Fund's books. Royce
Fund Services, Inc., Royce and/or the Fund may pay fees to broker-dealers,
financial intermediaries and other service providers who introduce investors
to the Funds and/or provide certain administrative services to their
customers who own Fund shares.
<PAGE>
Purchasing Shares
Minimum initial investments for shares purchased directly through The Royce
Funds:
Account Type Minimum
- ------------ -------
Regular account $ 50,000
IRA 2,000
403(b)(7) accounts 2,000
The subsequent investment minimum is $2,000, regardless of account type.
The Royce Fund reserves the right both to suspend the offering of any Fund's
shares to new investors and to reject any specific purchase request.
Redeeming Shares
Early Redemption Fee
You may redeem shares in your account at any time. In order to discourage
short-term investing, The Royce Fund assesses an early redemption fee of 1%
on redemptions of shares of the Fund that you held for less than six months.
The fee will be paid to the Fund out of the proceeds otherwise payable to
you.
The "first-in, first-out" method is used to determine the six-month holding
period by comparing the date of the redemption with the earliest dates of the
share purchases in an account. If you are redeeming shares held for less
than six months in the account, or another Royce fund account from which you
exchanged, you will incur the fee. The anniversary month of an account
determines the six-month holding period, so that if you purchased the Fund's
shares in June 2000, these shares would be subject to the fee if you were to
redeem them prior to December 2000. If you were to redeem the shares on or
after December 1, 2000, they would not be subject to the fee.
You will incur no fee on shares that you acquire through distribution
reinvestment or upon an exchange into another Royce fund. The following
types of shareholders and accounts are exempt from the early redemption fee:
employees of The Royce Fund, Royce or RFS or members of their immediate
families or employee benefit plans for them; participants in an Automatic
Investment or Withdrawal Plan; certain pre-approved group investment plans
and charitable organizations; profit-sharing trusts, corporations or other
institutional investors who are investment advisory clients of Royce; omnibus
or similar account customers of certain pre-approved broker-dealers and other
institutions.
The Royce Fund may suspend redemption privileges or postpone payment for the
Fund when the New York Stock Exchange is closed or during what the Securities
and Exchange Commission determines are emergency circumstances.
The Fund will normally make redemptions in cash, but The Royce Fund reserves
the right to satisfy a Fund shareholder's redemption request by delivering
selected shares or units of portfolio securities - redemption in kind - under
certain circumstances.
The Royce Fund reserves the right to involuntarily redeem Fund shares in any
account that falls below the minimum initial investment due to redemptions by
the shareholder. If at any time the balance in an account does not have a
value at least equal to the minimum initial investment, you may be notified
that the value of your account is below the Fund's minimum account balance
requirement. You would have 60 days to increase your account balance before
the account is liquidated. Proceeds would be paid promptly to the
shareholder.
The Royce Fund also reserves the right to revise or suspend the exchange
privilege at any time.
<PAGE>
Net Asset Value per Share
The price of shares that you purchase or redeem will be at their net asset
value. The net asset value per share (NAV) for the Fund is calculated at the
close of regular trading on the New York Stock Exchange (generally 4 p.m.
Eastern Time) and is determined every day that the Exchange is open. Net
asset value per share is calculated by dividing the value of the Fund's net
assets by the number of its outstanding shares. The Fund's investments are
valued based on market value or, if market quotations are not readily
available, at their fair value as determined in good faith under procedures
established by The Royce Fund's Board of Trustees.
The date on which your purchase, redemption or exchange of shares is
processed is the trade date, and the price used for the transaction is based
on the next calculation of net asset value after the order is processed.
Reports
The Royce Fund mails shareholder reports semi-annually and, to reduce
expenses, may mail only one copy to shareholders with the same last name and
sharing the same address. Please call Investor Services at (800) 221-4268 if
you need additional copies. You can choose to receive separate report copies
for accounts registered to different members of the same household by calling
Investor Services. Please allow 30 days for your request to be processed.
Dividends, Distributions and Taxes
The Fund pays any dividends from net investment income and makes any
distributions from net realized capital gains each year in December. Unless
the shareholder chooses otherwise, dividends and distributions will be
reinvested automatically in additional shares of the Fund.
Each year, shareholders receive important tax information about the
distributions received in their account(s) for the prior calendar year.
Unless your account is an IRA or is otherwise exempt from taxation, all Fund
distributions are subject to Federal income tax regardless of whether you
receive them in cash or reinvest them in shares. The taxation of
distributions is not related to how long you have owned a Fund's shares. The
following table describes in general how distributions are taxed at the
Federal level. The Fund's distributions normally consist primarily of capital
gains:
<TABLE>
<CAPTION>
Distribution Rate for 15% tax bracket investor Rate for 28% and higher tax brackets investor
- ------------ --------------------------------- ---------------------------------------------
<S> <C> <C>
Income dividend Ordinary income rate Ordinary income rate
Short-term capital gains Ordinary income rate Ordinary income rate
Long-term capital gains 10% 20%
</TABLE>
Selling or exchanging shares is a taxable event, and a shareholder may
realize a taxable gain or loss. The Fund will report to shareholders the
proceeds of their redemption(s). The tax consequences of a redemption also
depend on the shareholder's cost basis, so shareholders should retain all
account statements for use in determining the tax consequences of
redemptions.
The Internal Revenue Service will treat any loss you may have on the
redemption of Fund shares held for six months or less as a long-term capital
loss, up to the amount of any capital gain distributions you received from
the Fund during the time you held the shares.
At the time of purchase, the Fund's net asset value may include undistributed
income or capital gains. When the Fund subsequently distributes these
amounts, they are taxable to the shareholder, even though the distribution is
economically a return of part of the shareholder's investment.
The IRS requires that the Fund withhold 31% of taxable dividends, capital
gain distributions and redemptions paid to non-corporate shareholders who
have not complied with IRS taxpayer identification regulations.
Always consult a tax advisor with questions about Federal, state or local tax
consequences. The Statement of Additional Information includes a more
detailed discussion of Federal tax matters that may be relevant to a
shareholder.
<PAGE>
MANAGEMENT OF THE FUND
Royce & Associates Inc. is the Fund's investment adviser and is responsible
for the management of its assets. Its offices are located at 1414 Avenue of
the Americas, New York, NY 10019. Royce has been investing in small-cap
securities with a value approach for more than 25 years. Charles M. Royce,
President and Chief Investment Officer, is primarily responsible for
supervising the firm's investment activities. Charles R. Dreifus, CFA,
Principal and Senior Portfolio Manager of Royce since February 1998, manages
the Fund's portfolio and his investment decisions are independent of those
made for the other Royce funds. Mr. Dreifus has 30 years of investment
experience, 19 of them as a small and micro-cap value portfolio manager.
From November 1982 to January 1998, he was a General Partner and Managing
Director and, most recently, a Limited Managing Director of Lazard Freres &
Co. LLC. Mr. Dreifus was also the Portfolio Manager of Lazard Special Equity
Portfolio, formerly the Lazard Special Equity Fund, and Special Equity
Separate Accounts. From June 1968 to November 1982, he was employed by
Oppenheimer & Co. as a Limited Partner and Oppenheimer Capital as an
Executive Vice President, where he managed the Quest for Value Fund from May
1980 to November 1982.
Royce receives advisory fees monthly as compensation for its services to the
Fund. The annual rate of this fee, before any waiver required to maintain
the expense ratios of the Fund at or below the specified level as shown in
the Fees and Expenses table, is 1.00%. For 1999, the net advisory fees paid
to Royce on average net assets were 0.37%.
Royce Fund Services, Inc. distributes the Fund's shares. State Street Bank &
Trust Company is the custodian of the Fund's securities, cash and other
assets. State Street's agent, National Financial Data Services ("NFDS"), is
the Fund's transfer agent.
<PAGE>
For More Information:
The Royce Fund
- --------------
More information on The Royce Fund is available free upon request, including
the following:
Annual/Semi-annual Reports
Additional information about the Fund's investments, together
with a discussion of market conditions and investment strategies
that significantly affected the Fund's performance, is available in
the Fund's annual and semi-annual reports to shareholders.
Statement of Additional Information ("SAI")
Provides more details about The Royce Fund and its policies.
A current SAI is on file with the Securities and Exchange
Commission ("SEC") and is incorporated by reference (is legally
considered part of this prospectus).
To obtain more information:
By telephone
Call (800) 221-4268
By mail
Write to:
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
By E-mail
Send your request to:
[email protected]
Through the Internet
Prospectuses, applications, IRA forms and additional
information are available through our website at
http://www.roycefunds.com
Text only versions of the Fund's prospectus, SAI and other
documents filed with the SEC can be viewed online or downloaded
from: http://www.sec.gov
You can also obtain copies of documents filed with the SEC by visiting
the SEC's Public Reference Room in Washington, DC (telephone (800) SEC-
0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
A separate Shareholder Guide has been prepared for direct shareholders and is
available free upon request. The Guide contains important shareholder
information, including how to purchase and redeem shares of the Fund.
SEC File # 811-03599
<PAGE>
ROYCE OPPORTUNITY FUND
Institutional Service Class Shares
Value Investing in Small Companies for More Than 25 Years
Prospectus
May 1 , 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities, or determined that the
information in this prospectus is accurate or complete. It is a crime to
represent otherwise.
<PAGE>
Table of Contents
Overview 1
Royce Opportunity Fund 2
Investing in Small Company Stocks 5
General Shareholder Information 7
Management of the Fund 10
<PAGE>
OVERVIEW
- -------------------------------------------------------------------------------
"At Royce & Associates, Inc. ("Royce"), the Fund's investment adviser, we
attempt to invest in equity securities of small- and micro-cap companies that
are trading significantly below our assessment of their current worth. We
base this assessment on either what we believe a knowledgeable buyer might
pay to acquire the entire company, or what we think the value of the company
should be in the stock market. This analysis takes into consideration a
number of relevant factors, including the company's future prospects. We
select these securities using a risk-averse value approach, with the
expectation that their market prices should increase toward our estimate of
the current worth resulting in capital appreciation for Fund investors."
- Chuck Royce
- -------------------------------------------------------------------------------
This Prospectus relates only to the Institutional Service Class of shares of
Royce Opportunity Fund, which are generally offered through certain
retirement plans, as well as to other institutional investors and to certain
retail investors who purchase shares through financial intermediaries.
The information on pages 2-4 about the Fund's investment goal and principal
strategies and about the primary risks for FundFund investors is based on,
and should be read in conjunction with, the information on pages 5-6 of this
Prospectus. These pages include information about the investment and risk
characteristics of small- and micro-cap companies, the market for their
securities and Royce's risk-averse value approach to investing for the Fund.
The performance information presented in this Prospectus is current to
December 31, 1999. For more recent information, you can contact The Royce
Fund through any of the methods listed on the back cover of this Prospectus.
Royce Opportunity Fund may be a suitable investment as part of your overall
investment plan if you want to include a fund that focuses on securities of
small- and micro-cap companies.
<PAGE>
ROYCE OPPORTUNITY FUND
- -------------------------------------------------------------------------------
Investment Goal and Principal Strategies
Boniface A. Zaino, Senior Portfolio Manager of Royce, manages Royce
Opportunity Fund. The Fund's investment goal is long-term growth of capital.
Royce invests the Fund's assets primarily in a diversified portfolio of
equity securities issued by small- and micro-cap companies in an attempt to
take advantage of what it believes are opportunistic situations for under-
valued securities.
Such opportunistic situations may include turnarounds, emerging growth
companies and interrupted earnings patterns, companies with unrecognized
asset values or undervalued growth companies. Although the Fund normally
focuses on the securities of companies with market capitalizations less than
$1.5 billion, it may, in certain market environments, invest an equal or
greater percentage of its assets in securities of large-cap companies.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities.
Normally, the Fund will invest at least 80% of its assets in common stocks
and convertible securities. At least 65% of these securities will be issued
by companies with stock market capitalizations less than $500 million.
Portfolio Diagnostics 12/31/99
Number of securities 177
Median market capitalization $208 million
Primary Risks for Fund Investors
As with any mutual fund that invests in common stocks, Royce Opportunity Fund
is subject to market risk - the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of
your investment in the Fund will fluctuate with the market, and you could
lose money over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile and
their market is less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may
differ significantly from funds investing in larger-cap companies or other
asset classes.
In addition, the Fund's ability to achieve its goal will depend largely on
Mr. Zaino's skill in selecting the Fund's portfolio companies using his
opportunistic value approach and on the degree to which the market eventually
recognizes the then current worth of these companies.
<PAGE>
[BAR CHART]
CALENDAR YEAR RETURNS - in Percentages (%)
1999 32.34%
1998 4.91%
1997 20.83%
[END BAR CHART]
[PULL QUOTE]
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.31% (quarter ended 6/30/99) and the lowest return for a
calendar quarter was -13.21% (quarter ended 9/30/98).
[END PULL QUOTE]
Annualized Returns - in Percentages (%)
<TABLE>
<CAPTION>
One-Year Three-Year From Inception (11/19/96) to 12/31/99
-------- ---------- -------------------------
<S> <C> <C> <C>
Royce Opportunity Fund 32.34 18.82 20.00
Russell 2000 21.26 13.08 14.26
</TABLE>
The returns shown above are for the Fund's Investment Class shares, not
offered in this Prospectus, that would have substantially similar annual
returns to the Fund's Institutional Service Class because the shares of both
classes are invested in the same portfolio of securities and the annual
returns will differ only to the extent that the classes do not have the same
expenses. If Institutional Service Class expenses had been reflected, the
above returns would have been lower. Past performance is not an indication
of how the Fund will perform in the future.
Fees and Expenses of the Fund
The following table presents the fees and expenses that you may pay if you
buy and hold Institutional Service Class shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases None
Maximum deferred sales charge None
Maximum sales charge (load) imposed on reinvested dividends None
Early redemption fee (as a % of the amount redeemed, if applicable)
On purchases held for six months or more None
On purchases held for less than six months 1%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management fees 1.00%
Distribution (12b-1) fees 0.25
Other expenses 0.46
----
Total Annual Fund Operating Expenses 1.71
----
Fee Waiver (0.22)
----
Net Annual Fund Operating Expenses 1.49%
----
Royce has contractually agreed to waive its fees and reimburse expenses to
the extent necessary to maintain the Fund's Net Annual Operating Expense
ratio for its Institutional Service Class shares at or below 1.49% through
December 31, 2004.
<PAGE>
Example:
This example is intended to help you compare the cost of investing in the
Fund's Institutional Service Class shares with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in the Fund's Institutional
Service Class shares for the time periods indicated and then redeem all of
your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year, and that the Fund's total operating
expenses (net of fee waiver in years one through five) remain the same.
Although your actual costs may be higher or lower, based on the assumptions,
your costs would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$152 $471 $813 $1,916
<PAGE>
Investing in Small-Company Stocks
Small- and Micro-Cap Stocks
Royce views the large and diverse universe of small-cap companies as having
two investment segments or tiers. While small-caps are generally defined as
those companies with market capitalizations of less than $1.5 billion, Royce
refers to the segment of small-cap companies with market capitalizations
below $300 million as micro-cap.
Small- and micro-cap companies offer investment opportunities and additional
risks. They may not be well known to the investing public, may not be
significantly owned by institutional investors and may not have steady
earnings growth. In addition, the securities of such companies may be more
volatile in price, have wider spreads between their bid and ask prices and
have significantly lower trading volumes than larger capitalization stocks.
As a result, the purchase or sale of more than a limited number of shares of
a small- or micro-cap security may affect its market price. Royce may need a
considerable amount of time to purchase or sell its positions in these
securities, particularly when other Royce-managed accounts or other investors
are also seeking to purchase or sell them. Accordingly, Royce's investment
focus on small- and micro-cap securities generally requires it to have a long-
term (at least three years) investment outlook for a portfolio security.
The micro-cap segment consists of more than 6,200 companies with market caps
below $300 million. These companies are followed by few, if any, securities
analysts, and there tends to be less publicly available information about
them. Their securities generally have even more limited trading volumes and
are subject to even more abrupt or erratic market price movements than are
the securities in the upper tier, and Royce may be able to deal with only a
few market-makers when purchasing and selling these securities. Such
companies may also have limited product lines, markets or financial
resources, may lack management depth and may be more vulnerable to adverse
business or market developments. These conditions, which create greater
opportunities to find securities trading well below Royce's estimate of the
company's current worth, also involve increased risk.
The upper tier of the small-cap universe of securities consists of
approximately 1,700 companies with market caps between $300 million and $1.5
billion. In this segment, there is a relatively higher level of
institutional investor ownership and more research coverage by brokers than
generally exists for micro-cap companies. This greater attention makes the
market for such securities more efficient compared to micro-cap securities in
that they have somewhat greater trading volumes and narrower bid/ask prices.
[SIDEBAR]
Small-capitalization stocks or Small-caps are stocks with market
capitalizations of $1.5 billion or less.
Market capitalization is the number of a company's outstanding shares of
stock multiplied by its most recent closing price per share.
The Russell 2000 is an unmanaged index of U.S. small-company common stocks
that Royce and others use to benchmark the performance of small- and micro-
cap funds. It includes the smallest 2,000 companies (based on market
capitalization) among the top 3,000 companies tracked by Frank Russell
Company.
[END SIDEBAR]
<PAGE>
Value Investing
Royce uses a "value" method in managing the Fund's assets. In selecting
securities for the Fund, Royce evaluates the quality of a company's balance
sheet, the level of its cash flows and various measures of a company's
profitability. Royce then uses these factors to assess the company's current
worth. Royce bases this assessment on either what it believes a
knowledgeable buyer might pay to acquire the entire company or what it thinks
the value of the company should be in the stock market, taking into
consideration a number of relevant factors, including the company's future
growth prospects.
Royce attempts to identify and invest in securities of companies that are
trading significantly below its estimate of the company's current worth, with
the expectation that the market price of its securities should increase over
approximately a three year period towards this estimate, resulting in capital
appreciation for Fund investors.
Royce's value approach strives to reduce some of the risks of investing in
small- and micro-cap securities for the Fund's portfolio taken as a whole.
In addition to focusing on companies trading significantly below its estimate
of their current worth to reduce valuation risk, Royce evaluates various
other risk factors in selecting securities for the Fund. Royce attempts to
lessen financial risk by buying companies that combine strong balance sheets
with low leverage. Royce attempts to decrease portfolio risk in the micro-
cap segment of the small-cap universe by broadly diversifying portfolio
holdings.
While there can be no assurance that this risk-averse value approach will be
successful, Royce believes that it can reduce some of the risks of investing
in small- and micro-cap companies, which are inherently fragile in nature and
whose securities have substantially greater market price volatility.
Additionally, although Royce's approach to security selection seeks to reduce
downside risk to the Fund's portfolio during periods of broad small-cap
market declines, it may also reduce gains in strong small-cap up markets.
<PAGE>
GENERAL SHAREHOLDER INFORMATION
For more detailed discussion of The Royce Fund policies regarding direct
ownership of Fund shares, including information on opening accounts, buying,
redeeming, exchanging and transferring ownership of Fund shares, please refer
to The Royce Fund's Shareholder Guide dated May 1, 2000.
If you purchase Fund shares through a third party, such as a discount or full-
service broker-dealer, bank or other financial intermediary, investment
minimums, commissions, fees, policies and procedures may differ from those
described in this Prospectus. If you purchase Fund shares through a third
party, the shares may be held in the name of the third party on the Fund's
books. Royce Fund Services, Inc., Royce and/or the Fund may pay fees to
broker-dealers, financial intermediaries and other service providers who
introduce investors to the Funds and/or provide certain administrative
services to their customers who own Fund shares.
For the year ended December 31, 1999, Royce made payments for distribution
services relating to Royce Opportunity Fund out of its own resources in the
amount of $28,763.
Purchasing Shares
Minimum initial investments for shares purchased directly through The Royce
Funds:
Account Type Minimum
- ------------ -------
Regular account $50,000
IRA 50,000
401(k) and 403(b)(7) accounts None
The subsequent investment minimum is $50, regardless of account type.
The Royce Fund reserves the right both to suspend the offering of any Fund's
shares to new investors and to reject any specific purchase request.
Redeeming Shares
Early Redemption Fee
You may redeem shares in your account at any time. In order to discourage
short-term investing, The Royce Fund assesses an early redemption fee of 1%
on redemptions of shares of the Fund that you held for less than six months.
The fee will be paid to the Fund out of the proceeds otherwise payable to
you.
The "first-in, first-out" method is used to determine the six-month holding
period by comparing the date of the redemption with the earliest dates of the
share purchases in an account. If you are redeeming shares held for less
than six months in the account, or another Royce fund account from which you
exchanged, you will incur the fee. The anniversary month of an account
determines the six-month holding period, so that if you purchased the Fund's
shares in June 2000, these shares would be subject to the fee if you were to
redeem them prior to December 2000. If you were to redeem the shares on or
after December 1, 2000, they would not be subject to the fee.
You will incur no fee on shares that you acquire through distribution
reinvestment or upon an exchange into another Royce fund. The following
types of shareholders and accounts are exempt from the early redemption fee:
pre-approved retirement plans, group investment plans and charitable
organizations; profit-sharing trusts, corporations or other institutional
investors who are investment advisory clients of Royce; employees of The
Royce Fund, Royce or RFS or members of their immediate families or employee
benefit plans for them; participants in an Automatic Investment or Withdrawal
Plan; omnibus or similar account customers of certain pre-approved broker-
dealers and other institutions.
<PAGE>
The Royce Fund may suspend redemption privileges or postpone payment for the
Fund when the New York Stock Exchange is closed or during what the Securities
and Exchange Commission determines are emergency circumstances.
The Fund will normally make redemptions in cash, but The Royce Fund reserves
the right to satisfy a Fund shareholder's redemption request by delivering
selected shares or units of portfolio securities - redemption in kind - under
certain circumstances.
The Royce Fund reserves the right to involuntarily redeem Fund shares in any
account that falls below the minimum initial investment due to redemptions by
the shareholder. If at any time the balance in an account does not have a
value at least equal to the minimum initial investment, you may be notified
that the value of your account is below the Fund's minimum account balance
requirement. You would have 60 days to increase your account balance before
the account is liquidated. Proceeds would be paid promptly to the
shareholder.
The Royce Fund also reserves the right to revise or suspend the exchange
privilege at any time.
Net Asset Value per Share
The price of shares that you purchase or redeem will be at their net asset
value. The net asset value per share (NAV) for the Fund is calculated at the
close of regular trading on the New York Stock Exchange (generally 4 p.m.
Eastern Time) and is determined every day that the Exchange is open. Net
asset value per share is calculated by dividing the value of the Fund's net
assets by the number of its outstanding shares. The Fund's investments are
valued based on market value or, if market quotations are not readily
available, at their fair value as determined in good faith under procedures
established by The Royce Fund's Board of Trustees.
The date on which your purchase, redemption or exchange of shares is
processed is the trade date, and the price used for the transaction is based
on the next calculation of net asset value after the order is processed.
Reports
The Royce Fund mails shareholder reports semi-annually and, to reduce
expenses, may mail only one copy to shareholders with the same last name and
sharing the same address. Please call Investor Services at (800) 221-4268 if
you need additional copies. You can choose to receive separate report copies
for accounts registered to different members of the same household by calling
Investor Services. Please allow 30 days for your request to be processed.
Dividends, Distributions and Taxes
The Fund pays any dividends from net investment income and makes any
distributions from net realized capital gains each year in December. Unless
the shareholder chooses otherwise, dividends and distributions will be
reinvested automatically in additional shares of the Fund.
Each year, shareholders receive important tax information about the
distributions received in their account(s) for the prior calendar year.
Unless your account is an IRA or is otherwise exempt from taxation, all Fund
distributions are subject to Federal income tax regardless of whether you
receive them in cash or reinvest them in shares. The taxation of
distributions is not related to how long you have owned a Fund's shares. The
following table describes in general how distributions are taxed at the
Federal level. The Fund's distributions normally consist primarily of capital
gains:
<TABLE>
<CAPTION>
Distribution Rate for 15% tax bracket investor Rate for 28% and higher tax brackets investor
- ------------ --------------------------------- ---------------------------------------------
<S> <C> <C>
Income dividend Ordinary income rate Ordinary income rate
Short-term capital gains Ordinary income rate Ordinary income rate
Long-term capital gains 10% 20%
</TABLE>
<PAGE>
Selling or exchanging shares is a taxable event, and a shareholder may
realize a taxable gain or loss. The Fund will report to shareholders the
proceeds of their redemption(s). The tax consequences of a redemption also
depend on the shareholder's cost basis, so shareholders should retain all
account statements for use in determining the tax consequences of
redemptions.
The Internal Revenue Service will treat any loss you may have on the
redemption of Fund shares held for six months or less as a long-term capital
loss, up to the amount of any capital gain distributions you received from
the Fund during the time you held the shares.
At the time of purchase, the Fund's net asset value may include undistributed
income or capital gains. When the Fund subsequently distributes these
amounts, they are taxable to the shareholder, even though the distribution is
economically a return of part of the shareholder's investment.
The IRS requires that the Fund withhold 31% of taxable dividends, capital
gain distributions and redemptions paid to non-corporate shareholders who
have not complied with IRS taxpayer identification regulations.
Always consult a tax advisor with questions about Federal, state or local tax
consequences. The Statement of Additional Information includes a more
detailed discussion of Federal tax matters that may be relevant to a
shareholder.
<PAGE>
MANAGEMENT OF THE FUND
Royce & Associates Inc. is the Fund's investment adviser and is responsible
for the management of its assets. Its offices are located at 1414 Avenue of
the Americas, New York, NY 10019. Royce has been investing in small-cap
securities with a value approach for more than 25 years. Charles M. Royce,
President and Chief Investment Officer, is primarily responsible for
supervising the firm's investment activities. Boniface A. Zaino, Managing
Director and Senior Portfolio Manager of Royce since April 1998, manages the
Fund's portfolio and his investment decisions are independent of those made
for the other Royce funds. Mr. Zaino joined Royce in April 1998 and
previously was Group Managing Director at Trust Company of the West (since
1984).
Royce receives advisory fees monthly as compensation for its services to the
Fund. The annual rate of this fee, is 1.00% and for 1999, the net advisory
fees paid to Royce on average net assets were 1.00%.
Royce Fund Services, Inc. ("RFS") distributes the Fund's shares. The Royce
Fund has adopted a distribution plan for the Fund's Institutional Service
Class shares under Rule 12b-1. Under the plan, the Fund will pay a fee to
RFS at the annual rate of 0.25% of the average net assets of its
Institutional Service Class shares. RFS may use these fees to cover sales-
related and shareholder servicing costs and to pay sales commissions and
other fees related to the sale of the Fund's Institutional Service Class
shares.
State Street Bank & Trust Company is the custodian of the Fund's securities,
cash and other assets. State Street's agent, National Financial Data
Services ("NFDS"), is the Fund's transfer agent.
<PAGE>
For More Information:
The Royce Fund
- --------------
More information on The Royce Fund is available free upon request, including
the following:
Annual/Semi-annual Reports
Additional information about the Fund's investments, together
with a discussion of market conditions and investment strategies
that significantly affected the Fund's performance, is available in
the Fund's annual and semi-annual reports to shareholders.
Statement of Additional Information ("SAI")
Provides more details about The Royce Fund and its policies.
A current SAI is on file with the Securities and Exchange
Commission ("SEC") and is incorporated by reference (is legally
considered part of this prospectus).
To obtain more information:
By telephone
Call (800) 221-4268
By mail
Write to:
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
By E-mail
Send your request to:
[email protected]
Through the Internet
Prospectuses, applications, IRA forms and additional
information are available through our website at
http://www.roycefunds.com
Text only versions of the Fund's prospectus, SAI and other
documents filed with the SEC can be viewed online or downloaded
from: http://www.sec.gov
You can also obtain copies of documents filed with the SEC by visiting
the SEC's Public Reference Room in Washington, DC (telephone (800) SEC-
0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
A separate Shareholder Guide has been prepared for direct shareholders and is
available free upon request. The Guide contains important shareholder
information, including how to purchase and redeem shares of the Fund.
SEC File # 811-03599
<PAGE>
THE ROYCE FUND
STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Delaware business trust, is a
diversified open-end registered management investment company, which offers
investors the opportunity to invest in nine portfolios or series. Three of
the nine series, Royce Micro-Cap Fund, Pennsylvania Mutual Fund and Royce
Trust & GiftShares Fund, offer two classes of shares, an Investment Class and
a Consultant Class. In addition, Royce Opportunity Fund offers two classes
of shares, an Investment Class and an Institutional Service Class. Unless
specifically noted, all references to a particular series relate to that
series' Investment Class. Each series has distinct investment goals and/or
strategies, and a shareholder's interest is limited to the series in which
the shareholder owns shares. The nine series (each, a "Fund" and
collectively, the "Funds") are:
ROYCE PREMIER FUND ROYCE TOTAL RETURN FUND
ROYCE MICRO-CAP FUND ROYCE LOW-PRICED STOCK FUND
PENNSYLVANIA MUTUAL FUND ROYCE OPPORTUNITY FUND
ROYCE SELECT FUND ROYCE SPECIAL EQUITY FUND
ROYCE TRUST & GIFTSHARES FUND
This Statement of Additional Information is not a prospectus, but should
be read in conjunction with the Trust's current Prospectuses, each of which
is dated May 1, 2000. Please retain this document for future reference. The
audited financial statements and schedules of investments included in the
Funds' Annual Reports to Shareholders for the fiscal year or period ended
December 31, 1999 are incorporated herein by reference. To obtain an
additional copy of the Prospectus or Annual Report to Shareholders for any
of the Funds, please call Investor Information at 1-800-221-4268.
Investment Adviser Transfer Agent
Royce & Associates, Inc. ("Royce") State Street Bank and Trust Company
c/o National Financial Data Services
Distributor Custodian
Royce Fund Services, Inc. ("RFS") State Street Bank and Trust Company
May 1, 2000
TABLE OF CONTENTS
Page Page
OTHER INVESTMENT STRATEGIES....... 2 CUSTODIAN............................22
INVESTMENT POLICIES AND INDEPENDENT ACCOUNTANTS..............23
LIMITATIONS.......................2 PORTFOLIO TRANSACTIONS...............23
RISK FACTORS AND SPECIAL CODE OF ETHICS AND RELATED
CONSIDERATIONS....................6 MATTERS............................25
MANAGEMENT OF THE TRUST........ 11 PRICING OF SHARES BEING OFFERED..... 26
PRINCIPAL HOLDERS OF SHARES... 14 REDEMPTIONS IN KIND..................26
INVESTMENT ADVISORY TAXATION.............................26
SERVICES.........................18 DESCRIPTION OF THE TRUST.............33
DISTRIBUTION......................20 PERFORMANCE DATA.....................35
<PAGE>
OTHER INVESTMENT STRATEGIES
In addition to the principal investment strategies described in their
respective Prospectuses, each Fund may invest the balance of its assets as
described below.
ROYCE PREMIER FUND - in securities of companies with stock market
capitalizations above $1.5 billion, non-dividend-paying common stocks and non-
convertible preferred stocks and debt securities.
ROYCE MICRO-CAP FUND - in securities of companies with stock market
capitalizations above $300 million and non-convertible preferred stocks and
debt securities.
PENNSYLVANIA MUTUAL FUND - in securities of companies with stock market
capitalizations above $1.5 billion and non-convertible preferred stocks and
debt securities.
ROYCE SELECT FUND - in stocks of companies with market capitalizations above
$1.5 billion and non-convertible preferred stocks and debt securities.
ROYCE TRUST & GIFTSHARES FUND - in securities of companies with market
capitalizations above $1.5 billion and non-convertible preferred stocks and
debt securities.
ROYCE TOTAL RETURN FUND - in securities with stock market capitalizations
above $1.5 billion, non-dividend-paying common stocks and non-convertible
securities.
ROYCE LOW-PRICED STOCK FUND - in stocks of companies with prices higher than
$15 per share or market capitalizations above $1.5 billion and non-
convertible preferred stocks and debt securities.
ROYCE OPPORTUNITY FUND - in securities of companies with stock market
capitalizations above $1.5 billion and non-convertible preferred stocks and
debt securities.
ROYCE SPECIAL EQUITY FUND - in common stocks and convertible securities of
companies with market capitalizations above $500 million and non-convertible
preferred stocks and debt securities.
INVESTMENT POLICIES AND LIMITATIONS
Listed below are the Funds' fundamental investment policies and
limitations. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Fund's assets that may be
invested in any security or other asset or sets forth a policy regarding
quality standards, the percentage limitation or standard will be determined
immediately after or at the time of the Fund's acquisition of the security or
other asset. Accordingly, any subsequent change in values, net assets or
other circumstances will not be considered in determining whether the
investment complies with the Fund's investment policies and limitations.
<PAGE>
A Fund's fundamental investment policies cannot be changed without the
approval of a "majority of the outstanding voting securities" (as defined in
the Investment Company Act of 1940 (the "1940 Act")) of the Fund. Except
for the fundamental investment restrictions set forth below, the investment
policies and limitations described in this Statement of Additional
Information are operating policies and may be changed by the Board of
Trustees without shareholder approval.
No Fund may, as a matter of fundamental policy:
1. Issue any senior securities;
2. Purchase securities on margin or write call options on its
portfolio securities;
3. Sell securities short;
4. Borrow money, except that each of the Funds may borrow money
from banks as a temporary measure for extraordinary or
emergency purposes in an amount not exceeding 5% of such
Fund's total assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its total assets in the securities of
foreign issuers (except for Royce Opportunity Fund and Royce
Special Equity Fund, each of which may invest up to 25% of its
total assets in such securities);
7. Invest in restricted securities (except for Royce Opportunity
Fund, which may invest up to 15% of its net assets in illiquid
securities, including restricted securities) or in repurchase
agreements which mature in more than seven days;
8. Invest more than 10% (15% for Royce Opportunity Fund and Royce
Special Equity Fund) of its assets in securities for which
market quotations are not readily available (i.e., illiquid
securities) (except for Pennsylvania Mutual Fund, which is
not subject to any such limitation);
9. Invest, with respect to 75% of its total assets, more than 5%
of its assets in the securities of any one issuer (except U.S.
Government securities);
10. Invest more than 25% of its assets in any one industry;
11. Acquire (own, in the case of Pennsylvania Mutual Fund) more
than 10% of the outstanding voting securities of any one
issuer;
12. Purchase or sell real estate or real estate mortgage loans or
invest in the securities of real estate companies unless such
securities are publicly-traded;
13. Purchase or sell commodities or commodity contracts;
<PAGE>
14. Make loans, except for purchases of portions of issues of
publicly- distributed bonds, debentures and other securities,
whether or not such purchases are made upon the original
issuance of such securities, and except that each Fund may
loan up to 25% of its assets to qualified brokers, dealers or
institutions for their use relating to short sales or other
securities transactions (provided that such loans are fully
collateralized at all times);
15. Invest in companies for the purpose of exercising control of
management;
16. Purchase portfolio securities from or sell such securities
directly to any of the Trust's Trustees, officers, employees
or investment adviser, as principal for their own accounts;
17. Invest in the securities of other investment companies (except
for Pennsylvania Mutual Fund, Royce Opportunity Fund and
Royce Special Equity Fund, which may invest in such companies
as set forth below); or
18. Invest more than 5% of its total assets in warrants, rights
and options (except for Pennsylvania Mutual Fund, which may
not purchase any warrants, rights or options).
No Fund may, as a matter of operating policy:
1. Invest more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities; or
2. Enter into repurchase agreements with any party
other than the custodian of its assets.
Royce Opportunity Fund may not, as a matter of operating policy, invest
more than 10% of its assets in the securities of foreign issuers.
Royce Special Equity Fund may not, as a matter of operating policy:
1. Invest more than 5% of its assets in the securities of foreign
issuers;
2. Invest more than 5% of its assets in securities for
which market quotations are not readily available; or
3. Invest more than 5% of its assets in the securities
of other investment companies.
The Trust interprets Fundamental Policy No. 8 to preclude any Fund from
investing more than 10% (15% for Pennsylvania Mutual Fund, Royce Opportunity
Fund and Royce Special Equity Fund) of its net assets in illiquid securities.
<PAGE>
Pennsylvania Mutual Fund
Royce Opportunity Fund
Royce Special Equity Fund
Pennsylvania Mutual Fund and Royce Opportunity Fund may each invest up
to 25%, and Royce Special Equity Fund may invest up to 5%, of the value of
its total assets in the securities of other investment companies (open or
closed-end), including up to 5% of its total assets in the securities of any
one other investment company, provided that the Funds and all affiliated
persons of the Funds do not own, in the aggregate, more than 3% of the total
outstanding stock of any one such investment company. The Funds must acquire
such securities in the open market, in transactions involving no commissions
or discounts to a sponsor or dealer (other than customary brokerage
commissions). Under the 1940 Act, the issuers of such securities are not
required to redeem them from any one Fund in an amount exceeding 1% of such
issuers' total outstanding securities during any period of less than thirty
days. The Funds will vote all proxies with respect to such securities in the
same proportion as the vote of all other holders of such securities. Except
for cash collateral received in connection with their securities lending
activities and invested in the money market funds of their custodian bank,
neither Pennsylvania Mutual Fund, Royce Opportunity Fund nor Royce Special
Equity Fund has any current intention of investing in the securities of any
open-end investment companies.
Royce Opportunity Fund
Royce Opportunity Fund may not invest more than 15% of its net assets in
illiquid securities. Illiquid securities include securities subject to
contractual or legal restrictions on resale because they are not registered
under the Securities Act of 1933 (the "Securities Act") and other securities
for which market quotations are not readily available. Securities which are
not registered under the Securities Act are referred to as private placements
or restricted securities and are purchased directly from the issuer, a
control person of the issuer or another investor holding such securities.
A large institutional market has developed for these unregistered
privately placed restricted securities, including foreign securities.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. Notwithstanding the fact that these securities
may be subject to contractual or legal restrictions on resale to the general
public or to certain institutions, unregistered securities that can be sold
in accordance with Rule 144A under the Securities Act will not be considered
illiquid so long as Royce determines that an adequate trading market exists
for the security. Rule 144A allows an institutional trading market for
securities otherwise subject to restriction on resale to the general public.
An insufficient number of qualified institutional buyers interested in
purchasing certain restricted securities held by the Funds, however, could
adversely affect the marketability of such portfolio securities, and the
Funds might be unable to dispose of such securities promptly or at reasonable
prices.
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Funds' Rights as Stockholders
No Fund may invest in a company for the purpose of exercising control of
management. However, a Fund may exercise its rights as a stockholder and
communicate its views on important matters of policy to management, the board
of directors and/or stockholders if Royce or the Board of Trustees determines
that such matters could have a significant effect on the value of the Fund's
investment in the company. The activities that a Fund may engage in, either
individually or in conjunction with others, may include, among others,
supporting or opposing proposed changes in a company's corporate structure or
business activities; seeking changes in a company's board of directors or
management; seeking changes in a company's direction or policies; seeking the
sale or reorganization of a company or a portion of its assets; or supporting
or opposing third party takeover attempts. This area of corporate activity
is prone to litigation, and it is possible that a Fund could be involved in
lawsuits related to such activities. Royce will monitor such activities with
a view to mitigating, to the extent possible, the risk of litigation against
the Funds and the risk of actual liability if a Fund is involved in
litigation. However, no guarantee can be made that litigation against a Fund
will not be undertaken or liabilities incurred.
A Fund may, at its expense or in conjunction with others, pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if Royce and the Board of
Trustees determine this to be in the best interests of a Fund's shareholders.
Securities Lending
Each Fund may lend up to 25% of its assets to brokers, dealers and other
financial institutions. Securities lending allows the Fund to retain
ownership of the securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned securities or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to parties that participate in a Global
Securities Lending Program organized and monitored by the Funds' custodian
and who are deemed by it to be of good standing. Furthermore, such loans
will be made only if, in Royce's judgment, the consideration to be earned
from such loans would justify the risk.
The current view of the staff of the Securities and Exchange Commission
is that a Fund may engage in such loan transactions only under the following
conditions: (i) the Fund must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (ii)
the borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (iii) after giving notice, the Fund must be able to terminate the
loan at any time; (iv) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest or other distributions on the securities loaned and to
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) the Fund must be able to vote
proxies on the securities loaned, either by terminating the loan or by
entering into an alternative arrangement with the borrower.
<PAGE>
Lower-Rated (High-Risk) and Investment Grade Debt Securities
Each Fund may invest up to 5% (15% for Royce Opportunity Fund) of its
net assets in lower-rated (high-risk) non-convertible debt securities. They
may be rated from Ba to Ca by Moody's Investors Service, Inc. or from BB to D
by Standard & Poor's or may be unrated. These securities have poor
protection with respect to the payment of interest and repayment of principal
and may be in default as to the payment of principal or interest. These
securities are often speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
lower-rated (high-risk) debt securities may fluctuate more than those of
higher-rated debt securities and may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest
rates.
The market for lower-rated (high-risk) debt securities may be thinner
and less active than that for higher-rated debt securities, which can
adversely affect the prices at which the former are sold. If market
quotations cease to be readily available for a lower-rated (high-risk) debt
security in which a Fund has invested, the security will then be valued in
accordance with procedures established by the Board of Trustees. Judgment
plays a greater role in valuing lower-rated (high-risk) debt securities than
is the case for securities for which more external sources for quotations and
last sale information are available. Adverse publicity and changing investor
perceptions may affect a Fund's ability to dispose of lower-rated (high-risk)
debt securities.
Since the risk of default is higher for lower-rated (high-risk) debt
securities, Royce's research and credit analysis may play an important part
in managing securities of this type for the Funds. In considering such
investments for the Funds, Royce will attempt to identify those issuers of
lower-rated (high-risk) debt securities whose financial condition is adequate
to meet future obligations, has improved or is expected to improve in the
future. Royce's analysis may focus on relative values based on such factors
as interest or dividend coverage, asset coverage, earnings prospects and the
experience and managerial strength of the issuer.
Each of the Funds may also invest in non-convertible debt securities in
the lowest rated category of investment grade debt. Such securities may have
speculative characteristics, and adverse changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade
securities.
The Funds may also invest in investment grade non-convertible debt
securities. Such securities include those rated Aaa by Moody's (which are
considered to be of the highest credit quality and where the capacity to pay
interest and repay principal is extremely strong), those rated Aa by Moody's
(where the capacity to repay principal is considered very strong, although
elements may exist that make risks appear somewhat larger than expected with
securities rated Aaa), securities rated A by Moody's (which are considered to
possess adequate factors giving security to principal and interest) and
securities rated Baa by Moody's (which are considered to have an adequate
capacity to pay interest and repay principal, but may have some speculative
characteristics).
<PAGE>
Foreign Investments
Each Fund may invest up to 10% of its total assets (25% for Royce
Opportunity Fund and Royce Special Equity Fund) in the securities of foreign
issuers. Foreign investments involve certain risks which typically are not
present in securities of domestic issuers. There may be less information
available about a foreign company than a domestic company; foreign companies
may not be subject to accounting, auditing and reporting standards and
requirements comparable to those applicable to domestic companies; and
foreign markets, brokers and issuers are generally subject to less extensive
government regulation than their domestic counterparts. Markets for foreign
securities may be less liquid and may be subject to greater price volatility
than those for domestic securities. Foreign brokerage commissions and
custodial fees are generally higher than those in the United States. Foreign
markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, thereby making it
difficult to conduct such transactions. Delays or problems with settlements
might affect the liquidity of a Fund's portfolio. Foreign investments may
also be subject to local economic and political risks, political, economic
and social instability, military action or unrest or adverse diplomatic
developments, and possible nationalization of issuers or expropriation of
their assets, which might adversely affect a Fund's ability to realize on its
investment in such securities. Royce may not be able to anticipate these
potential events or counter their effects. Furthermore, some foreign
securities are subject to brokerage taxes levied by foreign governments,
which have the effect of increasing the cost of such investment and reducing
the realized gain or increasing the realized loss on such securities at the
time of sale.
Although changes in foreign currency rates may adversely affect the
Funds' foreign investments, Royce does not expect to purchase or sell foreign
currencies for the Funds to hedge against declines in the U.S. dollar or to
lock in the value of any foreign securities they purchase. Consequently, the
risks associated with such investments may be greater than if the Funds were
to engage in foreign currency transactions for hedging purposes.
Exchange control regulations in such foreign markets may also adversely
affect the Funds' foreign investments and the Funds' ability to make certain
distributions necessary to maintain their eligibility as regulated investment
companies and avoid the imposition of income and excise taxes may, to that
extent, be limited.
The considerations noted above are generally intensified for investments
in developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities.
The Funds may purchase the securities of foreign companies in the form
of American Depositary Receipts (ADRs). ADRs are certificates held in trust
by a bank or similar financial institution evidencing ownership of securities
of a foreign-based issuer. Designed for use in U.S. securities markets, ADRs
are alternatives to the purchase of the underlying foreign securities in
their national markets and currencies.
Depositories may establish either unsponsored or sponsored ADR
facilities. While ADRs issued under these two types of facilities are in
some respects similar, there are distinctions between
<PAGE>
them relating to the
rights and obligations of ADR holders and the practices of market
participants. A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities.
The depository usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions and the performance of other services.
The depository of an unsponsored facility frequently is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. Depositories create sponsored ADR
facilities in generally the same manner as unsponsored facilities, except
that the issuer of the deposited securities enters into a deposit agreement
with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will
bear some of the costs relating to the facility (such as deposit and
withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions and to provide shareholder communications and other information
to the ADR holders at the request of the issuer of the deposited securities.
Repurchase Agreements
In a repurchase agreement, a Fund in effect makes a loan by purchasing a
security and simultaneously committing to resell that security to the seller
at an agreed upon price on an agreed upon date within a number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement requires or obligates the seller to pay the agreed upon
price, which obligation is in effect secured by the value (at least equal to
the amount of the agreed upon resale price and marked to market daily) of the
underlying security.
The Funds may engage in repurchase agreements with respect to any U.S.
Government security, provided that such agreements are collateralized by cash
or securities issued by the U.S. Government or its agencies. While it does
not presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delays and costs to the Funds in connection
with bankruptcy proceedings), it is the policy of the Trust to enter into
repurchase agreements only with its custodian, State Street Bank and Trust
Company, and having a term of seven days or less.
Warrants, Rights and Options
Each Fund, other than Pennsylvania Mutual Fund, may invest up to 5% of
its total assets in warrants, rights and options. A warrant, right or call
option entitles the holder to purchase a given security within a specified
period for a specified price and does not represent an ownership interest.
<PAGE>
A put option gives the holder the right to sell a particular security at a
specified price during the term of the option. These securities have no
voting rights, pay no dividends and have no liquidation rights. In addition,
their market prices do not necessarily move parallel to the market prices of
the underlying securities.
The sale of warrants, rights or options held for more than one year
generally results in a long-term capital gain or loss to a Fund, and the sale
of warrants, rights or options held for one year or less generally results in
a short term capital gain or loss. The holding period for securities
acquired upon exercise of a warrant, right or call option, however, generally
begins on the day after the date of exercise, regardless of how long the
warrant, right or option was held. The securities underlying warrants,
rights and options could include shares of common stock of a single company
or securities market indices representing shares of the common stocks of a
group of companies, such as the S&P 600.
Investing in warrants, rights and call options on a given security
allows a Fund to hold an interest in that security without having to commit
assets equal to the market price of the underlying security and, in the case
of securities market indices, to participate in a market without having to
purchase all of the securities comprising the index. Put options, whether on
shares of common stock of a single company or on a securities market index,
would permit a Fund to protect the value of a portfolio security against a
decline in its market price and/or to benefit from an anticipated decline in
the market price of a given security or of a market. Thus, investing in
warrants, rights and options permits a Fund to incur additional risk and/or
to hedge against risk.
* * *
Royce believes that each of the Funds, except Royce Total Return Fund,
are suitable for investment only by persons who can invest without concern
for current income, and that such Funds are suitable only for those investors
who are in a financial position to assume above-average risks in search for
long-term capital appreciation.
<PAGE>
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to each Trustee
and officer of the Trust:
Positions
Name, Address and Held with
Age the Trust Principal Occupations
- ----------------- --------- ---------------------
President, Managing Director
Charles M. Royce* Trustee, (since April 1997), Secretary,
(60) President Treasurer, sole director and
1414 Avenue of and sole voting shareholder of
the Treasurer Royce & Associates, Inc.
Americas ("Royce"), the Trust's
New York, NY investment adviser; Trustee,
10019 President and Treasurer of the
Trust; Director, President and
Treasurer of Royce Value Trust,
Inc. ("RVT"), Royce Micro-Cap
Trust, Inc. ("OTCM") and Royce
Focus Trust, Inc. ("RFT") (since
October 1996), closed-end
diversified management
investment companies of which
Royce is the investment adviser;
Trustee, President and Treasurer
of Royce Capital Fund ("RCF")
(since December 1996), an open-
end diversified management
investment company of which
Royce is the investment adviser
(the Trust, RVT, OTCM, RFT and
RCF collectively, "The Royce
Funds"); Secretary and sole
director of Royce Fund
Services, Inc. ("RFS"), a wholly-
owned subsidiary of Royce and
the distributor of the Trust's
shares; and managing general
partner of Royce Management
Company ("RMC"), a registered
investment adviser.
Hubert L. Cafritz Trustee Financial consultant.
(76)
9421 Crosby Road
Silver Spring, MD
20910
Donald R. Dwight Trustee President of Dwight Partners,
(68) Inc.; Trustee of the registered
16 Clover Mill Lane investment companies
Lyme, NH 03768 constituting the Eaton Vance
Funds; Chairman (until March
1998) and Chairman Emeritus
(since March 1998) of Newspapers
of New England, Inc. Mr.
Dwight's prior experience
includes having
<PAGE>
Positions
Name, Address and Held with
Age the Trust Principal Occupations
- ----------------- --------- ---------------------
served as Lieutenant Governor of
the Commonwealth of
Massachusetts and as President
and Publisher of Minneapolis
Star and Tribune Company.
Richard M. Galkin Trustee Private investor and President
(61) of Richard M. Galkin Associates,
654 Boca Marina Inc., tele-communications
Court consultants. Mr. Galkin's prior
Boca Raton, FL business experience includes
33487 having served as President of
Manhattan Cable Television (a
subsidiary of Time Inc.),
President of Haverhills Inc.
(another Time Inc. subsidiary),
President of Rhode Island Cable
Television and Senior Vice
President of Satellite
Television Corp. (a subsidiary
of Comsat).
Stephen L. Isaacs Trustee Attorney; President of The Center for
(60) Health and Social Policy since
847 25th Avenue September 1996; President of
San Francisco, CA Health Policy Associates, Inc.,
94121 Consultants; and Director of
Columbia University Development
Law and Policy Program and
Professor at Columbia University
until August 1996.
William L. Koke Trustee Registered investment adviser
(65) and financial planner with
73 Pointina Road Shoreline Financial Consultants.
Westbrook, CT Mr. Koke's prior business
06498 experience includes having
served as Director of Financial
Relations of SONAT, Inc.,
Treasurer of Ward Foods, Inc.
and President of CFC, Inc.
David L. Meister Trustee Chief Executive Officer of
(60) Seniorlife.com since December
1535 Michael Lane 1999 and a consultant to the
Pacific communications industry prior
Palisades, CA thereto. Mr. Meister's prior
90272 business experience includes
having served as President of
Financial News Network, Senior
Vice President of HBO, President
of Time-Life Films and Head of
Broadcasting for Major League
Baseball.
<PAGE>
Positions
Name, Address and Held with
Age the Trust Principal Occupations
- ----------------- --------- ---------------------
Jack E. Fockler, Vice Managing Director (since April
Jr.* (41) President 1997) and Vice President of
1414 Avenue of Royce, having been employed by
the Royce since October 1989; Vice
Americas President of RFT (since October
New York, NY 1996), RCF (since December 1996)
10019 and of the other Royce Funds
(since April 1995); Vice
President of RFS (since November
1995); and general partner of
RMC.
W. Whitney Vice Managing Director (since April
George*(41) President 1997) and Vice President of
1414 Avenue of Royce, having been employed by
the Royce since October 1991; Vice
Americas President of RCF (since December
New York, NY 1996); Vice President of RFT
10019 (since October 1996) and of the
other Royce Funds (since April
1995); and general partner of
RMC.
Daniel A. Vice Vice President of Royce (since
O'Byrne* (37) President May 1994), having been employed
1414 Avenue of and by Royce since October 1986; and
the Assistant Vice President of RFT (since
Americas Secretary October 1996), of RCF (since
New York, NY December 1996) and of the other
10019 Royce Funds (since July 1994).
John E. Denneen* Secretary Associate General Counsel of
(33) Royce (since May 1996);
1414 Avenue of Secretary of RFT (since October
the 1996), of RCF (since December
Americas 1996) and of the other Royce
New York, NY Funds (since June 1996); and
10019 Associate of Seward & Kissel
prior to May 1996.
_____________________________________________________________________________
*An "interested person" of the Trust and/or Royce under Section 2(a)(19)
of the 1940 Act.
All of the Trust's trustees (other than Messrs. Cafritz and Koke) are
also directors/trustees of RVT, OTCM and RCF, and all of them (other than
Mr. Cafritz) are also directors of RFT.
The Board of Trustees has an Audit Committee, comprised of Hubert L.
Cafritz, Donald R. Dwight, Richard M. Galkin, Stephen L. Isaacs, William L.
Koke and David L. Meister. The Audit Committee is responsible for, among
other things, recommending the selection and nomination of the Funds'
independent accountants and for conducting post-audit reviews of the Funds'
financial conditions with such independent accountants. Mr. Galkin serves as
Chairman of the Audit Committee.
<PAGE>
For the year ended December 31, 1999, the following trustees and
affiliated persons of the Trust received compensation from the Trust and/or
the other funds in the group of registered investment companies comprising
The Royce Funds:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued As from The Royce Funds
Name From Trust Part of Trust Expenses paid to Trustee/Directors
- ---- ---------- ---------------------- --------------------------
<S> <C> <C> <C>
Hubert L. Cafritz, $35,000 N/A $35,000
Trustee
Donald R. Dwight, 35,000* N/A 61,750*
Trustee
Richard M. Galkin, 33,000 N/A 58,000
Trustee
Stephen L. Isaacs, 35,000 N/A 61,750
Trustee
William L. Koke, 35,000 N/A 38,750
Trustee
David L. Meister, 35,000 N/A 61,750
Trustee
John D. Diederich, 149,842 9,603 N/A
Director of
Administration
Howard J. Kashner, 76,106 4,549 N/A
General Counsel
John E. Denneen, 76,125 7,581 N/A
Associate General
Counsel
</TABLE>
* Includes $5,250 from the Trust ($9,187 from the Trust and other Royce
Funds) deferred during 1999 at the election of Mr. Dwight under The Royce
Funds' Deferred Compensation Plan for trustees/directors.
PRINCIPAL HOLDERS OF SHARES
As of March 31, 2000, the following persons were known to the Trust to
be the record and/or beneficial owners of 5% or more of the outstanding
shares of certain of its Funds:
<PAGE>
<TABLE>
<CAPTION>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
<S> <C> <C> <C>
Royce Premier Fund
- ------------------
Charles Schwab & Co., Inc. 25,698,047 Record 44.96%
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Micro-Cap Fund
- ---------------------
Investment Class
----------------
Charles Schwab & Co., Inc. 3,834,236 Record 33.31%
101 Montgomery Street
San Francisco, CA 94104-4122
Salomon Smith Barney 709,476 Record 6.15%
388 Greenwich Street
New York, NY 10013
Royce Micro-Cap Fund
- --------------------
Consultant Class
----------------
Wexford Clearing Services Corp 12,543 Record 9.9%
FBO Donald J. Hromadka SUCC TTEE
The Lorraine Ainlay Trust
11661 San Vicente Blvd., Ste. 410
Los Angeles, CA 90049-5112
Bear Stearns Securities Corp 29,123 Record 22.98%
FBO 220-81341-10
1 Metrotech Ctr N
Brooklyn, NY 11201-3870
Donaldson Lufkin Jenrette 23,200 Record 18.31%
Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Pennsylvania Mutual Fund
- ------------------------
Investment Class
----------------
Charles Schwab & Co., Inc. 4,336,121 Record 9.28%
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
<S> <C> <C> <C>
Laird Lorton Trust Company C/F 4,294,140 Record 9.19%
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1576
Carey & Co
c/o Huntington Trust Co.
P.O. Box 1558
Columbus, OH 43260-0002 2,425,764 Record 5.19%
Royce Select Fund
- -----------------
Irving W. Bailey II 20,019 Record and 27.28%
205 Worth Avenue, STE 201 Beneficial
Palm Beach, FL 33480
Charles M. Royce 10,356 Record and 14.11%
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
Charles W. Schwab Co., Inc. 34,087 Record 46.46%
101 Montgomery Street
San Francisco, CA 94104-4122
State Street Bank & Trust Co. 4,184 Record 5.70%
IRA FBO
Cuthbert P. Gorman Jr.
9545 Tamarack Dr.
Indianapolis, IN 46260
Royce Trust & GiftShares Fund
- -----------------------------
Investment Class
----------------
W. Whitney George, Trustee 219,532 Record and 13.57%
The Royce 1992 GST Trust Beneficial
1414 Avenue of the Americas
New York, NY 10019
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
<S> <C> <C> <C>
Royce Total Return Fund
- -----------------------
Charles Schwab & Co. Inc. 11,850,037 Record 38.52%
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Low-Priced Stock Fund
- ---------------------------
Charles Schwab & Co., Inc. 1,984,788 Record 48.80%
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Opportunity Fund
- ----------------------
Charles Schwab & Co. Inc. 2,852,571 Record 16.6%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
The Northern Trust Co. 4,553,378 Record 26.49%
FBO Andersen Consulting
P.O. Box 92956
Chicago, IL 60675-2956
Frojack Co. 1,326,398 Record 7.72%
c/o First National Bank ND
P.O. Box 6001
Grand Forks, ND 58206-6001
Royce Special Equity Fund
- -------------------------
Kinco & Co. FBO 5686 102,547 Record 32.77%
c/o Republic National Bank of NY
One Hanson Place
Brooklyn, NY 11243-2907
Charles R. Dreifus 75,935 Record and 24.25%
1414 Avenue of the Americas Beneficial
New York, NY 10019
Charles M. Royce 50,760 Record and 16.22%
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
<S> <C> <C> <C>
Daniel B. Strickberger 27,104 Record and 8.66%
and Carol A. Strickberger Beneficial
JT WROS
30 Petersville Road
Mount Kisco, NY 10549-4514
As of March 31, 2000, all of the trustees and officers of the Trust as a
group beneficially owned less than 1% of the outstanding shares of the
Consultant Classes of Royce Micro-Cap and Trust & GiftShares Funds, of each
class of Pennsylvania Mutual Fund and of Royce Premier and Total Return
Funds, approximately 1.8% of the outstanding shares of the Investment Class
of Royce Micro-Cap Fund, approximately 14.8% of the outstanding shares of
Royce Select Fund, approximately 13.8% of the outstanding shares of the
Investment Class of Royce Trust & GiftShares Fund, approximately 9.5% of the
outstanding shares of Royce Low-Priced Stock Fund, approximately 3.0% of the
outstanding shares of the Investment Class of Royce Opportunity Fund and
approximately 40.5% of the outstanding shares of Royce Special Equity Fund.
INVESTMENT ADVISORY SERVICES
Services Provided by Royce
As compensation for its services under the Investment Advisory
Agreements for the Funds listed below, Royce is entitled to receive the
following fees:
Percentage Per Annum
Fund of Fund's Average Net Assets
---- ----------------------------
Royce Premier Fund 1.00
Royce Micro-Cap Fund 1.50
Pennsylvania Mutual Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Trust & GiftShares Fund 1.25
Royce Total Return Fund 1.00
Royce Low-Priced Stock Fund 1.50
Royce Opportunity Fund 1.00
Royce Special Equity Fund 1.00
Such fees are payable monthly from the assets of the Fund involved and, in
the case of Royce Micro-Cap, Pennsylvania Mutual, Royce Trust & GiftShares
and Royce Opportunity Funds, are allocated between each of their two Classes
of shares based on the relative net assets of each class.
Under such Investment Advisory Agreements, Royce (i) determines the
composition of each Fund's portfolio, the nature and timing of the changes in
it and the manner of implementing
<PAGE>
such changes, subject to any directions it
may receive from the Trust's Board of Trustees; (ii) provides each Fund with
investment advisory, research and related services for the investment of its
assets; (iii) furnishes, without expense to the Trust, the services of
certain of its executive officers and full-time employees; and (iv) pays such
persons' salaries and executive expenses and all expenses incurred in
performing its investment advisory duties under the Investment Advisory
Agreements.
The Trust pays all administrative and other costs and expenses
attributable to its operations and transactions with respect to the above-
listed Funds, including, without limitation, transfer agent and custodian
fees; legal, administrative and clerical services; rent for its office space
and facilities; auditing; preparation, printing and distribution of its
prospectuses, proxy statements, shareholder reports and notices; supplies and
postage; Federal and state registration fees; Federal, state and local taxes;
non-affiliated trustees' fees; and brokerage commissions.
Under its Investment Advisory Agreement, Royce Select Fund pays Royce a
performance fee. See "Management of the Fund" in Royce Select Fund's
Prospectus for further information concerning this fee and other material
terms of such Investment Advisory Agreement, including Royce's obligation to
pay the Fund's ordinary operating expenses.
For each of the three years ended December 31, 1997, 1998 and 1999, as
applicable, Royce received advisory fees from the Funds (net of any amounts
waived by Royce) and waived advisory fees payable to it, as follows:
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Royce Premier Fund
1997 $4,319,656 -
1998 5,516,894 -
1999 5,464,280 -
Royce Micro-Cap Fund
1997 1,937,727 $511,724
1998 2,209,805 600,867
1999 1,421,494 464,060
Pennsylvania Mutual Fund
1997 4,379,842 -
1998 4,939,625 -
1999 4,287,443 -
<PAGE>
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Royce Select Fund
1998* $ 0 $ 9,966
1999 232,607 38,745
Royce Trust & GiftShares Fund
1997 0 19,859
1998 18,198 44,213
1999 78,353 47,727
Royce Total Return Fund
1997 444,718 93,398
1998 1,510,125 173,838
1999 2,375,933 147,162
Royce Low-Priced Stock Fund
1997 146,709 108,828
1998 192,516 119,294
1999 189,309 107,192
Royce Opportunity Fund
1997 84,743 114,508
1998 191,046 79,474
1999 421,670 -
Royce Special Equity Fund
1998** 5,049 12,621
1999 10,661 18,536
_________
* November 18, 1998 (commencement of operations) to December 31, 1998
** May 1, 1998 (commencement of operations) to December 31, 1998
DISTRIBUTION
RFS, a wholly-owned subsidiary of Royce, is the distributor of each
Fund's shares. RFS has its office at 1414 Avenue of the Americas, New York,
New York 10019. It was organized in November 1982 and is a member of the
National Association of Securities Dealers Regulation, Inc. ("NASDR").
As compensation for its services and for the expenses payable by it
under the Distribution Agreement with the Trust, RFS is entitled to receive,
for and from the assets of the Fund or share
<PAGE>
class involved, a monthly fee
equal to 1% per annum (consisting of an asset-based sales charge of .75% and
a personal service and/or account maintenance fee of .25%) of Royce Micro-Cap
Fund's, Pennsylvania Mutual Fund's and Royce Trust & GiftShares Fund's
Consultant Classes' respective average net assets, .25% per annum (consisting
of an asset-based sales charge) of Royce Trust & GiftShares Fund's and Royce
Low-Priced Stock Fund's Investment Class' respective average net assets and
.25% per annum (consisting of an asset-based sales charge, personal service
fee and/or account maintenance fee) of Royce Opportunity Fund's Institutional
Service Class's average net assets. Except to the extent that they may be
waived by RFS, these fees are not subject to any required reductions. RFS is
also entitled to receive the proceeds of any front-end sales loads that may
be imposed on purchases of shares of Royce Micro-Cap Fund's, Pennsylvania
Mutual Fund's and Royce Trust & GiftShares Fund's Consultant Classes' and of
any contingent deferred sales charges that may be imposed on redemptions of
such shares. Currently, each of Pennsylvania Mutual Fund's and Royce Micro-
Cap Fund's Consultant Class shares bear a 1% contingent deferred sales charge
on shares redeemed within one year of their purchase, and Royce Trust &
GiftShares Fund's Consultant Class shares bear a contingent deferred sales
charge which declines from 5% during the first year after purchase to 1.5%
during the sixth year after purchase. No contingent deferred sales charge is
imposed after the sixth year. Royce Premier Fund's, Royce Micro-Cap Fund's,
Pennsylvania Mutual Fund's, Royce Select Fund's, Royce Total Return Fund's,
Royce Opportunity Fund's and Royce Special Equity Fund's Investment Classes'
are not obligated to pay any fees to RFS under the Distribution Agreement.
Under the Distribution Agreement, RFS (i) seeks to promote the sale
and/or continued holding of shares of such Funds through a variety of
activities, including advertising, direct marketing and servicing investors
and introducing parties on an on-going basis; (ii) pays sales commissions and
other fees to those broker-dealers, investment advisers and others (excluding
banks) who have introduced investors to such Funds (which commissions and
other fees may or may not be the same amount as or otherwise comparable to
the distribution fees payable to RFS); (iii) pays the cost of preparing,
printing and distributing any advertising or sales literature and the cost of
printing and mailing the Funds' prospectuses to persons other than
shareholders of the Funds; and (iv) pays all other expenses incurred by it in
promoting the sale and/or continued holding of the shares of such Funds and
in rendering such services under the Distribution Agreement. The Trust bears
the expense of registering its shares with the Securities and Exchange
Commission and the cost of filing for sales of its shares under the
securities laws of the various states.
The Trust entered into the Distribution Agreement with RFS pursuant to a
Distribution Plan which, among other things, permits each Fund that remains
covered by the Plan to pay the monthly distribution fee out of its net
assets. As required by Rule 12b-1 under the 1940 Act, the shareholders of
each Fund or class of shares that remains covered by the Plan and the Trust's
Board of Trustees (which also approved the Distribution Agreement pursuant to
which the distribution fees are paid) approved the Plan, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plan or the
Distribution Agreement.
The Plan may be terminated as to any Fund or class of shares by vote of
a majority of the non-interested Trustees who have no direct or indirect
financial interest in the Plan or in the
<PAGE>
Distribution Agreement or by vote of
a majority of the outstanding voting securities of such Fund or class. Any
change in the Plan that would materially increase the distribution cost to a
Fund or class of shares requires approval by the shareholders of such Fund or
class; otherwise, the Trustees, including a majority of the non-interested
Trustees, as described above, may amend the Plan.
The Distribution Agreement may be terminated as to any Fund or class of
shares at any time on 60 days' written notice and without payment of any
penalty by RFS, by the vote of a majority of the outstanding shares of such
Fund or class or by the vote of a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to it.
The Distribution Agreement and the Plan, if not sooner terminated in
accordance with their terms, will continue in effect for successive one-year
periods, provided that each such continuance is specifically approved (i) by
the vote of a majority of the Trustees who are not parties to the Agreement
or interested persons of any such party and who have no direct or indirect
financial interest in the Plan or the Agreement and (ii) either by the vote
of a majority of the outstanding shares of the Fund or class of shares
involved or by the vote of a majority of the entire Board of Trustees.
While the Plan is in effect, the selection and nomination of those
Trustees who are not interested persons of the Trust will be committed to the
discretion of the Trustees who are not interested persons.
RFS has temporarily waived the distribution fees payable to it by Royce
Trust & GiftShares Fund's Investment Class and Royce Low-Priced Stock Fund.
No trustee of the Trust who was not an interested person of the Trust
had any direct or indirect financial interest in the operation of the Plan or
the Distribution Agreement. Charles M. Royce, an interested person of the
Trust, Royce and RFS, had such an interest.
Under the Rules of Fair Practice of the NASDR, the front-end sales
loads, asset-based sales charges and contingent deferred sales charges
payable by any Fund and/or the shareholders thereof to RFS are limited to (i)
6.25% of total new gross sales occurring after July 7, 1993 plus interest
charges on such amount at the prime rate plus 1% per annum, increased by (ii)
6.25% of total new gross sales occurring after such Fund first adopted the
Plan until July 7, 1993 plus interest charges on such amount at the prime
rate plus 1% per annum less any front-end, asset-based or deferred sales
charges on such sales or net assets resulting from such sales.
For the year ended December 31, 1999, Royce made payments for
distribution-related services to broker-dealers out of its own resources in
the amount of $1,290,415.
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the custodian
for the securities, cash and other assets of each Fund and the transfer agent
and dividend disbursing agent for each
<PAGE>
Fund's shares, but it does not
participate in any Fund's investment decisions. The Trust has authorized
State Street to deposit certain domestic and foreign portfolio securities in
several central depository systems and to use foreign sub-custodians for
certain foreign portfolio securities, as allowed by Federal law. State
Street's main office is at 225 Franklin Street, Boston, Massachusetts 02107.
All mutual fund transfer, dividend disbursing and shareholder service
activities are performed by State Street's agent, National Financial Data
Services, at 1004 Baltimore, Kansas City, Missouri 64105.
State Street is responsible for calculating each Fund's daily net asset
value per share and for maintaining its portfolio and general accounting
records and also provides certain shareholder services.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, whose address is 160 Federal Street, Boston,
Massachusetts 02110, are the Trust's independent accountants.
PORTFOLIO TRANSACTIONS
Royce is responsible for selecting the brokers who effect the purchases
and sales of each Fund's portfolio securities. Royce does not select a
broker to effect a securities transaction for a Fund unless Royce believes
such broker is capable of obtaining the best execution for the security
involved in the transaction. Best execution is comprised of several factors,
including the liquidity of the market for the security, the commission
charged, the promptness and reliability of execution, priority accorded the
order and other factors affecting the overall benefit obtained.
In addition to considering a broker's execution capability, Royce
generally considers the research and brokerage services which the broker has
provided to it, including any research relating to the security involved in
the transaction and/or to other securities. Royce may use commission dollars
generated by agency transactions for the Funds and its other client accounts
to pay for such services. Research services that may be paid for in this way
assist Royce in carrying out its investment decision-making responsibilities.
They may include general economic research, market and statistical
information, industry and technical research, strategy and company research,
advice as to the availability of securities or purchasers or sellers of a
particular security, research related to portfolio company shareholder voting
and performance measurement, and may be written or oral. Brokerage services
that may be paid for in this way include effecting securities transactions
and incidental functions such as clearance, settlement and custody.
Royce is authorized, in accordance with Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreements with the
Trust, to cause the Funds to pay brokerage commissions in excess of those
which another broker might have charged for effecting the same transaction,
in recognition of the value of research and brokerage services provided to
Royce by the broker. Thus, the Funds generally pay higher commissions to
those brokers who provide both such research and brokerage services than
those who provide only execution services.
<PAGE>
Royce determines the overall
reasonableness of brokerage commissions paid based on prevailing commission
rates for similar transactions and the value it places on the research and/or
brokerage services provided to it by the broker, viewed in terms of either
the particular transaction or Royce's overall responsibilities with respect
to its accounts and those of RMC.
Research and brokerage services furnished by brokers through whom a Fund
effects securities transactions may be used by Royce in servicing all of its
accounts and those of RMC, and Royce may not use all of such services in
connection with the Trust or any one of its Funds. Moreover, Royce's receipt
of these services does not reduce the investment advisory fees payable to
Royce, even though Royce might otherwise be required to purchase some of them
for cash. Royce may, therefore, be viewed as having a conflict of interest
relating to its obtaining such research services with Fund and other client
account commission dollars.
Firms that provide such research and brokerage services to Royce may
also promote the sale of the Funds' shares, and Royce and/or RFS may
separately compensate them for doing so. RFS does not effect portfolio
security transactions for the Funds or others.
Even though Royce makes investment decisions for each Fund independently
from those for the other Funds and the other accounts managed by Royce and
RMC, Royce frequently purchases, holds or sells securities of the same issuer
for more than one Royce/RMC account because the same security may be suitable
for more than one of them. When Royce is purchasing or selling the same
security for more than one Royce/RMC account managed by the same primary
portfolio manager on the same trading day, Royce generally seeks to average
the transactions as to price and allocate them as to amount in a manner
believed by Royce to be equitable to each. Royce generally effects such
purchases and sales of the same security pursuant to Royce/RMC's Trade
Allocation Guidelines and Procedures. Under such Guidelines and Procedures,
Royce places and executes unallocated orders with broker-dealers during the
trading day and then allocates the securities purchased or sold in such
transactions to one or more of Royce's and RMC's accounts at or shortly
following the close of trading, generally using the average net price
obtained by accounts with the same primary portfolio manager. Royce does such
allocations based on a number of judgmental factors that it and RMC believe
should result in fair and equitable treatment to those of their accounts for
which the securities may be deemed suitable. In some cases, this procedure
may adversely affect the price paid or received by a Fund or the size of the
position obtained for a Fund.
During each of the three years ended December 31, 1997, 1998 and 1999,
the Funds paid brokerage commissions as follows:
Fund 1997 1998 1999
- ---- ---- ---- ----
Royce Premier Fund $583,759 $828,760 $884,681
Royce Micro-Cap Fund 246,667 267,469 161,722
Pennsylvania Mutual Fund 375,095 625,624 466,564
Royce Select Fund -- 1,975* 54,130
Royce Trust & GiftShares Fund 8,178 43,648 83,657
Royce Total Return Fund 127,534 63,278 386,684
Royce Low-Priced Stock Fund 100,845 103,338 101,595
<PAGE>
Fund 1997 1998 1999
- ---- ---- ---- ----
Royce Opportunity Fund $66,857 $206,872 $372,382
Royce Special Equity Fund -- 748** 9,847
______________
* For the period from November 18, 1998 (commencement of operations) to
December 31, 1998
** For the period from May 1, 1998 (commencement of operations) to December
31, 1998
For the year ended December 31, 1999, the aggregate amount of brokerage
transactions of each Fund having a research component and the amount of
commissions paid by each Fund for such transactions were as follows:
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
Royce Premier Fund $247,817,328 $496,969
Royce Micro-Cap Fund 21,716,458 47,545
Pennsylvania Mutual Fund 126,731,536 236,504
Royce Select Fund 7,897,850 23,881
Royce Trust & GiftShares Fund 17,107,297 45,173
Royce Total Return Fund 98,204,985 232,236
Royce Low-Priced Stock Fund 14,993,810 48,938
Royce Opportunity Fund 54,738,682 243,890
Royce Special Equity Fund 1,205,788 3,765
CODE OF ETHICS AND RELATED MATTERS
Royce, RFS, RMC and The Royce Funds have adopted a Code of Ethics under
which directors, officers, employees and partners of Royce, RFS and RMC
("Royce-related persons") and interested trustees/directors, officers and
employees of The Royce Funds are generally prohibited from personal trading
in any security which is then being purchased or sold or considered for
purchase or sale by a Royce Fund or any other Royce or RMC account. The Code
of Ethics permits such persons to engage in other personal securities
transactions if (i) the securities involved are United States Government debt
securities, municipal debt securities, money market instruments, shares of
registered open-end investment companies or shares acquired from an issuer in
a rights offering or under an automatic dividend reinvestment or employer-
sponsored automatic payroll-deduction cash purchase plan, (ii) the
transactions are either non-volitional or are effected in an account over
which such person has no direct or indirect influence or control or (iii)
they first obtain permission to trade from Royce's Compliance Officer and an
executive officer of Royce. The Code contains standards for the granting of
such permission, and permission to trade will usually be granted only in
accordance with such standards.
Royce's and RMC's clients include several private investment companies
in which Royce or RMC has (and, therefore, Charles M. Royce, Jack E. Fockler,
Jr., W. Whitney George, Boniface A. Zaino and/or other Royce-related persons
may be deemed to beneficially own) a share of up to 15%
<PAGE>
of the company's
realized and unrealized net capital gains from securities transactions, but
less than 5% of the company's equity interests. The Code of Ethics does not
restrict transactions effected by Royce or RMC for such private investment
company accounts, and transactions for such accounts are subject to Royce's
and RMC's allocation policies and procedures. See "Portfolio Transactions".
As of February 29, 2000, Royce-related persons, interested
trustees/directors, officers and employees of The Royce Funds and members of
their immediate families beneficially owned shares of The Royce Funds having
a total value of over $45.2 million, and such persons beneficially owned
equity interests in Royce-related private investment companies totalling
approximately $3.1 million.
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is based on the
Fund's current net asset value per share. See "Net Asset Value Per Share" in
the Funds' Prospectuses.
As set forth under "Net Asset Value Per Share", State Street determines
each Fund's net asset value per share at the close of regular trading on the
New York Stock Exchange (generally at 4:00 p.m. Eastern Time), on each day
that the Exchange is open. The Exchange is open on all weekdays which are
not holidays. Thus, it is closed on Saturdays and Sundays and on New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
REDEMPTIONS IN KIND
Conditions may arise in the future which would, in the judgment of the
Trust's Board of Trustees or management, make it undesirable for a Fund to
pay for all redemptions in cash. In such cases, payment may be made in
portfolio securities or other property of the Fund. However, the Trust is
obligated to redeem for cash all shares presented for redemption by any one
shareholder up to $250,000 (or 1% of the Trust's net assets if that is less)
in any 90-day period. Royce would select the securities delivered in payment
of redemptions, valued at the same value assigned to them in computing the
Fund's net asset value per share for purposes of such redemption.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
TAXATION
Each Fund has qualified and intends to remain qualified each year for
the tax treatment applicable to a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
To so qualify, a Fund must comply with certain requirements of the Code
relating to, among other things, the source of its income and the
diversification of its assets.
<PAGE>
By so qualifying, a Fund will not be subject to Federal income taxes to
the extent that its net investment income and capital gain net income are
distributed, so long as the Fund distributes, as ordinary income dividends,
at least 90% of its investment company taxable income.
The Internal Revenue Service (the "IRS") will impose a non-deductible 4%
excise tax on a Fund to the extent that the Fund does not distribute
(including by declaration of certain dividends), during each calendar year,
(i) 98% of its ordinary income for such calendar year, (ii) 98% of its
capital gain net income for the one-year period ending October 31 of such
calendar year (or the Fund's actual taxable year ending December 31, if
elected) and (iii) the remaining 2% of such amounts if not distributed in the
prior year. To avoid the application of this tax, each Fund intends to
distribute substantially all of its net investment income and capital gain
net income at least annually to its shareholders.
Each Fund maintains accounts and calculates income by reference to the
U.S. dollar for U.S. Federal income tax purposes. Investments calculated by
reference to foreign currencies will not necessarily correspond to a Fund's
distributable income and capital gains for U.S. Federal income tax purposes
as a result of fluctuations in foreign currency exchange rates. Furthermore,
if any exchange control regulations were to apply to a Fund's investments in
foreign securities, such regulations could restrict that Fund's ability to
repatriate investment income or the proceeds of sales of securities, which
may limit the Fund's ability to make sufficient distributions to satisfy the
90% distribution requirement and avoid the 4% excise tax.
Income earned or received by a Fund from investments in foreign
securities may be subject to foreign withholding taxes unless a withholding
exemption is provided under an applicable treaty. Any such taxes would reduce
that Fund's cash available for distribution to shareholders. It is currently
anticipated that none of the Funds will be eligible to elect to "pass
through" such taxes to their shareholders for purposes of enabling them to
claim foreign tax credits or other U.S. income tax benefits with respect to
such taxes.
If a Fund invests in stock of a so-called passive foreign investment
company ("PFIC"), the Fund may be subject to Federal income tax on a portion
of any "excess distribution" with respect to, or gain from the disposition
of, the stock. The Fund would determine the tax by allocating such
distribution or gain ratably to each day of the Fund's holding period for the
stock. The Fund would be taxed on the amount so allocated to any taxable year
of the Fund prior to the taxable year in which the excess distribution or
disposition occurs, at the highest marginal income tax rate in effect for
such years, and the tax would be further increased by an interest charge.
The Fund would include in the Fund's investment company taxable income the
amount allocated to the taxable year of the distribution or disposition and,
accordingly, it would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to shareholders.
In lieu of being taxable in the manner described above, a Fund may be
able to elect to include annually in income its pro rata share of the
ordinary earnings and net capital gain (whether or not distributed) of the
PFIC. In order to make this election, the Fund would need to obtain annual
information from the PFICs in which it invests, which in many cases may be
difficult to obtain. Alternatively, if eligible, the Fund may be able to
elect to mark to market its PFIC stock, resulting in the stock being treated
as sold at fair market value on the last business day of each taxable year.
<PAGE>
In the event that the Fund makes a mark to market election for the current
taxable year, then any resulting gain or loss is reportable as ordinary
income or loss. The Fund may make either of these elections with respect to
its investments (if any) in PFICs.
Investments of a Fund in securities issued at a discount or providing
for deferred interest payments or payments of interest in kind (which
investments are subject to special tax rules under the Code) will affect the
amount, timing and character of distributions to shareholders. For example, a
Fund which acquires securities issued at a discount is required to accrue as
ordinary income each year a portion of the discount (even though the Fund may
not have received cash interest payments equal to the amount included in
income) and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and
excise taxes. In order to generate sufficient cash to make distributions
necessary to satisfy the 90% distribution requirement and to avoid income and
excise taxes, the Fund may have to dispose of securities that it would
otherwise have continued to hold.
Distributions
For Federal income tax purposes, distributions by each Fund from net
investment income and from any net realized short-term capital gain are
taxable to shareholders as ordinary income, whether received in cash or
reinvested in additional shares. Ordinary income generally cannot be offset
by capital losses. For corporate shareholders, distributions of net
investment income (but not distributions of short-term capital gains) may
qualify in part for the 70% dividends received deduction for purposes of
determining their regular taxable income. (However, the 70% dividends
received deduction is not allowable in determining a corporate shareholder's
alternative minimum taxable income.) The amount qualifying for the dividends
received deduction generally will be limited to the aggregate dividends
received by the Fund from domestic corporations. The dividends received
deduction for a corporate shareholder may be further reduced or eliminated if
the shares with respect to which dividends are received by the Fund or the
corporate shareholder's Fund shares are treated as debt-financed or are
deemed to have been held for fewer than 46 days, during a 90 day period
beginning 45 days before and ending 45 days after the Fund is entitled to
receive such dividends, or under other generally applicable statutory
limitations.
So long as a Fund qualifies as a regulated investment company and
satisfies the 90% distribution requirement, distributions by the Fund from
net capital gains will be taxable, whether received in cash or reinvested in
Fund shares and regardless of how long a shareholder has held his or its Fund
shares. Such distributions are not eligible for the dividends received
deduction. Capital gain distributions by the Fund, although fully includible
in income, currently are taxed at a lower maximum marginal Federal income tax
rate than ordinary income in the case of non-corporate shareholders. Such
long-term capital gains are generally taxed at a maximum marginal rate of
20%.
Distributions by a Fund in excess of its current and accumulated
earnings and profits will reduce a shareholder's basis in Fund shares (but,
to that extent, will not be taxable) and, to the extent such distributions
exceed the shareholder's basis, will be taxable as capital gain assuming the
shareholder holds Fund shares as capital assets.
<PAGE>
A distribution is treated as paid during a calendar year if it is
declared in October, November or December of the year to shareholders of
record in such month and paid by January 31 of the following year. Such
distributions are taxable to such shareholders as if received by them on
December 31, even if not paid to them until January. In addition, certain
other distributions made after the close of a Fund's taxable year may be
"spilled back" and treated as paid by the Fund (other than for purposes of
avoiding the 4% excise tax) during such year. Such dividends would be taxable
to the shareholders in the taxable year in which the distribution was
actually made by the Fund.
The Trust will send written notices to shareholders regarding the amount
and Federal income tax status as ordinary income or capital gain of all
distributions made during each calendar year.
Back-up Withholding/Withholding Tax
Under the Code, certain non-corporate shareholders who are United States
persons may be subject to 31% withholding on reportable dividends, capital
gains distributions and redemption payments ("back-up withholding").
Generally, shareholders subject to back-up withholding are those for whom a
taxpayer identification number and certain required certifications are not on
file with the Trust or who, to the Trust's knowledge, have furnished an
incorrect number. In addition, the IRS requires the Trust to withhold from
distributions to any shareholder who does not certify to the Trust that such
shareholder is not subject to back-up withholding due to notification by the
IRS that such shareholder has under-reported interest or dividend income.
When establishing an account, an investor must certify under penalties of
perjury that such investor's taxpayer identification number is correct and
that such investor is not subject to or is exempt from back-up withholding.
Ordinary income distributions paid to shareholders who are non-resident
aliens or which are foreign entities are subject to 30% United States
withholding tax unless a reduced rate of withholding or a withholding
exemption is provided under an applicable treaty. Non-U.S. shareholders are
urged to consult their own tax advisers concerning the United States tax
consequences to them of investing in a Fund.
Timing of Purchases and Distributions
At the time of an investor's purchase, a Fund's net asset value may
reflect undistributed income or capital gains or net unrealized appreciation
of securities held by the Fund. A subsequent distribution to the investor of
such amounts, although it may in effect constitute a return of his or its
investment in an economic sense, would be taxable to the shareholder as
ordinary income or capital gain as described above. Investors should
carefully consider the tax consequences of purchasing Fund shares just prior
to a distribution, as they will receive a distribution that is taxable to
them.
Sales, Redemptions or Exchanges of Shares
Gain or loss recognized by a shareholder upon the sale, redemption or
other taxable disposition of Fund shares (provided that such shares are held
by the shareholder as a capital asset)
<PAGE>
will be treated as capital gain or
loss, measured by the difference between the adjusted basis of the shares and
the amount realized on the sale or exchange. Gains for non-corporate
shareholders will be taxed at a maximum Federal rate of 20% for shares held
for more than 12 months; and 39.6% (ordinary income rate) for shares held for
12 months or less. For regular corporations, the maximum Federal rate on all
income is 35%. The IRS will disallow a loss to the extent that the shares
disposed of are replaced (including by receiving Fund shares upon the
reinvestment of distributions) within a period of 61 days, beginning 30 days
before and ending 30 days after the sale of the shares. In such a case, the
amount of the disallowed loss will increase the basis of the shares acquired.
A loss recognized upon the sale, redemption or other taxable disposition of
shares held for 6 months or less will be treated as a long-term capital loss
to the extent of any capital gain distributions received with respect to such
shares. A shareholder's exchange of shares between Funds will be treated for
tax purposes as a sale of the Fund shares surrendered in the exchange, and
may result in the shareholder's recognizing a taxable gain or loss.
* * *
The foregoing relates to Federal income taxation. Distributions, as
well as any gains from a sale, redemption or other taxable disposition of
Fund shares, also may be subject to state and local taxes. Under current
law, so long as each Fund qualifies for the Federal income tax treatment
described above, it is believed that neither the Trust nor any Fund will be
liable for any income or franchise tax imposed by Delaware.
Investors are urged to consult their own tax advisers regarding the
application to them of Federal, state and local tax laws.
Royce Trust & GiftShares Fund
Gift Taxes
An investment in Royce Trust & GiftShares Fund may be a taxable gift for
Federal tax purposes, depending upon the option selected and other gifts that
the Donor and his or her spouse may make during the year.
If the Donor selects the Withdrawal Option, the entire amount of the
gift will be a "present interest" that qualifies for the Federal annual gift
tax exclusion. In that case, the Donor will be required to file a Federal
gift tax return for the year of the gift only if (i) he or she makes gifts
(including the gift of Fund shares) totaling more than the amount of the
Federal annual gift tax exclusion (currently, $10,000) to the same individual
during that year, (ii) the Donor and his or her spouse elects to have any
gifts by either of them treated as "split gifts" (i.e., treated as having
been made one-half by each of them for gift tax purposes) or (iii) the Donor
makes any gift of a future interest during that year. The Trustee will notify
the Beneficiary of his or her right of withdrawal promptly following any
investment in the Fund under the Withdrawal Option.
If the Donor selects the Accumulation Option, the entire amount of the
gift will be a "future interest" for Federal gift tax purposes, so that none
of the gift will qualify for the Federal annual gift
<PAGE>
tax exclusion.
Consequently, the Donor will have to file a Federal gift tax return (IRS Form
709) reporting the entire amount of the gift, even if the gift is less than
$10,000.
No Federal gift tax will be payable by the Donor until his or her
cumulative taxable gifts (i.e., gifts other than those qualifying for the
annual exclusion or other exclusions) exceed the Federal gift and estate tax
applicable exclusion amount (currently $675,000 in 2000 and 2001 and
eventually increasing in uneven stages to $1,000,000 in 2006). Any gift of
Fund shares that does not qualify as a present interest will reduce the
amount of the Federal gift and estate tax exemption that would otherwise be
available for future gifts or to the Donor's estate. All gifts of Fund
shares qualify for "gift splitting" with the Donor's spouse, meaning that the
Donor and his or her spouse may elect to treat the gift as having been made
one-half by each of them.
The Donor's gift of Fund shares may also have to be reported for state
gift tax purposes, if the state in which the Donor resides imposes a gift
tax. Many states do not impose such a tax. Some of those that do follow the
Federal rules concerning the types of transfers subject to tax and the
availability of the annual exclusion.
Generation-Skipping Transfer Taxes
If the Beneficiary of a gift of Royce Trust & GiftShares Fund shares is
a grandchild or more remote descendant of the Donor or is assigned, under
Federal tax law, to the generation level of the Donor's grandchildren or more
remote descendants, any part of the gift that does not qualify for the
Federal annual gift tax exclusion will be a taxable transfer for purposes of
the Federal generation-skipping transfer tax ("GST tax"). The Donor may
protect these gifts from the GST tax by allocating his or her GST exemption
until his or her cumulative gifts (other than certain gifts qualifying for
the annual exclusion or other exclusions) to individuals assigned, under
Federal tax law, to the generation level of the Donor's grandchildren or more
remote descendants exceed the GST tax exemption (currently, $1,000,000). The
tax rate on transfers subject to GST tax is the maximum Federal estate tax
rate (currently, 55%). The donor must report gifts subject to GST tax,
whether or not covered by the GST tax exemption, on the Donor's Federal gift
tax return. Whether, and the extent to which, an investment in Royce Trust &
GiftShares Fund will qualify for the Federal annual gift tax exclusion will
depend upon the option selected and other gifts that the Donor and his or her
spouse may have made during the year. See "Gift Taxes" above.
Income Taxes
The Internal Revenue Service has taken the position in recent rulings
that a trust beneficiary who is given a power of withdrawal over
contributions to the trust should be treated as the "owner" of the portion of
the trust that was subject to the power for Federal income tax purposes.
Accordingly, if the Donor selects the Withdrawal Option, the Beneficiary may
be treated as the "owner" of all of the Fund shares in the account for
Federal income tax purposes, and will be required to report all of the income
and capital gains earned in the Trust on his or her personal Federal income
tax return. The Trust will not pay Federal income taxes on any of the
Trust's income or capital gains. The Trustee will prepare and file the
Federal income tax information returns that are required each year (and any
state income tax returns that may be required), and will send the Beneficiary
a statement following each year showing the amounts (if any) that the
<PAGE>
Beneficiary must report on his or her income tax returns for that year. If
the Beneficiary is under fourteen years of age, these amounts may be subject
to Federal income taxation at the marginal rate applicable to the
Beneficiary's parents. The Beneficiary will have the option to require the
Trustee to pay him or her a portion of the Trust's income and capital gains
annually to provide funds with which to pay any resulting income taxes, which
the Trustee will do by redeeming Fund shares. The amount distributed will be
a fraction of the Trust's ordinary income and short-term capital gains and
long-term capital gains equal to the highest marginal Federal income tax rate
imposed on each type of income (currently, 39.6% and 20%, respectively). If
the Beneficiary selects this option, he or she will receive those fractions
of his or her Trust's income and capital gains annually for the duration of
the Trust.
Under the Withdrawal Option, the Beneficiary will also be able to
require the Trustee to pay his or her tuition, room and board and other
expenses of his or her college or post-graduate education (subject, in
certain instances, to approval by the Beneficiary's Representative), and the
Trustee will raise the cash necessary to fund these distributions by
redeeming Fund shares. Any such redemption will result in the realization of
capital gain or loss on the shares redeemed, which will be reportable by the
Beneficiary on his or her income tax returns for the year in which the shares
are redeemed, as described above.
If the Donor selects the Accumulation Option, the Trust that he or she
creates will be subject to Federal income tax on all income and capital gains
earned by the Trust, less a $100 annual exemption (in lieu of the personal
exemption allowed to individuals). The amount of the tax will be determined
under the tax rate schedule applicable to estates and trusts, which is more
sharply graduated than the rate schedule for individuals, reaching the same
maximum marginal rate for ordinary income and short-term capital gains
(currently, 39.6%), but at a much lower taxable income level (for 2000,
$8,450) than would apply to an individual. It is anticipated, however, that
most of the income generated by Fund shares will be long-term capital gains,
on which the Federal income tax rate is currently limited to 20%. The
Trustee will raise the cash necessary to pay any Federal or state income
taxes by redeeming Fund shares. The Beneficiary will not pay Federal income
taxes on any of the Trust's income or capital gains, except those earned in
the year when the Trust terminates. The Trustee will prepare and file all
Federal and state income tax returns that are required each year, and will
send the Beneficiary an information statement for the year in which the Trust
terminates showing the amounts (if any) that the Beneficiary must report on
his or her Federal and state income tax returns for that year.
When the Trust terminates, the distribution of the remaining Fund shares
held in the Trust to the Beneficiary will not be treated as a taxable
disposition, and no capital gain or loss will be realized by the Beneficiary
(or, if he or she has died, by his or her estate) at that time. Any Fund
shares received by the Beneficiary will have the same cost basis as they had
in the Trust at the time of termination. Any Fund shares received by the
Beneficiary's estate will have a basis equal to the value of the shares at
the Beneficiary's death (or the alternate valuation date for Federal estate
tax purposes, if elected).
<PAGE>
Consultation With Qualified Tax Adviser
Due to the complexity of Federal and state gift, GST and income tax laws
pertaining to all gifts in trust, prospective Donors should consider
consulting with an attorney or other qualified tax adviser before investing
in Royce Trust & GiftShares Fund.
DESCRIPTION OF THE TRUST
Trust Organization
The Trust was organized in April 1996 as a Delaware business trust. It
is the successor by mergers to The Royce Fund, a Massachusetts business trust
(the "Predecessor"), and Pennsylvania Mutual Fund, a Delaware business trust.
The mergers were effected on June 28, 1996, under an Agreement and Plan of
Merger pursuant to which the Predecessor and Pennsylvania Mutual Fund merged
into the Trust, with each Fund of the Predecessor and Pennsylvania Mutual
Fund becoming an identical counterpart series of the Trust, Royce continuing
as the Funds' investment adviser under their pre-merger Investment Advisory
Agreements and RFS continuing as the Trust's distributor. A copy of the
Trust's Certificate of Trust is on file with the Secretary of State of
Delaware, and a copy of its Trust Instrument, its principal governing
document, is available for inspection by shareholders at the Trust's office
in New York. The Trust's business and affairs are managed under the
direction of its Board of Trustees.
The Trust has an unlimited authorized number of shares of beneficial
interest, which the Board of Trustees may divide into an unlimited number of
series and/or classes without shareholder approval. (Each Fund, other than
Royce Micro-Cap, Pennsylvania Mutual, Royce Trust & GiftShares and Royce
Opportunity Funds, presently has only one class of shares.) Shareholders
are entitled to one vote per share (with proportional voting for fractional
shares). Shares vote by individual series, except that shares are voted in
the aggregate and not by individual series when required by the 1940 Act and
that if Trustees determine that a matter affects shareholders of only one
series or class, then only shareholders of that series or class are entitled
to vote on that matter.
Royce Micro-Cap Fund, Pennsylvania Mutual Fund and Royce Trust &
GiftShares Fund each have two classes of shares, an Investment Class and a
Consultant Class. In addition, Royce Opportunity Fund has two classes of
shares, an Investment Class and an Institutional Service Class. The shares of
each class represent a pari passu interest in such Fund's investment
portfolio and other assets and have the same redemption and other rights.
On June 17, 1997, Pennsylvania Mutual Fund and Royce Total Return Fund
acquired all of the assets and assumed all of the liabilities of Royce Value
Fund and Royce Equity Income Fund, respectively. The acquisitions were
accomplished by exchanging shares of Pennsylvania Mutual Fund's Consultant
Class and of Royce Total Return Fund equal in value to the shares of Royce
Value Fund and Royce Equity Income Fund owned by each of their respective
shareholders.
<PAGE>
On April 30, 1999, Royce GiftShares Fund and PMF II changed their names
to Royce Trust & GiftShares Fund and Royce Opportunity Fund, respectively.
Each of the Trustees currently in office, other than Mr. Dwight, were
elected by the Predecessor's shareholders. Mr. Dwight was elected by the
Trust's Board of Trustees on June 18, 1998, to serve as a Trustee of the
Trust until his successor has been duly elected. There will normally be no
meeting of shareholders for the election of Trustees until less than a
majority of the shareholder-elected Trustees remain in office, at which time
the Trustees will call a shareholders meeting for the election of Trustees.
In addition, Trustees may be removed from office by written consents signed
by the holders of a majority of the outstanding shares of the Trust and filed
with the Trust's custodian or by a vote of the holders of a majority of the
outstanding shares of the Trust at a meeting duly called for this purpose
upon the written request of holders of at least 10% of the Trust's
outstanding shares. Upon the written request of 10 or more shareholders of
the Trust, who have been shareholders for at least 6 months and who hold
shares constituting at least 1% of the Trust's outstanding shares, stating
that such shareholders wish to communicate with the Trust's other
shareholders for the purpose of obtaining the necessary signatures to demand
a meeting to consider the removal of a Trustee, the Trust is required (at the
expense of the requesting shareholders) to provide a list of its shareholders
or to distribute appropriate materials. Except as provided above, the
Trustees may continue to hold office and appoint their successors.
The trustee of the Royce Trust & GiftShares Fund trusts will send
notices of meetings of Royce Trust & GiftShares Fund shareholders, proxy
statements and proxies for such meetings to the trusts' beneficiaries to
enable them to attend the meetings in person or vote by proxies. It will vote
all Trust & GiftShares Fund shares held by it which are not present at the
meetings and for which no proxies are returned in the same proportions as
Trust & GiftShares Fund shares for which proxies are returned.
Shares are freely transferable, are entitled to distributions as
declared by the Trustees and, in liquidation of the Trust or their series,
are entitled to receive the net assets of their series and/or class.
Shareholders have no preemptive rights. The Trust's fiscal year ends on
December 31.
Shareholder Liability
Generally, shareholders will not be personally liable for the
obligations of their Fund or of the Trust under Delaware law. The Delaware
Business Trust Act provides that a shareholder of a Delaware business trust
is entitled to the same limited liability extended to stockholders of private
corporations for profit organized under the Delaware General Corporation Law.
No similar statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the extent that the
Trust or a shareholder of the Trust is subject to the jurisdiction of courts
in those states, the courts may not apply Delaware law and may thereby
subject Trust shareholders to liability. To guard against this possibility,
the Trust Instrument (i) requires that every written obligation of the Trust
contain a statement that such obligation may be enforced only against the
Trust's assets (however, the omission of this disclaimer will not operate to
create personal liability for any shareholder); and (ii) provides for
indemnification out of Trust property of any Trust shareholder held
personally liable for the Trust's obligations. Thus, the risk of a Trust
shareholder incurring financial loss beyond his investment because of
shareholder liability is
<PAGE>
limited to circumstances in which: (i) a court
refuses to apply Delaware law; (ii) no contractual limitation of liability
was in effect; and (iii) the Trust itself would be unable to meet its
obligations. In light of Delaware law, the nature of the Trust's business and
the nature of its assets, management believes that the risk of personal
liability to a Trust shareholder is extremely remote.
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds is historical and is not intended to
indicate future returns. Each Fund's share price and total returns fluctuate
in response to market conditions and other factors, and the value of a Fund's
shares when redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of a Fund's return, including
the effect of reinvesting dividends and capital gain distributions and any
change in the Fund's net asset value per share (NAV) over the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded percentage rate
that would have produced the same result if the rate of growth or decline in
value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual total return of 7.18%,
which is the steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should
realize that a Fund's performance is not constant over time, but changes from
year to year, and that average annual total returns represent averaged
figures as opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, a Fund's cumulative total
returns, reflecting the simple change in value of an investment over a stated
period, may be quoted. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments or a series of redemptions, over
any time period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share prices) in
order to illustrate the relationship of these factors and their contributions
to total return. Total returns and other performance information may be
quoted numerically or in a table, graph or similar illustration.
Historical Fund Results
The following table shows certain of the Funds' total returns for the
periods indicated. Such total returns reflect all income earned by each Fund,
any appreciation or depreciation of the assets of such Fund and all expenses
incurred by such Fund for the stated periods. The table compares the Funds'
total returns to the records of the Russell 2000 Index (Russell 2000) and
Standard & Poor's 500 Composite Stock Price Index (S&P 500) over the same
periods. The comparison to the Russell 2000 shows how the Funds' total
returns compared to the record of a broad index of small capitalization
stocks. The S&P 500 comparison is provided to show how the Funds' total
returns
<PAGE>
compared to the record of a broad average of common stock prices over
the same period. The Funds have the ability to invest in securities not
included in the indices, and their investment portfolios may or may not be
similar in composition to the indices. Figures for the indices are based on
the prices of unmanaged groups of stocks, and, unlike the Funds, their
returns do not include the effect of paying brokerage commissions and other
costs and expenses of investing in a mutual fund.
</TABLE>
<TABLE>
<CAPTION>
Period Ended
Fund December 31, 1999 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
<S> <C> <C> <C>
Royce Premier Fund
1 Year Total Return 11.5 % 21.3% 21.1 %
5 Year Average Annual Total Return 14.4 16.7 28.6
Average Annual Total Return since 12-31-91 13.7 14.7 19.7
(commencement of operations)
Royce Micro-Cap Fund
1 Year Total Return 13.7% 21.3% 21.1%
5 Year Average Annual Total Return 13.5 16.7 28.6
Average Annual Total Return since 12-31-91 15.3 14.7 19.7
(commencement of operations)
Royce Micro-Cap Fund (Consultant Class)
1 Year Total Return 12.7% 21.3% 21.1%
Average Annual Total Return since 5-1-98 -2.3 3.7 19.8
(commencement of sale of Consultant Class
shares)
Pennsylvania Mutual Fund (Investment Class)
1 Year Total Return 6.0% 21.3% 21.1%
5 Year Average Annual Total Return 13.1 16.7 28.6
10 year Average Annual Total Return 10.7 13.4 18.2
Pennsylvania Mutual Fund (Consultant Class)
1 Year Total Return 5.3% 21.3% 21.1%
Average Annual Total Return since 6-18-97 8.1 11.8 23.7
(commencement of sale of Consultant Class
shares)
Royce Select Fund
1 Year Total Return 35.4% 21.3% 21.1%
Average Annual Total Return since 11-18-98 40.3 27.0 26.7
(commencement of operations)
<PAGE>
Fund December 31, 1999 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
<S> <C> <C> <C>
Royce Trust & GiftShares Fund (Investment Class)
1 Year Total Return 41.8% 21.3% 21.1%
Average Annual Total Return since 12-27-95 27.9 14.1 26.4
(commencement of operations)
Royce Trust & GiftShares Fund (Consultant Class)
1 Year Total Return 40.3% 21.3% 21.1%
Average Annual Total Return since 9-26-97 26.0 6.6 23.2
(commencement of sale of Consultant Class
shares)
Royce Total Return Fund
1 Year Total Return 1.6% 21.3% 21.1%
5 Year Average Annual Total Return 15.9 16.7 28.6
Average Annual Total Return since 12-15-93 14.0 13.9 23.6
(commencement of operations)
Royce Low-Priced Stock Fund
1 Year Total Return 29.8% 21.3% 21.1%
5 Year Average Annual Total Return 19.0 16.7 28.6
Average Annual Total Return since 12-15-93 16.1 13.9 23.6
(commencement of operations)
Royce Opportunity Fund (Investment Class)
1 Year Total Return 32.3% 21.3% 21.1%
Average Annual Total Return since 11-19-96 20.0 14.3 26.5
(commencement of operations)
Royce Special Equity Fund
1 Year Total Return -9.6% 21.3% 21.1%
Average Annual Total Return since 5-1-98 -9.8 3.7 19.8
(commencement of operations)
</TABLE>
During the applicable period ended December 31, 1999, a hypothetical
$10,000 investment in certain of the Funds would have grown as indicated
below, assuming all distributions were reinvested:
<PAGE>
Value of
Fund/Period Commencement Date Hypothetical Investment at December 31, 1999
- ----------------------------- --------------------------------------------
Royce Premier Fund (12-31-91) $ 27,919
Royce Micro-Cap Fund (12-31-91) 31,228*
Pennsylvania Mutual Fund (12-31-79) 140,582*
Royce Select Fund (11-18-98) 14,606
Royce Trust & GiftShares Fund (12-27-95) 26,848*
Royce Total Return Fund (12-15-93) 22,017
Royce Low-Priced Stock Fund (12-15-93) 24,644
Royce Opportunity Fund (11-19-96) 17,648*
Royce Special Equity Fund (5-1-98) 8,419
*Represents Investment Class results.
The Funds' performances may be compared in advertisements to the
performance of other mutual funds in general or to the performance of
particular types of mutual funds, especially those with similar investment
objectives. Such comparisons may be expressed as mutual fund rankings
prepared by Lipper Analytical Services, Inc. ("Lipper"), an independent
service that monitors the performance of registered investment companies.
The Funds' rankings by Lipper for the one year period ended December 31,
1999, were:
Fund Lipper Ranking
---- --------------
Royce Premier Fund 76 out of 312 small-cap value funds
Royce Micro-Cap Fund 64 out of 312 small-cap value funds
Pennsylvania Mutual Fund 131 out of 312 small-cap value funds
Royce Trust & GiftShares Fund 7 out of 312 small-cap value funds
Royce Total Return Fund 166 out of 312 small-cap value funds
Royce Low-Priced Stock Fund 26 out of 312 small-cap value funds
Royce Opportunity Fund 20 out of 312 small-cap value funds
Royce Select Fund 13 out of 312 small-cap value funds
Royce Special Equity Fund 298 out of 312 small-cap value funds
Money market funds and municipal funds are not included in the Lipper survey.
The Lipper performance analysis ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees payable by shareholders into consideration and is prepared
without regard to tax consequences.
The Lipper General Equity Funds Average can be used to show how the
Funds' performances compare to a broad-based set of equity funds. The Lipper
General Equity Funds Average is an average of the total returns of all equity
funds (excluding international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper. As of December 31,
1999, the average included 1,128 large-cap funds, 1,358 multi-cap funds, 610
mid-cap funds, 831 small-cap funds, 116 S&P 500 funds, 229 equity income
funds and 29 specialty equity funds.
<PAGE>
Ibbotson Associates (Ibbotson) provides historical returns of the
capital markets in the United States. The Funds' performance may be compared
to the long-term performance of the U.S. capital markets in order to
demonstrate general long-term risk versus reward investment scenarios.
Performance comparisons could also include the value of a hypothetical
investment in common stocks, long-term bonds or U.S. Treasury securities.
Ibbotson calculates total returns in the same manner as the Funds.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, U.S. Treasury bills and the
U.S. rate of inflation. These capital markets are based on the returns of
several different indices. For common stocks, the S&P 500 is used. For small
capitalization stocks, return is based on the return achieved by Dimensional
Fund Advisors (DFA) U.S. 9-10 Small Company Fund. This fund is a market-
value-weighted index of the ninth and tenth deciles of the New York Stock
Exchange (NYSE), plus stocks listed on the American Stock Exchange (AMEX) and
over-the-counter (OTC) with the same or less capitalization as the upper
boundary of the NYSE ninth decile. As of December 31, 1999, DFA U.S. 9-10
Small Company Fund contained approximately 2,728 stocks, with a median market
capitalization of about $142 million.
The S&P 500 is an unmanaged index of common stocks frequently used as a
general measure of stock market performance. The Index's performance figures
reflect changes of market prices and quarterly reinvestment of all
distributions.
The S&P SmallCap 600 Index is an unmanaged market-weighted index
consisting of approximately 600 domestic stocks chosen for market size,
liquidity and industry group representation. As of December 31, 1999, the
weighted mean market value of a company in this Index was approximately $1.1
billion.
The Russell 2000, prepared by the Frank Russell Company, tracks the
return of the common stocks of approximately 2,000 of the smallest out of the
3,000 largest publicly traded U.S.-domiciled companies by market
capitalization. The Russell 2000 tracks the return on these stocks based on
price appreciation or depreciation and includes dividends.
U.S. Treasury bonds are securities backed by the credit and taxing power
of the U.S. government and, therefore, present virtually no risk of default.
Although such government securities fluctuate in price, they are highly
liquid and may be purchased and sold with relatively small transaction costs
(direct purchase of U.S. Treasury securities can be made with no transaction
costs). Returns on intermediate-term government bonds are based on a one-
bond portfolio constructed each year, containing a bond that is the shortest
non-callable bond available with a maturity of not less than five years.
This bond is held for the calendar year and returns are recorded. Returns on
long-term government bonds are based on a one-bond portfolio constructed each
year, containing a bond that meets several criteria, including having a term
of approximately 20 years. The bond is held for the calendar year and
returns are recorded. Returns on U.S. Treasury bills are based on a one-bill
portfolio constructed each month, containing the shortest term bill having
not less than one month to maturity. The total return on the bill is the
month-end price divided by the previous month-end price, minus one. Data up
to 1976 is from the U.S. Government
<PAGE>
Bond file at the University of Chicago's
Center for Research in Security Prices; The Wall Street Journal is the source
thereafter. Inflation rates are based on the Consumer Price Index.
Royce may, from time to time, compare the performance of common stocks,
especially small capitalization stocks, to the performance of other forms of
investment over periods of time. In addition, Royce may compare the
performance of one or more of the Funds over various time periods and/or
market cycles to the record of one or more indices or funds described above.
From time to time, in reports and promotional literature, the Funds'
performances also may be compared to other mutual funds in financial or
business publications and periodicals, such as KIPLINGER's, INDIVIDUAL
INVESTOR, MONEY, FORBES, BUSINESS WEEK, BARRON's, FINANCIAL TIMES, FORTUNE,
MUTUAL FUNDS MAGAZINE and THE WALL STREET JOURNAL. In addition, financial or
business publications and periodicals, as they relate to fund management,
investment philosophy and investment techniques, may be quoted.
Morningstar, Inc.'s proprietary risk ratings may be quoted in Fund sales
and/or advertising materials. For the three years ended December 31, 1999,
the average risk score for the 2,491 domestic equity funds rated by
Morningstar with a three-year history was 1.07 and the average risk score for
the 476 small company funds rated by Morningstar with a three-year history
was 1.36. For the three years ended December 31, 1998, the risk scores for
the Funds with a three-year history, and their ranks within Morningstar's
equity funds category and its small company category were as follows:
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Premier 0.94 Within highest 40% Within highest 6%
Micro-Cap 1.17 Within highest 71% Within highest 25%
(Investment
Class)
Pennsylvania .93 Within highest 38% Within highest 5%
Mutual (In-
vestment
Class)
Trust & .78 Within highest 8% Within highest 1%
GiftShares
Investment
Class)
Total Return 0.67 Within highest 2% Within highest 1%
<PAGE>
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Low-Priced 1.10 Within highest 64% Within highest 19%
Stock
Royce 1.05 Within highest 58% Within highest 14%
Opportunity
Fund
The Funds' performances may also be compared to those of other
compilations or indices.
Advertising for the Funds may contain examples of the effects of
periodic investment plans, including the principle of dollar cost averaging.
In such a program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are high and
more shares when prices are low. While such a strategy does not assure a
profit or guard against loss in a declining market, the investor's average
cost per share can be lower than if fixed numbers of shares were purchased at
the same intervals. In evaluating such a plan, investors should consider
their ability to continue purchasing shares during periods of declining price
levels.
The Funds may be available for purchase through retirement plans or
other programs offering deferral of or exemption from income taxes, which may
produce superior after-tax returns over time. For example, a $2,000 annual
investment earning a taxable return of 8% annually would have an after-tax
value of $177,887 after thirty years, assuming tax was deducted from the
return each year at a 28% rate. An equivalent tax-deferred investment would
have a value of $244,692 after thirty years.
Risk Measurements
Quantitative measures of "total risk," which quantify the total
variability of a portfolio's returns around or below its average return, may
be used in advertisements and in communications with current and prospective
shareholders. These measures include standard deviation of total return and
the Morningstar risk statistic. Such communications may also include market
risk measures, such as beta, and risk-adjusted measures of performance such
as the Sharpe Ratio, Treynor Ratio, Jensen's Alpha and Morningstar's star
rating system.
Standard Deviation. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation
of those returns. For example, a fund's historical risk can be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile - i.e., spread out around the fund's average
monthly total return, the fund's monthly total returns have been over the
prior period.
Return Per Unit of Risk. This is a measure of a fund's risk adjusted
return and is calculated by dividing a fund's average annual total return by
its annualized standard deviation over a designated time period.
<PAGE>
Beta. Beta measures the sensitivity of a security's or portfolio's
returns to the market's returns. It measures the relationship between a
fund's excess return (over 3-month T-bills) and the excess return of the
benchmark index (S&P 500 for domestic equity funds). The market's beta is by
definition equal to 1. Portfolios with betas greater than 1 are more volatile
than the market, and portfolios with betas less than 1 are less volatile than
the market.
Morningstar Risk. The Morningstar proprietary risk statistic evaluates
a fund's downside volatility relative to that of other funds in its class
based on the underperformances of the fund relative to the riskless T-bill
return. It then compares this statistic to those of other funds in the same
broad investment class.
Sharpe Ratio. Also known as the Reward-to-Variability Ratio, this is
the ratio of a fund's average return in excess of the risk-free rate of
return ("average excess return") to the standard deviation of the fund's
excess returns. It measures the returns earned in excess of those that would
have been earned on a riskless investment per unit of total risk assumed.
Treynor Ratio. Also known as the Reward-to-Volatility Ratio, this is
the ratio of a fund's average excess return to the fund's beta. It measures
the returns earned in excess of those that would have been earned on a
riskless investment per unit of market risk assumed. Unlike the Sharpe
Ratio, the Treynor Ratio uses market risk (beta), rather than total risk
(standard deviation), as the measure of risk.
Jensen's Alpha. This is the difference between a fund's actual returns
and those that would have been earned on a benchmark portfolio with the same
amount of risk - i.e., the same beta, as the portfolio. Jensen's Alpha
measures the ability of active management to increase returns above those
that are purely a reward for bearing market risk.
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted performance.
Ratings may change monthly. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars (highest).
Morningstar ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are adjusted for fees
and sales loads. Ten percent of the funds in an investment category receive
five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive
two stars and the bottom 10% receive one star.
None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
