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THE
ROYCE
FUNDS
Value Investing in Small Companies For Over 20 Years
Royce Value Trust
Royce Micro-Cap Trust
Royce Global Trust
1996 Annual Report
www.roycefunds.com
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- --------------------------------------------------------------------------------
HISTORY SINCE INCEPTION
- --------------------------------------------------------------------------------
The following table details the share accumulations by an initial investor
in the Funds who reinvested all distributions (including fractional shares) and
participated fully in primary subscriptions for each of the rights offerings.
Full participation in distribution reinvestments and rights offerings maximizes
the returns available to an investor. This table should be read in conjunction
with the Performance Reviews of the Funds.
<TABLE>
<CAPTION>
Amount Purchase NAV MKT
History Invested Price Shares Value* Value*
------------------- -------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ROYCE VALUE TRUST
- ------------------
11/28/86 Initial Purchase $ 10,000 $ 10.000 1,000 $ 9,280 $ 10,000
10/15/87 Distribution $.30 7.000 42
12/31/87 Distribution $.22 7.125 32 8,578 7,250
12/27/88 Distribution $.51 8.625 63 10,529 9,238
09/22/89 Rights Offering 405 9.000 45
12/29/89 Distribution $.52 9.125 67 12,942 11,866
09/24/90 Rights Offering 457 7.375 62
12/31/90 Distribution $.32 8.000 52 11,713 11,074
09/23/91 Rights Offering 638 9.375 68
12/31/91 Distribution $.61 10.625 82 17,919 15,697
09/25/92 Rights Offering 825 11.000 75
12/31/92 Distribution $.90 12.500 114 21,999 20,874
09/27/93 Rights Offering 1,469 13.000 113
12/31/93 Distribution $1.15 13.000 160 26,603 25,428
10/28/94 Rights Offering 1,103 11.250 98
12/19/94 Distribution $1.05 11.375 191 27,939 24,905
11/03/95 Rights Offering 1,425 12.500 114
12/07/95 Distribution $1.29 12.125 253 35,676 31,243
12/06/96 Distribution $1.15 12.250 247
- --------------------------------------------------------------------------------------------------------------
12/31/96 $ 16,322 2,878 $ 41,213 $ 36,335
- --------------------------------------------------------------------------------------------------------------
ROYCE MICRO-CAP TRUST
- ----------------------
12/14/93 Initial Purchase $ 7,500 $ 7.500 1,000 $ 7,250 $ 7,500
10/28/94 Rights Offering 1,400 7.000 200
12/19/94 Distribution $.05 6.750 9 9,163 8,462
12/07/95 Distribution $.36 7.500 58 11,264 10,136
12/06/96 Distribution $.80 7.625 133
- --------------------------------------------------------------------------------------------------------------
12/31/96 $ 8,900 1,400 $ 13,132 $ 11,550
- --------------------------------------------------------------------------------------------------------------
ROYCE GLOBAL TRUST
- ---------------------
10/31/96 Initial Purchase $ 4,375 $ 4.375 1,000 $ 5,280 $ 4,375
- --------------------------------------------------------------------------------------------------------------
12/31/96 $ 4,375 1,000 $ 5,520 $ 4,594
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Other than for Initial Purchase, values are stated as of December 31 of the
year indicated, after reinvestment of distributions.
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[Logo]
Dear Fellow Stockholders:
We are pleased to present our 1996 investment results and
our new Annual Report format. Included in this report are
Royce Value and Royce Micro-Cap Trusts, as well as Royce
Global Trust, a fund for which we assumed the investment
management responsibility on November 1, 1996. We are
excited about the opportunity that Royce Global Trust
provides and want to welcome our new stockholders to our
family.
The second half of the year was a good one in terms of
absolute and relative performance for both Royce Value and
Royce Micro-Cap Trusts. The shift away from momentum and
high growth to value during the summer was beneficial to
the Net Asset Value (NAV) and market returns of both Funds
in the last six months. Although our Royce Global Trust
management tenure has been short, we were pleased with
both its early NAV and market price results. Even though
the individual fund investment orientations differ, we
employ the same systematic decision making process for all
three funds. The basic premise is the price one pays for
an investment makes a significant difference in the
returns one receives.
We invite your comments.
Sincerely,
Charles M. Royce
Charles M. Royce
President
[Photo]
Charles M. Royce,
President and Chief
Investment Officer
1996 Performance Results*
RVT OTCM
Through 12/31/96: NAV MKT NAV MKT
--- --- --- ---
Last 3 months 7.8% 9.4% 8.2% 13.9%
Last 6 months 8.2% 11.6% 5.0% 5.7%
1996 15.5% 16.3% 16.6% 13.9%
*Royce GLobal Trust did not have a full quarter of performance
history under Quest Advisory Corp. management.
ANNUAL REPORT REFERENCE GUIDE
Letter to Royce Global Trust Stockholders...PAGE 1
Royce Global Trust Performance/Portfolio Review...PAGE 2
RVT/OTCM Stockholder Letter...PAGES 3-6
RVT Performance/Portfolio Review...PAGES 7-8
OTCM Performance/Portfolio Review...PAGES 9-10
Stockholder Information...PAGE 11
Distribution Reinvestment and Cash Purchase Plan Q & A 's...INSIDE BACK COVER
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The Royce Funds
Value Investing in Small
Companies for Over 20 Years
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Royce Global Trust Stockholder:
We begin the first full calendar year of our new charge encouraged by our
early results and excited about the potential that a globally-oriented
investment approach offers. On November 1, 1996, when we assumed the investment
management responsibility for All Seasons Global Fund, we made two immediate
changes to the Fund. We changed its name to Royce Global Trust ('RGT') and its
investment focus. The Fund now uses a value oriented approach to invest in
global securities without regard to market capitalization. We are pleased to
provide our first progress report.
The first two months of our management, November and December, resulted in
reasonable NAV and market price performance. The Fund's NAV was up 4.5% with a
market price gain of 5.0%. For the full year, the Fund's NAV was up 8.4%, and
the market price was up 9.7%.
At the outset of our involvement in the Fund's management we indicated that
we would become significant stockholders by investing our capital alongside
yours. The senior management of your adviser owned over 500,000 shares of Royce
Global Trust as of the writing of this letter. We also committed to waive our
management fee until the Fund's stock was trading consistently at or above $5.28
(the net asset value per share as of October 31, 1996). The year-end market
price was up 13.1% since June 21, 1996, the day before the announcement of the
proposal to change managers. We are pleased with the market performance thus
far.
We have focused on restructuring and replacing existing portfolio holdings
with equity securities of globally-oriented companies that we know well and
whose prices we deem attractive at current levels. At The Royce Funds, we have
over 20 years of investment experience and a strong value orientation. We fully
expect to continue this tradition with RGT.
We feel good about our initial progress in terms of the portfolio
restructuring and its results. We invite your questions and comments and
appreciate your support as fellow stockholders.
Sincerely,
<TABLE>
<S> <C> <C>
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
President Vice President Vice President
</TABLE>
February 14, 1997
P.S. The NAV per share as of this writing is $5.59. To our knowledge, this is
the Fund's highest NAV since June 1992.
1
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ROYCE GLOBAL TRUST
PERFORMANCE AND PORTFOLIO REVIEW
WHAT WE DO
Royce Global Trust ('RGT') is a closed-end fund that invests in securities of
globally oriented companies using a disciplined value approach. Normally, at
least 65% of the assets will be invested in the securities of companies of at
least three countries, including the United States.
HOW WE DID
Beginning on November 1, 1996, Quest
Advisory Corp. assumed the investment
management for RGT. The Fund's
investment approach was changed to
include more of a value oriented equity
focus. NAV performance for the full
year reflects that of two investment
managers - Veitia and Associates for
the first ten months (+3.7%) and Quest
Advisory Corp. for November and
December (+4.5%). NAV total return for
the full year was 8.4%.
Cash represented 31% of total net
assets as of December 31, 1996, down
from 43% as of October 31, 1996. This
was a reflection of our work in
progress as we replaced inherited
positions with globally oriented
companies we know well and deem
attractive at current prices. A good
example is Velcro Industries, the
Fund's top position at year-end. Based
in the Netherlands, Velcro is believed
to have approximately 50% of the
world's hook and loop fastener market.
The Velcro name is synonymous with the
word 'fastener,' like Kleenex is with
'tissue.'
We are excited about the opportunity
before us, as we were some ten years
ago when we began our flagship
closed-end fund, Royce Value Trust.
PORTFOLIO DIAGNOSTICS
Median Mkt Cap: $436 mil
Wtd. Avg. P/E: 11.1x
Wtd. Avg. P/B: 1.5x
Wtd. Avg. Yield: 4.0%
FUND HIGHLIGHTS
Fund Assets: $44,154,298
NAV Per Share: $5.52
Market Price Per Share: $4.5938
Shares Outstanding: 7,998,419
Symbol: FUND
TOTAL RETURNS THROUGH 12/31/96
NAV MKT
--- ---
Nov. 1 - Dec. 31, 1996*: +4.5% +5.0%
4th Quarter: +4.5% +11.4%
1-Year: +8.4% +9.6%
*Quest Advisory management effective
date: 11/1/96
PORTFOLIO INDUSTRY BREAKDOWN
[PIE CHART]
* Excludes cash and cash equivalents
% OF
TOP TEN POSITIONS NET ASSETS
----------------- ----------
1. Velcro Industries 2.3%
2. Willis Corroon Group 2.2%
3. PXRE 2.0%
4. Standard Commercial 2.0%
5. Lazare Kaplan International 1.9%
6. Stanhome 1.8%
7. Leucadia National 1.8%
8. Suzy Shier 1.7%
9. Scitex 1.6%
10. DIMON 1.6%
2
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The Royce Funds
Value Investing in Small Companies for
Over 20 Years
1414 Avenue of the Americas
New York, NY 10019
(212) 355-7311
(800) 221-4268
Dear Shareholder:
SMALL-CAP SECURITIES WERE BULLIED IN 1996 FOR
A THIRD STRAIGHT YEAR BY THEIR LARGE-CAP
BRETHREN. After running even in the first
six months, small-cap stocks [MAN]
fell behind in the more volatile
second half. For the full year, the Russell 2000 Index of small-cap stocks was
up 16.5% versus a gain of 23.0% for the large-cap oriented S&P 500 Index.
Perhaps the more interesting story in 1996 was the return of market
volatility. The Russell 2000 recorded four down months in 1996, twice as many as
in 1995. According to the independent mutual fund evaluation service,
Morningstar, 361 mutual funds, or 16% of the 2,255 diversified funds that invest
primarily in domestic stocks, lost money in the fourth quarter, as did one of
every three small-cap funds. More funds were in the red for the fourth quarter
than in the previous three quarters combined. We believe that a higher level of
volatility often precedes a period of lower returns.
Combined with increased volatility was a change in market leadership among
small-cap stocks during the second half. The value style of investing, which was
the market laggard earlier in the year, became a market leader during the latter
half. From the first of the year through the Russell 2000 peak on May 22, the
Russell 2000 Value Index was up 10.3% while the Russell 2000 Growth Index was up
a robust 20.9%. However, from the Russell 2000 peak in May through year-end, the
Russell 2000 Value Index recorded a gain of 10.1% versus a decline of 8.0% for
the Russell 2000 Growth Index, quite a reversal of events and perhaps a
harbinger for the market in 1997.
THE THRILL OF REWARD AND THE DENIAL OF RISK
Investment risk and reward are rarely discussed together, as investors
typically focus on one or the other at a time. When times are good, the return
portion of the equation dominates investors' conversations, and when times are
bad, the risk portion moves to center stage. Although the most recent small-cap
cycle clearly favored the 'return' component, the 'risk' segment is always
worthy of equal consideration because it impacts the path of long-term returns.
Risk involves both uncertainty and possibility of loss. Both aspects are
measurable, and both are paramount to the Funds' management philosophy.
To simplify matters, 'uncertainty' relates to fund volatility and is best
measured using two gauges, standard deviation and beta. As the table below
indicates, both Royce Value Trust ('RVT') and Royce Micro-Cap Trust ('OTCM')
were among the 'lowest risk' funds out of the 34 closed-end domestic equity
funds tracked by Morningstar, for the last three years.
MORNINGSTAR RISK*
RVT OTCM
Rank Rank
---- ----
Standard Deviation 3 4
Beta 5 3
Mstar Risk Ratio 9 6
* As of December 31, 1966. Ranking of the lowest to highest
out of the 34 funds in Morningstar's closed-end domestic
equity objective category with three years of history.
'Possibility of loss' is perhaps more important than statistical measures of
volatility because it takes into account a fund's actual down market results.
Morningstar risk ratio actually measures the concept of possibility of loss more
effectively because it considers a fund's underperformance (on a monthly basis)
relative to a safe and attainable return (3-month Treasury bills). Using this
methodology, Royce Value Trust and Royce Micro-Cap Trust can be considered
'below-average risk'
3
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among a peer group of all domestic equity closed-end funds which are primarily
large-cap focused.
While we use various techniques to reduce risk, we cannot prevent the Funds'
net asset values from going down during market downdrafts. However, both Funds
typically have not declined as much during difficult periods when compared to
their benchmark index, the Russell 2000. Since RVT's inception, there have been
twelve down quarters for the Russell 2000. BOTH RVT AND OTCM OUTPERFORMED THE
RUSSELL 2000 IN ALL DOWN QUARTERS SINCE THEIR INCEPTIONS.
Russell 2000 Down Quarter Performance
QTR RUSSELL
ENDED 2000 RVT* OTCM*
----- ---- --- ----
12/31/94 -1.9% -0.7% -0.2%
6/30/94 -3.9 -1.1 +0.1
3/31/94 -2.7 -1.2 +.08
6/30/92 -6.8 -2.8
6/30/91 -1.6 +1.4
9/30/90 -24.5 -17.8
3/31/90 -2.1 -0.9
12/31/89 -5.0 -2.1
12/31/88 -0.6 -0.3
9/30/88 -0.9 +2.8
12/31/87 -29.2 -19.5
6/30/87 -0.7 +1.2
RVT outperformed the Russell 2000 in all
down quarters since its inception.
OTCM outperformed the Index in all
down quarters since its inception.
*NAV performance
Our focus on risk management remains an important part of our investment
process. While individual market phases reward different risk profiles at
different times, central to the management of the Funds is a belief that PAYING
ATTENTION TO RISK DOES NOT DIMINISH LONG-TERM RETURNS. Although this flies in
the face of modern portfolio theory, it remains one of our principal tenets.
WITHIN THE SMALL-CAP UNION:
ONE COUNTRY, TWO COASTS AND MANY STATES
Many changes have taken place in the small-cap [MAP OF THE
investment universe over the last ten years, and we now UNITED STATES]
believe that small-cap stocks are no longer 'small' by previous standards; no
longer 'unknown' as this sector is now regarded as a professional asset class;
and no longer 'under-owned' as the number of small-cap mutual fund portfolios
has grown to well over 400. What were once deemed small-cap stocks (under $300
million in market cap) ten years ago and beyond, are now better defined as
'micro-cap' securities by today's standards. The small-cap universe, which is
presently defined as under $1 billion in market cap, is both broad (over 7,900
issues) and substantial ($1.3 trillion in total capitalization) and as different
and diverse as California and Rhode Island.
THIS LEADS TO AN IMPORTANT, BUT UNRECOGNIZED, ASPECT OF THE SMALL-CAP
MARKET -- IT IS REALLY TWO MARKETS IN ONE: SMALL-CAP AT THE UPPER END AND
MICRO-CAP AT THE LOWER END OF THE CAPITALIZATION RANGE. On the surface, the
distinction may seem subtle, but upon further investigation the differences are
real and quantifiable.
Two Distinct Markets
Small-Cap Micro-Cap
$300 mil - $1 bil $5 mil - $300 mil
1,400 Companies 6,500 companies
$810 bil total cap. $470 bil total cap.
Different performance
Different liquidity
Different institutional acceptance
As we indicated earlier, in 1996 bigger was better in the equity market. This
was also the case with the small-cap market, as the following table indicates:
4
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WHY SIZE MATTERED IN
THE SMALL-CAP WORLD
'FROM CALIFORNIA TO RHODE ISLAND'
S&P 600 PERFORMANCE RETURNS BY QUINTILE
Size (by quintiles) 1996 Performance
- ------------------ ----------------
Largest 20% 46.0%
Next 20% 29.7%
Middle 20% 23.3%
Next 20% 7.5%
Smallest 20% -4.8%
A similar example of this phenomenon was supplied by Prudential Securities'
quantitative analyst, Claudia Mott. Upon examining year-to-date performance of
the broadly based Nasdaq Composite through November 30, she found the top 10
contributors (most of which are large-cap oriented) had produced more than half
of the Index's total return. When factoring out the top 100 contributors, she
found the remaining 4,000+ securities had generated a net negative contribution
for the year.
STILLNESS IN THE WATER
Raymond Devoe, author of 'The Devoe Report,' recently
recounted a scuba-diving experience of some 30 years ago [SHARK]
which evoked eerie analogies to the current investment climate. After receiving
certification at his Caribbean beach hotel, Mr. Devoe swam off into the clear,
blue waters of St. Thomas for his first reef dive. Making his way along the
reef, he stopped near a large rock to enjoy an array of colorful plants and the
tropical fish swimming casually among them. After ten minutes, Mr. Devoe
realized something was terribly wrong -- the fish had disappeared as if they
were hiding from something. He was left alone with the sound of his beating
heart and escaping air bubbles. Not knowing the cause of the sudden 'stillness
in the water,' he experienced a sense of panic and returned to the beach without
incident, yet badly shaken.
Mr. Devoe discussed his sensation with many other divers and most responded
with curious looks. Years later he read Peter Mathiessen's 1971 book, Blue
Meridian_--_The Search for the Great White Shark, and discovered that 'stillness
in the water' takes place prior to great white shark attacks. The panic, or
sense that something is wrong, occurs when the brain receives too many
conflicting messages, leading to an eerie sensation that 'something's coming.'
Divers who have survived shark attacks know the sensation and respond to it
appropriately. They have developed instincts or intuition, and have the
experience to rely on them.
Currently, Mr. Devoe and other experienced investors (ourselves included)
cite similar sensations of apprehension about the equity market. Although one
would hardly describe the current equity market as 'standing still' or
'stillness in the water,' it does evoke a feeling of unease. In what has been
the longest and strongest bull market in history, with the Dow Jones Industrial
Average up over 4,000 points since October 1990, there is seemingly a universal
acceptance that continued prosperity is nearly guaranteed. Although there
haven't been any shark sightings in quite some time, our intuition tells us that
we should not be quick to rule out the possibility. Our own sense of order is
that markets are cyclical, volatility is to be expected, and performance
expectations should be lower.
We are not forecasting bad things for the market. However, our investment
experience may be helpful in recognizing when things seem out of place. AN
ESTABLISHED DECISION-MAKING FRAMEWORK (INVESTMENT PROCESS) HELPS US, LIKE ANY
GOOD DIVER, AVOID THE MISTAKES OR MISSTEPS CAUSED BY PANIC OR FEAR.
5
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<PAGE>
THE ROAD AHEAD
Charles Dow once observed, 'There is always a
disposition in peoples' minds to think that existing
conditions will be permanent.' In the last several [TWO LANE ROAD WITH CLOUDS]
shareholder reports, we have documented why we believe that the equity market
will be different over the next few years. These changes may already be
underway, when one considers that the rolling 3-year average annual total
returns for the Russell 2000, which peaked at 28.2% in September 1993, are now
13.7% as of December 1996. Furthermore, this Index is flat since its peak in
late May.
1996 gave us a higher level of market volatility and the shifting success of
investment styles. If these changes continue, 1997 could be a very interesting
year. We are excited about the recent results and remain enthused about the
long-term prospects of our risk-averse style of investing. Your continued
confidence is appreciated.
Sincerely,
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
Charles M. Royce Jack E. Fockler, Jr. W. Whitney George
President Vice President Vice President
February 3, 1997
PERFORMANCE REVIEWS AND PORTFOLIO ANALYSES FOR ROYCE VALUE TRUST AND ROYCE
MICRO-CAP TRUST BEGIN ON PAGES 7 AND 9, RESPECTIVELY, OF THIS REPORT.
All performance information in this Report is presented on a total return basis
and reflects the reinvestment of distributions. Past performance is no guarantee
of future results. Share prices will fluctuate, so that shares may be worth more
or less than their original cost when sold.
Morningstar risk ratio, beta and standard deviation are measures of a fund's
relative risk and are calculated for the trailing 36-month period. Morningstar
proprietary risk ratio measures a fund's downside volatility relative to all
equity funds which have an average score of 1.00. The average score for the 34
funds in the domestic equity objective category with a three year history was
1.07 for the three years ended 12/31/96. The lower the risk ratio, the lower a
fund's downside volatility has been. Beta is a measure of sensitivity to market
movements compared to the unmanaged S&P 500 Index, with the beta of the S&P 500
equal to 1.00. A low beta means that a fund's market related volatility has been
low. Standard deviation is a statistical measure within which a fund's total
returns have varied over time. The greater the standard deviation, the greater a
fund's volatility.
The Russell 2000, Russell 2000 Growth, Russell 2000 Value, S&P 600 and S&P 500
are unmanaged indices of common stocks and include the reinvestment of
dividends.
6
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ROYCE VALUE TRUST
PERFORMANCE REVIEW
WHAT WE DO
Royce Value Trust ('RVT') is a closed-end fund that invests in small and
micro-cap companies using a disciplined value approach.
HOW WE DID
1996 was a seminal year for Royce Value
Trust. The Fund now has 10 years of
performance history and approximately
$441 million in total net assets. RVT
outperformed the popular small-cap
oriented Russell 2000 Index and its
small-cap performance benchmark, the
S&P 600 Index, in the fourth quarter
with a 7.8% NAV return versus gains of
5.2% and 5.6%, respectively. The second
half emergence of value as a market
leader within small-cap was reflected
in the pick up in the Fund's fourth
quarter returns.
PORTFOLIO DIAGNOSTICS
Median Mkt. Cap: $267 mil
Wtd. Avg. P/E: 13.5x
Wtd. Avg. P/B: 1.6x
Wtd. Avg. Yield: 2.0%
Turnover Rate: 34%
Avg. Daily Trading Vol.: 50,400
RVT VERSUS RUSSELL 2000 & S&P 600
VALUE OF $10,000 INVESTED ON 11/30/86
[LINE GRAPH]
TOTAL RETURNS THROUGH 12/31/96
NAV MKT
--- ---
4th Quarter 1996: +7.8% +9.4%
1-Year: +15.5% +16.3%
5-Year Avg. Annual: +15.1% +14.0%
10-Year Avg. Annual: +12.7% +10.4%
In spite of its strong second half, RVT was unable to catch up to both small-cap
indices, which began the year with fast starts. For the full year, RVT provided
a 15.5% NAV total return versus 16.5% for the Russell 2000 and 21.3% for the S&P
600. RVT's 15.1% average annual NAV total return for the last five years was
comparable to both small-cap indices. For the last 10 years, RVT outperformed
both, posting a 12.7% average annual NAV total return versus 12.4% for the
Russell 2000 and 11.2% for the S&P 600.
We are as excited about the Fund's next 10 years as we were when we began in
late 1986.
RISK/RETURN COMPARISON
FROM 11/30/86 TO 12/31/96
Avg. Annual Standard
Total Return Deviation RUR
------------ --------- ---
RVT 12.7% 12.0 1.06
Russell 2000 12.0% 18.2 0.66
S&P 600 10.7% 18.1 0.59
Since its inception,
RVT has outperformed
both benchmarks on an absolute
and a risk-adjusted basis.
RUR = Return Per Unit of Risk: Average annual
total return divided by the annualized
standard deviation over a designated time period.
The Russell 2000 and S&P 600 are unmanaged indices of domestic small-cap stocks.
7
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ROYCE VALUE TRUST
PORTFOLIO REVIEW
FUND HIGHLIGHTS
Net Assets: $441,836,672
NAV Per Share: $14.32
Market Price Per Share: $12.625
Shares Outstanding: 26,348,378
PORTFOLIO INDUSTRY BREAKDOWN*
[PIE CHART]
*Excludes cash and cash equivalents
MARKET CAP EXPOSURE
[BAR GRAPH]
% of Portfolio
% OF
TOP TEN POSITIONS NET ASSETS
----------------- ----------
1. The Standard Register Co. 1.2%
2. PXRE 1.0%
3. Ash Grove Cement 1.0%
4. Woodward Governor 0.9%
5. Marshall Industries 0.9%
6. Florida Rock Industries 0.9%
7. Wesco Financial 0.9%
8. Zenith National Insurance 0.9%
9. International Semi-Tech Sr. Note 0.8%
10. Lilly Industries 0.8%
IDEAS THAT WORKED GOOD IDEAS AT THE TIME
During calendar 1996, each of the Even the best small-cap companies
following companies made meaningful are not immune to the business flu.
positive contributions to our overall Usually, if their balance sheets are
performance. Among these winners, strong and they have a history of high
there were no examples of hot new internal returns, these companies will
issues, high-priced takeovers or recover. We are generally well
momentum miracles. Rather, our top rewarded for our persistence, although
five performers emerged from a series rebounds can take longer than we
of long-term investment decisions, anticipate. Unfortunately, a few of
carefully considered and executed in our investments never recover. Our
prior years. We built our positions five worst performers in 1996 were:
when business conditions were
difficult and other investors had
voted negatively on future prospects.
REALIZED AND REALIZED AND
SECURITY UNREALIZED GAIN SECURITY UNREALIZED LOSS
-------- --------------- -------- ---------------
Claire's Stores $2,439,667 Scitex Corporation $869,213
Ethan Allen Interiors 2,125,825 Sage Labs 741,000
The Standard Register Co. 1,995,937 Blair 611,813
Woodward Governor 1,984,675 Catherines Stores 584,100
Stein Mart 1,886,346 Gryphon Holdings 581,000
8
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ROYCE MICRO-CAP TRUST
PERFORMANCE REVIEW
WHAT WE DO
Royce Micro-Cap Trust ('OTCM') is a closed-end fund that uses a disciplined
value approach to invest in companies with market capitalizations of $300
million or less. Due to the sector's size and limited institutional following,
we believe there is more opportunity than in the general small-cap market to
find pricing inefficiencies.
HOW WE DID
Royce Micro-Cap Trust now has three years of performance history and
approximately $113 million in total net assets. It remains the only closed-end
fund which focuses on the small-end of small-cap, the sector known as
micro-cap. OTCM outperformed its relevant small-cap benchmark (Russell
2000 Index) for the fourth quarter, (8.2% vs. 5.2%), and finished just
ahead for the full year (16.6% vs. 16.5%) on an NAV basis.
PORTFOLIO DIAGNOSTICS
Median Mkt. Cap: $156 mil
Wtd. Avg. P/E: 12.7x
Wtd. Avg. P/B: 1.5x
Wtd. Avg. Yield: 1.5%
Turnover Rate: 51%
OTCM (NAV) vs. Russell 2000
Growth of $10,000 Invested on 12/31/93
[LINE GRAPH]
Since its inception, the Fund's micro-cap orientation has
provided an edge versus the small-cap oriented Russell 2000.
TOTAL RETURNS THROUGH 12/31/96
NAV MKT
--- ---
4th Quarter 1996: + 8.2% +13.9%
1-Year: +16.6% +13.9%
3-Year Avg. Annual: +14.9% + 9.0%
The Fund's risk averse orientation was especially beneficial with the pick up in
market volatility and the emergence of value as a market leader in the last six
months of the year. Average annual NAV total returns for the last three years
and since inception (12/14/93) periods for the Fund were 14.9% and 14.7%,
respectively.
We are encouraged by our initial results and the potential rewards afforded
by the sector. We believe that micro-cap companies are what small-caps were 20
years ago in terms of return potential.
RISK/RETURN COMPARISON
FROM 12/31/93 TO 12/31/96
Avg. Annual Standard
Total Return Deviation RUR
------------ --------- ---
OTCM 14.9% 7.8 1.91
Russell 2000 13.7% 12.1 1.13
Since its inception,
OTCM has outperformed
The Russell 2000 on both an absolute
and a risk-adjusted basis.
RUR = Return Per Unit of Risk: Average annual
total return divided by the annualized
standard deviation over a designated time period.
The Russell 2000 is an unmanaged index of domestic small-cap stocks.
The Nasdaq Composite, an unmanaged index of small and large company stocks, was
up 22.7% in 1996.
9
<PAGE>
<PAGE>
ROYCE MICRO-CAP TRUST
PORTFOLIO REVIEW
- ----------------------------------------
FUND HIGHLIGHTS
Net Assets: $113,953,022
NAV Per Share: $9.38
Market Price Per Share: $8.25
Shares Outstanding: 12,153,511
- ----------------------------------------
PORTFOLIO INDUSTRY BREAKDOWN*
[PIE CHART]
* Excludes cash and cash equivalents
MARKET CAP EXPOSURE
[BAR GRAPH]
% of Portfolio
% OF
TOP TEN POSITIONS NET ASSETS
----------------- ----------
1. New England Business Service 1.4%
2. PXRE 1.4%
3. Florida Rock Industries 1.4%
4. Matthews International 1.3%
5. Penn Engineering & Manufacturing 1.2%
6. Duff & Phelps Credit Rating 1.2%
7. Sevenson Environment Services 1.1%
8. Simpson Manufacturing 1.1%
9. Lifetime Hoan 1.1%
10. Gibson Greeting 1.1%
IDEAS THAT WORKED GOOD IDEAS AT THE TIME
During calendar 1996, each of the Even the best small-cap companies
following companies made meaningful are not immune to the business flu.
positive contributions to our overall Usually, if their balance sheets are
performance. Among these winners, strong and they have a history of high
there were no examples of hot new internal returns, these companies will
issues, high-priced takeovers or recover. We are generally well
momentum miracles. Rather, our top rewarded for our persistence, although
five performers emerged from a series rebounds can take longer than we
of long-term investment decisions, anticipate. Unfortunately, a few of
carefully considered and executed in our investments never recover. Our
prior years. We built our positions five worst performers in 1996 were:
when business conditions were
difficult and other investors had
voted negatively on future prospects.
REALIZED AND REALIZED AND
SECURITY UNREALIZED GAIN SECURITY UNREALIZED LOSS
-------- --------------- -------- ---------------
Dreco Energy $674,683 Chico's FAS $405,798
Gulfmark International 656,018 Equity Oil 323,650
Cliff's Drilling 639,181 Richardson Electronics 263,000
Wet Seal 593,970 Catherines Stores 255,194
Simpson Manufacturing 572,759 TBC 204,625
10
<PAGE>
<PAGE>
The Boards of Directors of Royce Value Trust, Inc. and Royce Micro-Cap
Trust, Inc. have given the Funds' management the discretionary authority to
cause each of the Funds to repurchase up to 300,000 shares of their common stock
in open market and other transactions through December 31, 1997. Such
repurchases would be effected at a price per share less than the then current
net asset value, but not in excess of the then prevailing market price.
The Boards of Directors of Royce Value Trust, Inc. and Royce Micro-Cap
Trust, Inc. are authorized to offer stockholders an opportunity to subscribe for
additional shares of common stock of the Funds through rights offerings at a
price per share that may be less than the then current net asset value of the
Funds' common stock. The timing and terms of any such offerings are left to the
Board's discretion.
ROYCE MICRO-CAP TRUST, INC.
At a Special Meeting of Stockholders held on December 3, 1996, the Fund's
stockholders approved the new Investment Advisory Agreement between the Fund and
Quest Advisory Corp., as follows:
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST VOTES ABSTAINED
-------------- ------------------ ---------------
<S> <C> <C> <C>
8,397,503 108,366 57,232
</TABLE>
ROYCE GLOBAL TRUST, INC.
At the 1996 Annual Meeting of Stockholders (called for August 29, 1996 and
adjourned to October 25, 1996), the Fund's stockholders approved: (i) a new
investment advisory agreement between the Fund and Quest Advisory Corp.; (ii)
the election of a new Board of Directors, consisting of (a) Charles M. Royce,
(b) Richard M. Galkin, (c) Stephen L. Isaacs and (d) David L. Meister; (iii) a
change in the Fund's fundamental investment objectives; (iv) amended and
restated articles of incorporation; and (v) the selection of new accountants.
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST VOTES ABSTAINED
-------------- ------------------ ---------------
<S> <C> <C> <C>
(i) 4,110,941 2,634,924 181,443
(ii)(a) 4,408,812 N/A 2,518,497
(b) 4,398,578 N/A 2,528,732
(c) 4,395,738 N/A 2,531,571
(d) 4,394,875 N/A 2,532,435
(iii) 4,049,794 2,648,011 229,503
(iv) 4,052,997 2,640,741 233,570
(v) 5,591,433 1,156,127 179,747
</TABLE>
On or about October 18, 1996, the Fund's stockholders were informed of a
proposal by Quest Advisory Corp. to voluntarily waive its advisory fee until a
share of the Fund's Common Stock had a market value equivalent to the share's
net asset value as of October 31, 1996 (as described in detail in a letter to
the Fund's stockholders from Quest Advisory Corp.), and they were offered an
opportunity to change their votes. At least one beneficial holder changed its
votes on October 23, 1996, before the Annual Meeting. However, such changed
votes were inadvertently not cast by the record holder of the shares at the
October 25, 1996 Annual Meeting. Had such votes been cast at the Annual Meeting,
the voting results would have been the following:
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST VOTES ABSTAINED
-------------- ------------------ ---------------
<S> <C> <C> <C>
(i) 4,476,006 2,269,859 181,443
(ii)(a) 4,408,812 N/A 2,518,497
(b) 4,398,578 N/A 2,528,732
(c) 4,395,738 N/A 2,531,571
(d) 4,394,875 N/A 2,532,435
(iii) 4,414,859 2,282,946 229,503
(iv) 4,418,062 2,275,676 233,570
(v) 5,591,433 1,156,127 179,747
</TABLE>
------------------------
The 1997 Annual Meetings of the Funds' Stockholders are scheduled to be
held on April 29, 1997, at the Funds' offices in New York. The purposes and
times of the meetings will be set forth in the Proxy Statement you will receive
in the mail shortly.
11
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN
- --------------------------------------------------------------------------------
WHAT IS THE DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN?
Distributions of net investment income, if any, and capital gains are
normally made in December. The Funds' Distribution Reinvestment and Cash
Purchase Plans offer you an automatic way to reinvest your dividends and capital
gains distributions in additional shares of a Fund, increasing your holdings in
the Fund. Reinvestment of the annual distribution is done at market price,
without commissions. The number of shares to be issued to a stockholder will be
determined by dividing the amount of the distribution payable to the stockholder
by the lower of (i) the last reported sale price of a share of the Fund's common
stock on the valuation date, which follows the record date, or (ii) the net
asset value per share on the valuation date, provided that the Fund will not
issue new shares at a discount of more than 5% from the last reported sale price
on that date.
The Plan also allows registered stockholders to make optional cash
purchases of shares of a Fund's common stock through the Plan Agent and to
deposit certificates representing your Fund shares with the Plan Agent for
safekeeping. Stockholders should refer to the Plan document for information on
these options.
HOW DO REGISTERED STOCKHOLDERS PARTICIPATE IN THE PLAN?
If your shares are registered directly with a Fund, you are automatically a
participant in its Plan unless you have instructed the Plan Agent in writing
otherwise. The Plan Agent must receive the instructions not less than 10 days
prior to the record date for a distribution in order to be effective for that
distribution. A registered stockholder may also receive the distribution in the
form of a stock certificate for the full shares and a check for the fractional
share if the Plan Agent is properly notified. Stockholders who elect to not
participate in the Plan will receive all distributions in cash, paid by check
mailed directly to the stockholder by State Street Bank and Trust Company,
dividend paying agent and Plan Agent.
WHAT IF MY SHARES ARE HELD BY A BROKERAGE FIRM, BANK OR OTHER NOMINEE?
If your shares are held in the name of a brokerage firm, bank, or other
nominee as the stockholder of record, we still expect them to automatically
reinvest distributions on your behalf. Please consult with your brokerage firm,
bank or other nominee to be certain that it is reinvesting distributions on your
behalf. If your nominee is unable to reinvest distributions on your behalf, you
should instruct your nominee to have your shares registered in your name in
order to participate.
HOW WILL I KNOW HOW MANY SHARES I HAVE?
The Plan Agent maintains the accounts for registered stockholders in the
Plan and sends written confirmation of all transactions in the account,
including information needed by participants for personal and tax records.
Shares in the account of each participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each participant will
be able to vote those shares at a shareholder meeting or by proxy. A participant
may also send other stock certificates held by them to the Plan Agent to be held
in non-certificated form. There is no service fee charged to participants for
reinvesting distributions. The Plan Agent's fees for the processing of the
distribution reinvestment are paid for by the Fund. A participant may terminate
his/her account under the Plan by written notice to the Plan Agent. Termination
will be effective as described in the Plan. If a participant elects to sell
his/her shares before the Plan is terminated, the Plan Agent will deduct a $2.50
fee plus brokerage commissions from the sale transaction. If a nominee is the
registered owner of your shares, the nominee will maintain the accounts on your
behalf.
WHAT IF I NEED MORE INFORMATION?
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: [Name of Fund] Distribution Reinvestment and Cash Purchase Plan,
c/o State Street Bank and Trust Company, PO Box 8200, Boston MA 02266-8200,
telephone (800) 426-5523.
12
<PAGE>
<PAGE>
[Logo]
1414 Avenue of the Americas
New York, NY 10019
FOR GENERAL INFORMATION, TELEPHONE SERVICES,
ADDITIONAL REPORT COPIES & INQUIRIES
1-800-221-4268
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
1-800-426-5523
SERVICES FOR INVESTMENT PROFESSIONALS
FUND MATERIALS, PERFORMANCE UPDATES
1-800-59-ROYCE (597-6923)
LOOK FOR OUR REVISED WEB SITE IN THE SPRING OF '97!
COMPARE UPDATED FUND PERFORMANCE, CHAT WITH OTHER INVESTORS,
MEET THE PORTFOLIO MANAGERS,
FIND OUT WHAT'S NEW - WE LOOK FORWARD TO YOUR VISIT!
HTTP://WWW.ROYCEFUNDS.COM
YOU CAN ALSO REACH THE ROYCE FUNDS BY E-MAIL
[email protected]
