UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
FORM N-CSR |
CERTIFIED SHAREHOLDER REPORT |
OF |
REGISTERED MANAGEMENT INVESTMENT COMPANIES |
Investment Company Act File Number: 811-07537 |
Name of Registrant: Royce Capital Fund |
Address of Registrant: 745 Fifth Avenue |
New York, NY 10151 |
Name and address of agent for service: | John E. Denneen, Esq. | |||
745 Fifth Avenue | ||||
New York, NY 10151 |
Registrant’s telephone number, including area code: (212) 508-4500 |
Date of fiscal year end: December 31, 2012 |
Date of reporting period: January 1, 2013 – June 30, 2013 |
Item 1. Reports to Shareholders.
SEMIANNUAL
REVIEW AND REPORT
TO SHAREHOLDERS
Royce Capital Fund– Micro-Cap Portfolio Royce Capital Fund– Small-Cap Portfolio | |||
www.roycefunds.com |
Performance and Expenses | Through June 30, 2013 |
Average Annual Total Returns | Annual | ||||||||||||||||||||
Since Inception | Operating | ||||||||||||||||||||
Fund | One-Year | Five-Year | 10-Year | 15-Year | (12/27/96) | Expenses | |||||||||||||||
Royce Capital Fund–Micro-Cap Portfolio | 8.54 | % | 4.14 | % | 8.79 | % | 10.67% | 11.35 | % | 1.35 | % | ||||||||||
Royce Capital Fund–Small-Cap Portfolio | 20.26 | 7.33 | 10.86 | 10.75 | 11.56 | 1.06 | |||||||||||||||
Russell Microcap Index1 | 25.38 | 8.53 | 7.81 | n.a. | n.a. | n.a. | |||||||||||||||
Russell 2000 Index | 24.21 | 8.77 | 9.53 | 6.60 | 7.662 | n.a. | |||||||||||||||
Important Performance, Expense, and Risk Information
All performance information in this Review and Report reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current performance may be higher or lower than performance quoted. Current month-end performance may be obtained at www.roycefunds.com. The Fund’s total returns do not reflect any deduction for charges or expenses of the variable contracts investing in the Fund. All performance and expense information reflects the result for each Fund’s Investment Class Shares. Service Class Shares bear an annual distribution expense that is not borne by the Investment Class. Operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees, other expenses and, in the case of Royce Capital Fund–Micro-Cap Portfolio, acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Series of Royce Capital Fund invest primarily in securities of small-cap and micro-cap companies, which may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Royce Capital Fund–Micro-Cap Portfolio may invest up to 35% of its net assets in foreign securities and Royce Capital Fund–Small-Cap Portfolio may invest up to 25% of its net assets in foreign securities. Investments in foreign securities may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see “Investing in Foreign Securities” in the prospectus.) Please read the prospectus carefully before investing or sending money. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index along with the next smallest eligible securities as determined by Russell. The Russell 2000 Index is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. Index returns include net reinvested dividends and/or interest income. Distributor: Royce Fund Services, Inc. |
This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
Table of Contents | |
Semiannual Review | |
Performance and Expense Table | Inside Cover |
Letter to Our Shareholders | 2 |
2013 In Quotes | 30 |
Postscript: Searching for Super Small-Cap Companies Through the Macro Noise | Inside Back Cover |
Semiannual Report to Shareholders | 7 |
This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders | 1 |
Charles M. Royce, President As it has for the past few years, sentiment once again shifted dramatically in the second quarter and volatility returned to the markets. However, unlike the previous few years, it was the bond market that felt the brunt of the pain as speculation that the Federal Reserve may soon pull back from its unprecedented stimulus efforts fueled a one percentage point jump in 10-year Treasury yields during the final two months of the quarter. After gaining 12.4% in the first quarter of 2013, the Russell 2000 Index advanced 3.1% in the second quarter, finishing the first half of the year with a 15.9% gain. At the same time, the CBOE Volatility Index (VIX), after hitting a fresh 2013 low in March 2013, spiked 33% in the second quarter—the largest quarterly increase since the third quarter of 2011. In the span of one quarter, we have transitioned from a world in which the idea that interest rates would remain indefinitely low to one in which the shift back to a more normalized yield environment is now center stage. Continued on page 4... | Letter to Our Shareholders Exile on Wall Street The small-cap market reached peaks in July 2007 and April 2011 before surging to its most recent record highs. Surveying the small-cap landscape from the vantage points of these respective summits shows that each cycle (the second of which is still going on) has presented a difficult environment for active managers such as the parties penning this letter. This has been particularly true of the most recent period, which has seen solid results for the major small-cap indexes, ETFs, and other passive investment vehicles, while the active managers who once routinely outperformed all of them have achieved more muted results. The current phase has favored more defensive sectors and investments with high dividend yields, such as REITs and MLPs. Strong balance sheets and higher-quality metrics such as returns on invested capital (ROIC) have also been out of favor in this world of easy money and zero interest rates that tends to be more supportive of lower-quality businesses. And we have not even mentioned the flight to fixed income, which, along with the proliferation of ETFs, has been one of the most significant developments in the investment world during the last three-plus years. These events took shape in a market that has featured regular spasms of high volatility and periods of declining stock prices, some of them of a historically extreme nature. These are periods in which fundamentally driven active management approaches such as ours have historically proven their worth. That many of our portfolios struggled to preserve their value as effectively as they have done historically during the market downturns since the pre-crisis peak in July 2007 has been frustrating and humbling, to say the least. Yet investing is a routinely humbling business. This is not the first time (and almost certainly won’t be the last) in which we have endured a prolonged relative slump versus the small-cap market as a whole. But behind every contrarian, especially an out-of-sync one, is a disciplined investor. By buying out-of-favor companies and rooting around beaten down sectors and industries, we do things every day that may not look particularly savvy to many on Wall Street, at least in the short run. After | ||
2 | This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
40 years, we are used to doing things according to our own principles and long-term time frame and do not mind being something akin to exiles on Wall Street. | By buying out-of-favor companies and rooting around beaten down sectors and industries, we do things every day that may not look particularly savvy to many on Wall Street, at least in the short run. After 40 years, we are used to doing things according to our own principles and long-term time frame and do not mind being something akin to exiles on Wall Street. We are bullish not only on stocks but, more important, on our specific approach to quality and active management. | |||
It should come as no surprise, then, that we are not persuaded—or even bothered—by those voices suggesting that active management has perhaps seen its day in the sun. With ETFs and high-frequency trading seemingly making markets that much more efficient, with so many investors disenchanted with equities, and with sustained periods of relative underperformance in the books, perhaps (so the argument runs) active managers should simply switch to indexing or find another line of work. To be sure, the last several years have given us little to crow about (while serving up plenty of crow to eat). However, we remain as enthusiastic as ever about active management in general and value-oriented small-cap investing in particular. To paraphrase Mark Twain, we find reports of the death of active management to be greatly exaggerated. | ||||
So while lower-quality stocks have dominated the market and outperformed many of our holdings through the current cycle, we are undeterred in our conviction that well-run, cash-rich businesses with high returns on invested capital remain the best route to building long-term wealth. It is also important to remember that many stocks possessing these attributes have done very well on an absolute basis through the current cycle even as they have suffered in comparison to their more defensive or higher-yielding cohorts. Finally, we have already seen signs of a change in which we think the kind of higher-quality companies that we favor can assume a leadership role. There were encouraging signals in May and in the second half of 2012 that investors were giving more thought to fundamentals. In short, we are excited about the days ahead. We are bullish not only on stocks but, more important, on our specific approach to quality and active management. | ||||
Tumbling Dice When 2012 drew to a close, we were equally optimistic. The second half of 2012 offered much that was good for what ailed quality-centric investors. The last few months in particular saw a brief resurgence for quality as many companies with strong balance sheets, high ROIC, and strong cash flow characteristics outpaced the rest of the small-cap market. This rally did not last long into 2013, however, as more highly levered and lower-ROIC businesses soon resumed leadership. Quality stocks for the most part acquitted themselves well in the bullish first quarter; they simply did not attract as much interest as more defensive areas. The strongest sectors for the small-cap Russell 2000 Index during the first quarter were Health Care, Consumer Discretionary, and Financials, the latter drawing much of its strength from REITs. More cyclical sectors such as Technology and Energy, which we see as featuring some of the most attractively valued, high-quality companies available over the last couple of years, lagged. The result was a strong opening quarter for stocks across the board. Small-caps led, showing positive returns for the third consecutive quarter. The Russell 2000 gained 12.4% compared to respective gains of 11.0% and 10.6% for the large-cap Russell 1000 and S&P 500 Indexes, while the more tech-oriented Nasdaq Composite rose 8.2%. Quality stocks resuming their back seat was not entirely surprising. Stocks as a whole have been |
This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders | 3 |
From our perspective, the end to the easy money bias that has been in place for several years presents an attractive environment for active managers with an absolute orientation like us, as underlying fundamentals and less-leveraged balance sheets should become increasingly more important. We have long thought that the ongoing efforts to reflate the economy through numerous quantitative easings and a zero interest rate policy would have unintended consequences. To be sure, the actions of the Fed have been distorting asset pricing and valuations in the equity market in a number of ways. Many of the fundamental qualities we hold so dear, for example, seem temporarily suspended in an investment world where highly-leveraged businesses are benefiting from the ability to restructure their debt, lower funding costs, and extend maturities. The unintended consequence of leveling the playing field has given lower-quality companies the luxury of time, which in a normal environment they would not have. It would not surprise us to see these trends reverse as tapering is implemented and monetary stimulus is slowly trimmed back and ultimately withdrawn. To be clear, our balance sheet scrutiny is paramount to our process, particularly our focus on risk. To that end, we have always chosen to focus on companies with high operating leverage. Our measure of financial leverage centers on the ratio of assets to stockholders’ equity, looking for a two-to-one ratio for non-financial companies. Continued on page 6... | |||
Letter to Our Shareholders | ||
on an encouraging roll since the low on June 2, 2012, so some give-back was not entirely unexpected, even if it was somewhat disappointing. Going into the second quarter, we were confident that the rally could last, though we also assumed that a correction would be a natural part of a longer-term bullish trend, as has been the case over the past several years. While share prices all over the globe were more volatile in the second quarter, on the domestic front a rocky market still resulted in positive returns, with strength across all asset classes. The tech-oriented Nasdaq Composite led for the quarter with a 4.2% advance. Small-cap edged out the large-cap indexes, with the Russell 2000 up 3.1% for the quarter compared to respective gains of 2.9% and 2.7% for the large-cap S&P 500 and Russell 1000 Indexes. One-year results were also strong for the major indexes, with the Russell 2000 leading (+24.2%), followed by the Russell 1000 (+21.2%), S&P 500 (+20.6%), and Nasdaq (+16.0%). Three-year results were even more closely aligned, offering compelling evidence of just how tightly correlated equity returns have been. Average annual total returns for the three-year period ended June 30, 2013 for the Russell 2000 (+18.7%), the Russell 1000 (+18.6%), and S&P 500 (+18.5%) were within two-tenths of one another while the Nasdaq rose 17.3% over the same span. That stocks continue to perform well could be seen by the fact that trailing one-, five-, and 10-year results for the small-cap and two large-cap indexes were well ahead of their returns for the same periods ended one year prior. Micro-cap returns also continued their ascent. The Russell Microcap Index gained 18.3% year-to-date through June 30, 2013. Its one-year result was also strong, up 25.4%. The micro-cap index’s trailing three-, five-, and 10-year results were also fine, though it trailed the Russell 2000 in these periods. By contrast, mid-caps narrowly underperformed year-to-date—the Russell Midcap Index rose 15.5% through the end of June—but outpaced their small-cap peers for the one-, three-, 10-, 15-, 20-, and 25-year periods ended June 30, 2013. This impressive long-term record helps to explain why we think of mid-caps as the market’s stealth asset class. Outside the U.S., short- and intermediate-term results were far less bullish. The first quarter saw positive, though lower, returns for the Russell Global ex-U.S. Small Cap Index, which climbed 6.5% while the Russell Global ex-U.S. Large Cap Index was up 3.1%. Second-quarter results slipped into the red as the Russell Global ex-U.S. Small Cap Index fell 4.5% and the Russell Global ex-U.S. Large Cap Index was down 2.9%. This left year-to-date results through June 30, 2013 considerably behind the major U.S. indexes: the Russell ex-U.S. Small Cap Index was up 1.8% while its large-cap sibling managed only a 0.1% advance. In this context it was hardly surprising that one-, three-, and five-year results for the non-U.S. indexes were also well behind their U.S. equivalents for the periods ended June 30, 2013. | ||
Shine a Light In the first quarter cyclical companies mostly lagged defensive sectors, but the second quarter offered a more eclectic, and thus encouraging, mix. Within the Russell 2000, both Consumer-oriented sectors remained strong, as did Health Care, Information Technology, and Telecommunication Services. However, the more cyclical Energy, Materials, and Industrials sectors fell, as did more high-yielding areas such as REITs and Utilities. |
4 | This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
| Our contention is that the unusual performance pattern spurred by the effects of multiple rounds of QE and zero interest rates has begun to unwind, which will set the stage for more fundamentally based value-oriented approaches to take hold of market leadership. Guarded optimism may be as close to bliss as we can usually get, but we have seldom felt more confident about our investment approach as we do right now, looking out on the months and years to come. |
This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders | 5 |
This is an important part of our ongoing search for a company’s “margin of safety.” If a company is carrying too much debt, it impedes its own ability to meet the challenge of out-of-left-field occurrences such as lawsuits, the loss of a major customer, or overseas currency crises. A conservatively capitalized company, especially a smaller company, can better weather these storms because it has the necessary financial reserves to do so, while a company with too much debt on the balance sheet runs a greater risk that stormy weather will turn into a hurricane. We also view financially strong companies as well-positioned to grow. The assets of these companies are derived more from retained earnings than paid-in capital, i.e., they have the ability to self-fund their own success as a business. Of course, transitions are never easy. Shifting back to a more normalized yield environment is likely to be marked by increased volatility and pockets of uncertainty. Stock prices have begun the transition from their reliance on monetary policy to fundamentals, which is a process we believe will stress the importance of companies with strong, less-leveraged balance sheets, excess cash flow generation, and the ability to self-finance. We look forward to a more normalized yield environment that could usher in that long-awaited flight to quality. | Letter to Our Shareholders This unnatural and (we believe) temporary advantage reduced the attractiveness of the conservatively capitalized businesses that have been our portfolio mainstays since the early 1970s. However, with Fed policy changing, we are moving closer to a market in which strong fundamentals are likely to be in high demand once more. What Ben Bernanke actually said back in June about the Fed potentially tapering its bond purchases seemed entirely positive. Many of us have been waiting for the economy and the markets to return to more historically normal conditions for some time. We have been especially eager to see interest rates normalize, which would be as sure a sign as any that the economy and markets are operating at something like business as usual (and this period of QE and zero interest rates has been anything but that). We suspect an environment in which the Fed is not as intimately involved in the economy will be a healthy one for stocks. So while many investors saw the Fed’s plans to taper bond purchases as a cause for alarm, we saw it as an affirmation that the economy is healing as it grows. Within the next couple of years, it should grow even stronger. Along with more historically normal—that is, higher—rates, this would be a very welcome development for equities in our view, particularly the kind of attractively valued, well-run, financially strong small-cap businesses that remain our favorites. Guarded optimism may be as close to bliss as we can usually get, but we have seldom felt more confident about our investment approach as we do right now, looking out on the months and years to come. Sincerely, | ||||||
Charles M. Royce | W. Whitney George | Jack E. Fockler, Jr. | |||||
President | Vice President | Vice President | |||||
July 31, 2013 |
6 | This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
Table of Contents |
Semiannual Report to Shareholders | ||||||||||
Managers’ Discussions of Fund Performance | ||||||||||
Royce Capital Fund–Micro-Cap Portfolio | 8 | |||||||||
Royce Capital Fund–Small-Cap Portfolio | 10 | |||||||||
Schedules of Investments and Financial Statements | 12 | |||||||||
Notes to Financial Statements | 21 | |||||||||
Understanding Your Fund’s Expenses | 25 | |||||||||
Trustees and Officers | 26 | |||||||||
Notes to Performance and Other Important Information | 27 | |||||||||
Board Approval of Investment Advisory Agreement | 28 | |||||||||
Royce Capital Fund 2013 Semiannual Report to Shareholders | 7 |
Royce Capital Fund–Micro-Cap Portfolio |
AVERAGE ANNUAL TOTAL RETURNS Through 6/30/13 | ||||||||||
January–June 20131 | 3.29 | % | ||||||||
One-Year | 8.54 | |||||||||
Three-Year | 8.90 | |||||||||
Five-Year | 4.14 | |||||||||
10-Year | 8.79 | |||||||||
15-Year | 10.67 | |||||||||
Since Inception (12/27/96) | 11.35 | |||||||||
ANNUAL EXPENSE RATIO | ||||||||||
Operating Expenses | 1.35 | % | ||||||||
1 Not annualized | ||||||||||
CALENDAR YEAR TOTAL RETURNS | ||||||||||
Year | RCM | Year | RCM | |||||||
2012 | 7.6 | % | 2004 | 13.8 | % | |||||
2011 | -12.1 | 2003 | 49.2 | |||||||
2010 | 30.1 | 2002 | -12.9 | |||||||
2009 | 57.9 | 2001 | 29.7 | |||||||
2008 | -43.3 | 2000 | 18.5 | |||||||
2007 | 4.0 | 1999 | 28.1 | |||||||
2006 | 21.1 | 1998 | 4.1 | |||||||
2005 | 11.6 | 1997 | 21.2 | |||||||
TOP 10 POSITIONS % of Net Assets | ||||||||||
Kirkland’s | 1.4 | % | ||||||||
GP Strategies | 1.3 | |||||||||
Graham Corporation | 1.3 | |||||||||
Horsehead Holding Corporation | 1.3 | |||||||||
Patriot Transportation Holding | 1.3 | |||||||||
Marten Transport | 1.3 | |||||||||
Perry Ellis International | 1.2 | |||||||||
ATMI | 1.2 | |||||||||
Stein Mart | 1.2 | |||||||||
Olympic Steel | 1.2 | |||||||||
PORTFOLIO SECTOR BREAKDOWN % of Net Assets | ||||||||||
Industrials | 20.5 | % | ||||||||
Consumer Discretionary | 17.3 | |||||||||
Information Technology | 13.4 | |||||||||
Materials | 10.1 | |||||||||
Health Care | 7.9 | |||||||||
Energy | 7.5 | |||||||||
Financials | 5.4 | |||||||||
Consumer Staples | 0.7 | |||||||||
Utilities | 0.1 | |||||||||
Miscellaneous | 4.8 | |||||||||
Cash and Cash Equivalents | 12.3 | |||||||||
Manager’s Discussion Micro-caps enjoyed generally strong returns in the first six months of 2013, but this did not translate to notable results for Royce Capital Fund–Micro-Cap Portfolio (RCM). The Fund rose 3.3% for the year-to-date period ended June 30, 2013 versus respective gains of 18.3% and 15.9% for its benchmark for the same period, the Russell Microcap Index, and the small-cap Russell 2000 Index. The year’s first quarter saw the bulk of underperformance. The first three months of the year were a mostly bullish period that followed a solid third quarter and more volatile fourth quarter in 2012. RCM, however, struggled during the year’s first three months. For the first quarter, the Fund gained 2.5% versus 12.6% for its benchmark and 12.4% for the small-cap index. The second quarter brought considerably more volatility and, unsurprisingly, lower returns for equities across the board. Markets across the globe convulsed late in June following the announcement by Fed Chairman Bernanke that the central bank would consider slowing the pace of monthly bond purchases later in the year. Along with less-than-stellar news out of China, Brazil, Turkey, and Europe, stocks fell precipitously for several sessions before beginning to find their feet again. The upshot was a rougher quarter for stocks. RCM was up 0.8% for the second quarter versus 5.1% for the micro-cap index and 3.1% for the small-cap index. For the periods ended June 30, 2013, the Fund underperformed both indexes for one-, three-, and five-year spans, while the Fund outpaced the micro-cap index for the 10-year period and beat the Russell 2000 for the 15-year and since inception (12/27/96) periods. (The Russell Microcap Index’s inception was June 30, 2000.) RCM’s average annual total return since inception was 11.3%, a long-term record in which we take great pride. The portfolio’s top contributor in the first half was hhgregg, a retailer specializing in consumer electronics, home appliances, and other items. Its share price benefited from growing home sales and improving consumer confidence. We reduced our position in April and May. Clothing retailer Stein Mart also received help from higher levels of consumer activity. It drew an even larger advantage from resolving internal accounting issues that drove investors from its stock late in 2012. The company, which discovered these errors on its own, restated results and then continued to improve its merchandizing strategy. Even with the rise in its share price, we liked its valuation at the end of June, when it was RMC’s eleventh-largest holding. Two top-ten positions were also top contributors in the first half. Graham |
GOOD IDEAS THAT WORKED Top Contributors to Performance Year-to-Date through 06/30/131 | |||||||||||
hhgregg | 0.66% | ||||||||||
Stein Mart | 0.65 | ||||||||||
Graham Corporation | 0.55 | ||||||||||
Kirkland’s | 0.53 | ||||||||||
Monotype Imaging Holdings | 0.43 | ||||||||||
1 Includes dividends | |||||||||||
Important Performance and Expense Information All performance information in this Report reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current performance may be higher or lower than performance quoted. The Fund’s total returns do not reflect any deduction for charges or expenses of the variable contracts investing in the Fund. Returns as of the most recent month-end may be obtained at www.roycefunds.com. All performance and risk information reflects the result of the Investment Class (its oldest class). Shares of RCM’s Service Class bear an annual distribution expense that is not borne by the Investment Class. Operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Regarding the two “Good Ideas” tables shown above, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Fund’s year-to-date performance for 2013. |
8 | Royce Capital Fund 2013 Semiannual Report to Shareholders |
Performance and Portfolio Review Corporation manufactures custom vacuum and heat transfer equipment. We bought shares when its niche business was slow and its valuation looked particularly attractive to us. Growing sales and record revenue in its fiscal fourth quarter helped to draw other investors. Kirkland’s was another company that profited from the resurgence in the housing industry as well as from analytical tools that allowed it to better understand and respond to sales activity at its stores, creating greater efficiency and better inventory management. PDI provides outsourced sales and other commercial services to pharmaceutical, biotechnology, and healthcare companies in the U.S. Its contract sales business has not grown as we initially anticipated, which has hurt results. We began to reduce our position in April. Detracting most from the portfolio’s results in the period were investments in the Materials sector, particularly those in the metals & mining category. Four of the portfolio’s five largest detractors were precious metals miners. We have reduced the Fund’s exposure to this industry, holding positions only in those companies that are well funded and capable in our view of weathering what remained at the end of June a very challenging period for mining businesses. These challenges include rising operating costs and declining commodity prices. We added shares of Endeavour Silver in January, March, and April and trimmed our position in Pilot Gold in the first quarter. Choosing to hold shares of McEwen Mining, we also reduced our stake in Lumina Copper. The lack of exposure to more defensive areas of the market, most notably REITs and MLPs, was also a factor in first-half results (though REITs abruptly reversed course in the second quarter). This was consistent with much of what hampered relative returns in 2012. We take a disciplined approach, looking for bargain-priced companies with strong balance sheets and above-average returns on invested capital. This vintage Royce formula has led us to companies that have not experienced full participation in the last few years’ worth of rallies while they have often been sold off with equal abandon during downturns. Perhaps needless to say, our patience and discipline have been amply tested throughout the last two-and-a-half years, though by no means enough for us to abandon what has been successful for most of the Fund’s more than two decades of history. Indeed, we are highly confident going forward that companies with solid fundamentals and strong managements can ultimately be market leaders. We recently increased the Fund’s exposure to U.S. companies, which stood at 75% of net assets at the end of June. We firmly believe that the portfolio is well positioned for the next market phase, one which we anticipate should be better for the kind of conservatively capitalized micro-cap businesses that we seek for the portfolio. |
GOOD IDEAS AT THE TIME | |
Endeavour Silver | -0.44% |
Pilot Gold | -0.41 |
McEwen Mining | -0.32 |
Lumina Copper | -0.30 |
PDI | -0.29 |
1 Net of dividends |
ROYCE CAPITAL–MICRO-CAP VS. RUSSELL MICROCAP AND RUSSELL 2000 Value of $10,000 Invested on 6/30/00 (Russell Microcap Inception) | |||
Includes reinvestment of distributions. |
FUND INFORMATION AND PORTFOLIO DIAGNOSTICS | |||
Fund Net Assets | $560 million | ||
Number of Holdings | 196 | ||
Turnover Rate | 16% | ||
Average Market Capitalization1 | $373 million | ||
Weighted Average P/E Ratio2,3 | 17.4x | ||
Weighted Average P/B Ratio2 | 1.5x | ||
U.S. Investments (% of Net Assets) | 73.4% | ||
Non-U.S. Investments (% of Net Assets) | 14.3% | ||
Ticker Symbol | |||
Investment Class | RCMCX | ||
Service Class | RCMSX | ||
1Geometric Average. This weighted calculation uses each portfolio holding’s market cap in a way designed to not skew the effect of very large or small holdings; instead, it aims to better identify the portfolio’s center, which Royce believes offers a more accurate measure of average market cap than a simple mean or median. | |||
2Harmonic Average. This weighted calculation evaluates a portfolio as if it were a single stock and measures it overall. It compares the total market value of the portfolio to the portfolio’s share in the earnings of its underlying stocks. | |||
STATISTICAL MEASURES Five-Year Period Ended 6/30/13 | |||
Sharpe Ratio | Standard Deviation | ||
RCM | 0.28 | 24.59 | |
Russell Microcap | 0.45 | 25.07 | |
DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater Over the Last 7 Years, in Percentages (%) | |||
Royce Capital Fund 2013 Semiannual Report to Shareholders | 9 |
Royce Capital Fund–Small-Cap Portfolio |
AVERAGE ANNUAL TOTAL RETURNS Through 6/30/13 | ||||||||||
January–June 20131 | 12.42 | % | ||||||||
One-Year | 20.26 | |||||||||
Three-Year | 13.86 | |||||||||
Five-Year | 7.33 | |||||||||
10-Year | 10.86 | |||||||||
15-Year | 10.75 | |||||||||
Since Inception (12/27/96) | 11.56 | |||||||||
ANNUAL EXPENSE RATIO | ||||||||||
Operating Expenses | 1.06 | % | ||||||||
1 Not annualized | ||||||||||
CALENDAR YEAR TOTAL RETURNS | ||||||||||
Year | RCS | Year | RCS | |||||||
2012 | 12.5 | % | 2004 | 25.0 | % | |||||
2011 | -3.3 | 2003 | 41.1 | |||||||
2010 | 20.5 | 2002 | -13.8 | |||||||
2009 | 35.2 | 2001 | 21.0 | |||||||
2008 | -27.2 | 2000 | 33.3 | |||||||
2007 | -2.1 | 1999 | 8.2 | |||||||
2006 | 15.6 | 1998 | 8.9 | |||||||
2005 | 8.6 | 1997 | 17.1 | |||||||
TOP 10 POSITIONS % of Net Assets | ||||||||||
Nu Skin Enterprises Cl. A | 3.0 | % | ||||||||
G-III Apparel Group | 3.0 | |||||||||
Unit Corporation | 3.0 | |||||||||
Federated Investors Cl. B | 3.0 | |||||||||
Buckle (The) | 2.8 | |||||||||
NETGEAR | 2.7 | |||||||||
Steven Madden | 2.5 | |||||||||
Crocs | 2.5 | |||||||||
Jos. A. Bank Clothiers | 2.4 | |||||||||
Fabrinet | 2.3 | |||||||||
PORTFOLIO SECTOR BREAKDOWN % of Net Assets | ||||||||||
Consumer Discretionary | 32.2 | % | ||||||||
Information Technology | 19.5 | |||||||||
Financials | 13.1 | |||||||||
Health Care | 8.2 | |||||||||
Industrials | 7.5 | |||||||||
Energy | 6.0 | |||||||||
Consumer Staples | 4.6 | |||||||||
Materials | 3.8 | |||||||||
Miscellaneous | 0.4 | |||||||||
Cash and Cash Equivalents | 4.7 | |||||||||
Manager’s Discussion The first half of 2013 featured a robust, though increasingly volatile, market for equities, as well as an economy that is growing, even if the pace is much slower than any of us would like. In this context, we were pleased with the absolute performance of Royce Capital Fund–Small-Cap Portfolio (RCS) through the year’s first six months. For the year-to-date period ended June 30, 2013 RCS gained 12.4% versus 15.9% for its small-cap benchmark, the Russell 2000 Index, for the same period. Although our ultimate goal is always strong absolute long-term returns, underperformance has still been frustrating. The companies that we seek for the portfolio have strong balance sheets, high returns on invested capital, and strong cash flow characteristics. We also look for management teams with track records of prudent capital allocation. Companies with these attributes have lagged the market over the last two-plus years, but we have seen signs that this trend is beginning to shift. There were encouraging signs, for example, in the second quarter, which saw not only ample volatility but also a fair amount of differentiation at the company, industry, and sector levels. We think this trend is likely to continue. During the first quarter, RCS rose 7.6% compared to 12.4% for its small-cap benchmark. The Fund then gained a short-term edge over its benchmark, rising 4.5% in the more volatile second quarter while its benchmark was up 3.1%. RCS also maintained an edge over its benchmark to outpace the Russell 2000 over longer-term periods. For the periods ended June 30, 2013, the Fund outperformed the small-cap index for the 10-, 15-year, and since inception (12/27/96) periods. RCS’s average annual total return since inception was 11.6%. We are proud of the Fund’s long-term record on both an absolute and relative basis. RCS’s largest holding at the end of the period, Nu Skin Enterprises, felt the effects of market skepticism before rebounding in the first half. Nu Skin makes skin care treatments and nutritional supplements with a niche in anti-aging products. It sells using a direct marketing strategy. This last part convinced many investors in 2012 that Nu Skin’s business model was essentially the same as Herbalife, which was not a desirable association considering that the latter endured accusations of being a pyramid scheme. Knowing the company well, we ignored the noise and held on, liking the company’s global reach, quality products, solid earnings and cash flows, and low-debt balance sheet. Once investors were |
GOOD IDEAS THAT WORKED Top Contributors to Performance Year-to-Date through 06/30/131 | |||||||||||
Nu Skin Enterprises Cl. A | 1.56% | ||||||||||
Federated Investors Cl. B | 0.86 | ||||||||||
G-III Apparel Group | 0.85 | ||||||||||
Inter Parfums | 0.83 | ||||||||||
Guess? | 0.61 | ||||||||||
1 Includes dividends | |||||||||||
Important Performance and Expense Information All performance information in this Report reflects past performance, is presented on a total return basis, and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Current performance may be higher or lower than performance quoted. The Fund’s total returns do not reflect any deduction for charges or expenses of the variable contracts investing in the Fund. Returns as of the most recent month-end may be obtained at www.roycefunds.com. All performance and risk information reflects the result of the Investment Class (its oldest class). Shares of RCS’s Service Class bear an annual distribution expense that is not borne by the Investment Class. Operating expenses reflect the Fund’s total annual operating expenses for the Investment Class as of the Fund’s most current prospectus and include management fees and other expenses. Regarding the two “Good Ideas” tables shown above, the sum of all contributors to, and all detractors from, performance for all securities in the portfolio would approximate the Fund’s year-to-date performance for 2013. |
10 | Royce Capital Fund 2013 Semiannual Report to Shareholders |
Performance and Portfolio Review |
convinced of Nu Skin’s viability, its shares began to climb, helped also by its expanding business in China. We began to take gains in March. Our take on asset manager and money market specialist Federated Investors has not changed much over the last year. Money market funds are still facing new regulations—the new rules remain under review, extending a process that has been dragging on for a while now. We agree with most industry observers who think that the longer this process takes, the less onerous the rules are going to be. Equally important is our confidence that rising interest rates are going to help its business. Although we began to trim our position in mid-May, we held a large stake at the end of the period, when it was RCS’s fourth-largest holding. G-III Apparel Group—the Fund’s second-largest holding at the end of June—reaped the benefit of investors recognizing the value in its growing product line and licensing deals. Long recognized as the U.S.’s largest coat maker, for years the stock suffered from a seasonal bias—when winter sales peaked (or when the winter was mild), its share price would often suffer. For example, we added shares in the fall and winter of 2011-12 when warmer weather was helping to drive its price down. The company has been diversifying into dresses and sportswear, owns brands such as Wilsons Leather and Vilebrequin, manufactures for Calvin Klein, Kenneth Cole, Cole Hahn, Tommy Hilfiger, and Ivanka Trump, and has licenses for the NFL, NBA, MLB, and NHL. This large and impressive roster, along with growing profitability, helped its stock price to rise, particularly after it raised its guidance for fiscal 2013 in early June. As for positions that detracted from performance, wireless product maker NETGEAR saw its price fall through much of the first half, primarily due to a product execution problem in its storage business, which hurt fiscal first-quarter earnings, and an acquisition in April of select assets of the Sierra Wireless AirCard business, which some investors thought left NETGEAR too exposed to the lower-margin wireless service provider segment. Ever contrarian, we built our stake because we think the firm is very well positioned to benefit from ongoing global growth for wireless products. Our high regard for the durable name of Maidenform Brands led us to continue adding shares in the first half. Its business has slumped over the last couple of years, making its valuation increasingly attractive to us. |
GOOD IDEAS AT THE TIME | |
NETGEAR | -0.74% |
Maidenform Brands | -0.24 |
Vera Bradley | -0.23 |
Orthofix International | -0.17 |
American Eagle Outfitters | -0.17 |
1 Net of dividends |
ROYCE CAPITAL–SMALL-CAP VS. RUSSELL 2000 Value of $10,000 Invested on 12/27/96 | |
Includes reinvestment of distributions. |
FUND INFORMATION AND PORTFOLIO DIAGNOSTICS | ||||
Fund Net Assets | $881 million | |||
Number of Holdings | 74 | |||
Turnover Rate | 22% | |||
Average Market Capitalization1 | $1,323 million | |||
Weighted Average P/E Ratio2,3 | 14.2x | |||
Weighted Average P/B Ratio2 | 1.8x | |||
U.S. Investments (% of Net Assets) | 87.0% | |||
Non-U.S. Investments (% of Net Assets) | 8.3% | |||
Ticker Symbol | ||||
Investment Class | RCPFX | |||
Service Class | RCSSX | |||
1Geometric Average. This weighted calculation uses each portfolio holding’s market cap in a way designed to not skew the effect of very large or small holdings; instead, it aims to better identify the portfolio’s center, which Royce believes offers a more accurate measure of average market cap than a simple mean or median. | ||||
2Harmonic Average. This weighted calculation evaluates a portfolio as if it were a single stock and measures it overall. It compares the total market value of the portfolio to the portfolio’s share in the earnings of its underlying stocks. | ||||
3The Fund’s P/E ratio calculation excludes companies with zero or negative earnings (1% of portfolio holdings as of 6/30/13). | ||||
STATISTICAL MEASURES Five-Year Period Ended 6/30/13 | ||||
Sharpe Ratio | Standard Deviation | |||
RCS | 0.43 | 21.37 | ||
Russell Microcap | 0.46 | 24.07 | ||
DOWN MARKET PERFORMANCE COMPARISON All Down Periods of 7.5% or Greater Over the Last 7 Years, in Percentages (%) | ||||
Royce Capital Fund 2013 Semiannual Report to Shareholders | 11 |
Schedules of Investments
Royce Capital Fund–Micro-Cap Portfolio |
SHARES | VALUE | ||||
COMMON STOCKS – 87.7% | |||||
Consumer Discretionary – 17.3% | |||||
Auto Components - 1.1% | |||||
Drew Industries | 121,079 | $ | 4,760,826 | ||
Fuel Systems Solutions 1 | 80,300 | 1,436,567 | |||
6,197,393 | |||||
Diversified Consumer Services - 2.4% | |||||
American Public Education 1 | 106,370 | 3,952,709 | |||
Capella Education 1 | 105,000 | 4,373,250 | |||
Lincoln Educational Services | 952,893 | 5,021,746 | |||
13,347,705 | |||||
Household Durables - 1.1% | |||||
Cavco Industries 1 | 90,404 | 4,560,882 | |||
Skullcandy 1 | 274,403 | 1,498,240 | |||
6,059,122 | |||||
Internet & Catalog Retail - 0.3% | |||||
Vitacost.com 1 | 217,100 | 1,834,495 | |||
Leisure Equipment & Products - 0.7% | |||||
Callaway Golf | 406,412 | 2,674,191 | |||
146,600 | 1,442,544 | ||||
4,116,735 | |||||
Media - 0.3% | |||||
Saraiva S/A Livreiros Editores | 107,300 | 1,394,537 | |||
Specialty Retail - 8.8% | |||||
Buckle (The) | 76,025 | 3,954,821 | |||
Cato Corporation (The) Cl. A | 152,300 | 3,801,408 | |||
Citi Trends 1 | 332,427 | 4,830,164 | |||
†Destination Maternity | 175,000 | 4,305,000 | |||
326,843 | 5,219,683 | ||||
Jos. A. Bank Clothiers 1 | 63,570 | 2,626,712 | |||
Kirkland’s 1 | 452,180 | 7,800,105 | |||
Shoe Carnival | 277,300 | 6,657,973 | |||
Stein Mart | 504,278 | 6,883,395 | |||
Zumiez 1 | 113,400 | 3,260,250 | |||
49,339,511 | |||||
Textiles, Apparel & Luxury Goods - 2.6% | |||||
Calida Holding | 64,000 | 1,571,966 | |||
Maidenform Brands 1 | 171,200 | 2,966,896 | |||
Perry Ellis International | 339,030 | 6,885,699 | |||
True Religion Apparel 1 | 96,900 | 3,067,854 | |||
14,492,415 | |||||
Total (Cost $77,842,684) | 96,781,913 | ||||
Consumer Staples – 0.7% | |||||
Food Products - 0.7% | |||||
Asian Citrus Holdings | 2,786,100 | 998,621 | |||
Legumex Walker 1 | 193,200 | 824,825 | |||
Sipef | 30,400 | 2,042,611 | |||
1,303,907 | 178,505 | ||||
Total (Cost $4,955,593) | 4,044,562 | ||||
Energy – 7.5% | |||||
Energy Equipment & Services - 5.7% | |||||
Canadian Energy Services & Technology | 203,300 | 3,156,688 | |||
Dawson Geophysical 1 | 87,429 | 3,222,633 | |||
Geospace Technologies 1 | 5,412 | 373,861 | |||
Gulf Island Fabrication | 207,488 | 3,973,395 | |||
Lamprell 1 | 515,400 | 1,099,416 | |||
Natural Gas Services Group 1 | 211,875 | 4,976,944 | |||
Tesco Corporation 1 | 348,380 | 4,616,035 | |||
TGC Industries | 564,140 | 4,637,231 | |||
Total Energy Services | 408,900 | 5,657,027 | |||
31,713,230 | |||||
Oil, Gas & Consumable Fuels - 1.8% | |||||
Contango Oil & Gas | 34,607 | 1,167,986 | |||
Gran Tierra Energy 1 | 198,300 | 1,191,783 | |||
Renewable Energy Group 1 | 63,800 | 907,874 | |||
Sprott Resource | 1,087,300 | 3,628,814 | |||
Triangle Petroleum 1 | 456,104 | 3,197,289 | |||
55,122 | 144,971 | ||||
10,238,717 | |||||
Total (Cost $29,788,239) | 41,951,947 | ||||
Financials – 5.4% | |||||
Capital Markets - 2.5% | |||||
FBR & Co. 1 | 152,816 | 3,860,132 | |||
Gluskin Sheff + Associates | 58,700 | 1,086,148 | |||
GMP Capital | 330,700 | 1,949,548 | |||
INTL FCStone 1 | 232,569 | 4,058,329 | |||
U.S. Global Investors Cl. A | 198,700 | 419,257 | |||
Westwood Holdings Group | 60,527 | 2,597,819 | |||
13,971,233 | |||||
Commercial Banks - 0.8% | |||||
Bancorp (The) 1 | 119,428 | 1,790,226 | |||
BCB Holdings 1 | 1,303,907 | 386,719 | |||
Pacific Continental | 208,800 | 2,463,840 | |||
4,640,785 | |||||
Insurance - 0.4% | |||||
American Safety Insurance Holdings 1 | 26,963 | 780,579 | |||
Navigators Group 1 | 22,536 | 1,285,453 | |||
2,066,032 | |||||
Real Estate Management & Development - 1.7% | |||||
Brasil Brokers Participacoes | 742,200 | 2,178,686 | |||
Kennedy-Wilson Holdings | 332,630 | 5,534,963 | |||
Midland Holdings | 4,750,000 | 1,776,033 | |||
9,489,682 | |||||
Total (Cost $30,508,800) | 30,167,732 | ||||
Health Care – 7.9% | |||||
Biotechnology - 0.8% | |||||
Burcon NutraScience 1 | 140,303 | 339,533 | |||
Dyax Corporation 1 | 560,516 | 1,939,385 | |||
Lexicon Pharmaceuticals 1 | 1,018,079 | 2,209,232 | |||
4,488,150 | |||||
12 | Royce Capital Fund 2013 Semiannual Report to Shareholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. |
June 30, 2013 (unaudited) |
SHARES | VALUE | ||||
Health Care (continued) | |||||
Health Care Equipment & Supplies - 3.5% | |||||
Cerus Corporation1 | 555,557 | $ | 2,455,562 | ||
CryoLife | 325,589 | 2,038,187 | |||
Exactech 1 | 135,317 | 2,672,511 | |||
Merit Medical Systems 1 | 204,235 | 2,277,220 | |||
SurModics 1 | 153,378 | 3,069,094 | |||
Syneron Medical 1 | 439,785 | 3,826,129 | |||
Trinity Biotech ADR | 85,570 | 1,441,855 | |||
ZELTIQ Aesthetics 1 | 288,669 | 1,844,595 | |||
19,625,153 | |||||
Health Care Providers & Services - 2.6% | |||||
45,000 | 1,293,750 | ||||
CorVel Corporation 1 | 152,646 | 4,467,948 | |||
IPC The Hospitalist 1 | 35,724 | 1,834,785 | |||
PDI 1 | 412,620 | 1,939,314 | |||
U.S. Physical Therapy | 175,160 | 4,841,422 | |||
14,377,219 | |||||
Health Care Technology - 0.1% | |||||
59,300 | 731,762 | ||||
Pharmaceuticals - 0.9% | |||||
Unichem Laboratories | 523,764 | 1,449,881 | |||
Vetoquinol | 76,475 | 2,603,066 | |||
Zogenix 1 | 530,478 | 907,118 | |||
4,960,065 | |||||
Total (Cost $37,732,715) | 44,182,349 | ||||
Industrials – 20.5% | |||||
Aerospace & Defense - 0.5% | |||||
AeroVironment 1 | 67,000 | 1,352,060 | |||
American Science & Engineering | 27,300 | 1,528,800 | |||
2,880,860 | |||||
Building Products - 1.7% | |||||
AAON | 71,539 | 2,366,510 | |||
Quanex Building Products | 229,800 | 3,869,832 | |||
WaterFurnace Renewable Energy | 157,500 | 3,077,518 | |||
9,313,860 | |||||
Commercial Services & Supplies - 1.9% | |||||
Courier Corporation | 135,418 | 1,933,769 | |||
Ennis | 293,449 | 5,073,733 | |||
Heritage-Crystal Clean 1 | 58,134 | 849,338 | |||
417,700 | 1,332,463 | ||||
Team 1 | 40,400 | 1,529,140 | |||
10,718,443 | |||||
Construction & Engineering - 1.8% | |||||
Layne Christensen 1 | 205,669 | 4,012,602 | |||
Severfield-Rowen | 3,924,542 | 2,820,367 | |||
Sterling Construction 1 | 341,847 | 3,097,134 | |||
9,930,103 | |||||
Electrical Equipment - 2.9% | |||||
Global Power Equipment Group | 354,188 | 5,709,511 | |||
Graphite India | 2,131,709 | 2,636,611 | |||
LSI Industries | 588,613 | 4,761,879 | |||
Powell Industries 1 | 42,100 | 2,174,465 | |||
Voltamp Transformers | 115,400 | 776,777 | |||
16,059,243 | |||||
Machinery - 6.0% | |||||
AIA Engineering | 172,693 | 990,969 | |||
Foster (L.B.) Company | 122,146 | 5,273,043 | |||
FreightCar America | 227,391 | 3,863,373 | |||
Gorman-Rupp Company | 44,670 | 1,422,293 | |||
Graham Corporation | 240,020 | 7,207,801 | |||
Kadant | 137,931 | 4,161,378 | |||
Key Technology 1 | 259,129 | 3,713,318 | |||
RBC Bearings 1 | 59,322 | 3,081,778 | |||
Semperit AG Holding | 110,441 | 3,967,651 | |||
33,681,604 | |||||
Professional Services - 2.8% | |||||
CRA International 1 | 209,706 | 3,873,270 | |||
Exponent | 50,797 | 3,002,611 | |||
GP Strategies 1 | 308,408 | 7,346,278 | |||
Kforce | 103,600 | 1,512,560 | |||
15,734,719 | |||||
Road & Rail - 2.5% | |||||
Marten Transport | 450,570 | 7,060,432 | |||
Patriot Transportation Holding 1 | 235,440 | 7,072,617 | |||
14,133,049 | |||||
Trading Companies & Distributors - 0.4% | |||||
Houston Wire & Cable | 181,700 | 2,514,728 | |||
Total (Cost $100,668,172) | 114,966,609 | ||||
Information Technology – 13.4% | |||||
Communications Equipment - 2.2% | |||||
Anaren 1 | 167,384 | 3,839,789 | |||
COM DEV International 1 | 303,700 | 1,157,970 | |||
Digi International 1 | 320,910 | 3,006,927 | |||
KVH Industries 1 | 255,100 | 3,395,381 | |||
Parrot 1 | 45,520 | 1,266,788 | |||
12,666,855 | |||||
Computers & Peripherals - 0.7% | |||||
Avid Technology 1 | 82,093 | 482,707 | |||
Super Micro Computer 1 | 315,611 | 3,358,101 | |||
3,840,808 | |||||
Electronic Equipment, Instruments & Components - 1.0% | |||||
Electro Rent | 142,600 | 2,394,254 | |||
Fabrinet 1 | 217,969 | 3,051,566 | |||
5,445,820 | |||||
Internet Software & Services - 0.8% | |||||
QuinStreet 1 | 320,700 | 2,767,641 | |||
428,700 | 1,701,939 | ||||
4,469,580 | |||||
IT Services - 1.1% | |||||
CSE Global | 1,592,500 | 1,067,949 | |||
EPAM Systems 1 | 137,348 | 3,733,118 | |||
Forrester Research | 37,194 | 1,364,648 | |||
6,165,715 | |||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. | Royce Capital Fund 2013 Semiannual Report to Shareholders | 13 |
Schedules of Investments
Royce Capital Fund–Micro-Cap Portfolio (continued) |
SHARES | VALUE | |||||
Information Technology (continued) | ||||||
Semiconductors & Semiconductor Equipment - 5.7% | ||||||
Advanced Energy Industries 1 | 269,100 | $ | 4,685,031 | |||
ATMI 1 | 291,100 | 6,884,515 | ||||
AXT 1 | 1,102,947 | 2,977,957 | ||||
GSI Technology 1 | 518,261 | 3,275,409 | ||||
Integrated Silicon Solution 1 | 455,899 | 4,996,653 | ||||
M/A-COM Technology Solutions Holdings 1 | 163,742 | 2,390,633 | ||||
Mindspeed Technologies 1 | 301,495 | 976,844 | ||||
Rudolph Technologies 1 | 56,893 | 637,202 | ||||
Sigma Designs 1 | 631,245 | 3,187,787 | ||||
Ultra Clean Holdings 1 | 316,776 | 1,916,495 | ||||
31,928,526 | ||||||
Software - 1.9% | ||||||
Monotype Imaging Holdings | 173,542 | 4,409,702 | ||||
TeleNav 1 | 296,400 | 1,550,172 | ||||
VASCO Data Security International 1 | 546,829 | 4,544,149 | ||||
10,504,023 | ||||||
Total (Cost $70,686,400) | 75,021,327 | |||||
Materials – 10.1% | ||||||
Chemicals - 2.3% | ||||||
C. Uyemura & Co. | 36,400 | 1,502,904 | ||||
FutureFuel Corporation | 196,100 | 2,778,737 | ||||
LSB Industries 1 | 60,500 | 1,839,805 | ||||
Quaker Chemical | 77,988 | 4,836,036 | ||||
Societe Internationale de Plantations d’Heveas | 28,985 | 2,042,233 | ||||
12,999,715 | ||||||
Metals & Mining - 7.7% | ||||||
Alamos Gold | 218,800 | 2,650,482 | ||||
Allied Nevada Gold 1 | 55,829 | 361,772 | ||||
Argonaut Gold 1 | 135,100 | 730,930 | ||||
Bear Creek Mining 1 | 598,300 | 967,111 | ||||
Endeavour Mining 1 | 1,395,200 | 742,904 | ||||
Endeavour Silver 1 | 587,200 | 2,014,096 | ||||
Geodrill 1 | 1,217,200 | 821,729 | ||||
Gold Standard Ventures 1 | 700,000 | 441,000 | ||||
Goldgroup Mining 1 | 652,000 | 68,194 | ||||
Haynes International | 78,170 | 3,741,998 | ||||
Horsehead Holding Corporation 1 | 560,303 | 7,177,481 | ||||
Imdex | 782,292 | 443,576 | ||||
International Tower Hill Mines 1 | 306,722 | 199,369 | ||||
Lumina Copper 1 | 290,000 | 1,337,359 | ||||
McEwen Mining 1 | 938,196 | 1,576,169 | ||||
Olympic Steel | 276,228 | 6,767,586 | ||||
Phoscan Chemical 1 | 2,968,200 | 747,906 | ||||
Pilot Gold 1 | 1,669,325 | 1,269,811 | ||||
Quaterra Resources 1 | 895,000 | 80,550 | ||||
Silvercorp Metals | 486,600 | 1,372,212 | ||||
Synalloy Corporation | 93,641 | 1,454,245 | ||||
Timmins Gold 1 | 918,500 | 2,002,330 | ||||
Universal Stainless & Alloy Products 1 | 185,536 | 5,469,601 | ||||
Village Main Reef | 793,885 | 36,140 | ||||
Western Copper and Gold 1 | 720,000 | 367,200 | ||||
42,841,751 | ||||||
Paper & Forest Products - 0.1% | ||||||
TFS Corporation 1 | 1,150,235 | 536,493 | ||||
Total (Cost $65,205,579) | 56,377,959 | |||||
Utilities – 0.1% | ||||||
Independent Power Producers & Energy Traders - 0.1% | ||||||
Alterra Power 1 | 1,844,000 | 552,306 | ||||
Total (Cost $2,120,432) | 552,306 | |||||
Miscellaneous 4 – 4.8% | ||||||
Total (Cost $26,207,634) | 27,242,206 | |||||
TOTAL COMMON STOCKS | ||||||
(Cost $445,716,248) | 491,288,910 | |||||
REPURCHASE AGREEMENT – 12.5% | ||||||
Fixed Income Clearing Corporation, | ||||||
0.01% dated 6/28/13, due 7/1/13, | 69,794,000 | |||||
COLLATERAL RECEIVED FOR SECURITIES | ||||||
LOANED – 1.3% | ||||||
Money Market Funds | ||||||
Federated Government Obligations Fund | 7,576,072 | |||||
TOTAL INVESTMENTS – 101.5% | ||||||
(Cost $523,086,320) | 568,658,982 | |||||
LIABILITIES LESS CASH | ||||||
AND OTHER ASSETS – (1.5)% | (8,540,011 | ) | ||||
NET ASSETS – 100.0% | $ | 560,118,971 | ||||
14 | Royce Capital Fund 2013 Semiannual Report to Shareholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. |
June 30, 2013 (unaudited) |
Royce Capital Fund–Small-Cap Portfolio |
SHARES | VALUE | ||||
COMMON STOCKS – 95.3% | |||||
Consumer Discretionary – 32.2% | |||||
Auto Components - 0.6% | |||||
Dorman Products | 110,848 | $ | 5,057,994 | ||
Automobiles - 0.9% | |||||
Thor Industries | 162,015 | 7,967,898 | |||
Media - 1.3% | |||||
Saga Communications Cl. A | 96,261 | 4,419,342 | |||
World Wrestling Entertainment Cl. A | 685,558 | 7,068,103 | |||
11,487,445 | |||||
Specialty Retail - 15.3% | |||||
American Eagle Outfitters | 675,615 | 12,336,730 | |||
Ascena Retail Group 1 | 768,880 | 13,416,956 | |||
Buckle (The) | 473,724 | 24,643,122 | |||
Cato Corporation (The) Cl. A | 438,305 | 10,940,093 | |||
GameStop Corporation Cl. A | 89,272 | 3,752,102 | |||
Guess? | 561,354 | 17,418,815 | |||
Jos. A. Bank Clothiers 1 | 517,662 | 21,389,794 | |||
Shoe Carnival | 811,843 | 19,492,350 | |||
Stein Mart | 810,230 | 11,059,640 | |||
134,449,602 | |||||
Textiles, Apparel & Luxury Goods - 14.1% | |||||
Barry (R.G.) | 150,460 | 2,443,471 | |||
Crocs 1 | 1,327,178 | 21,898,437 | |||
Deckers Outdoor 1 | 373,422 | 18,861,545 | |||
G-III Apparel Group 1 | 544,994 | 26,225,111 | |||
Maidenform Brands 1 | 963,725 | 16,701,354 | |||
Steven Madden 1 | 453,668 | 21,948,458 | |||
Vera Bradley 1 | 752,470 | 16,298,500 | |||
124,376,876 | |||||
Total (Cost $217,873,422) | 283,339,815 | ||||
Consumer Staples – 4.6% | |||||
Food & Staples Retailing - 0.6% | |||||
Village Super Market Cl. A | 168,043 | 5,560,543 | |||
Personal Products - 4.0% | |||||
Inter Parfums | 307,575 | 8,772,039 | |||
Nu Skin Enterprises Cl. A | 429,877 | 26,274,082 | |||
35,046,121 | |||||
Total (Cost $25,575,430) | 40,606,664 | ||||
Energy – 6.0% | |||||
Energy Equipment & Services - 5.5% | |||||
Helmerich & Payne | 34,400 | 2,148,280 | |||
Matrix Service 1 | 835,308 | 13,014,098 | |||
Oil States International 1 | 81,386 | 7,539,599 | |||
Unit Corporation 1 | 611,165 | 26,023,406 | |||
48,725,383 | |||||
Oil, Gas & Consumable Fuels - 0.5% | |||||
Cimarex Energy | 61,518 | 3,998,055 | |||
Total (Cost $39,993,747) | 52,723,438 | ||||
Financials – 13.1% | |||||
Capital Markets - 3.0% | |||||
Federated Investors Cl. B | 949,301 | 26,020,340 | |||
Commercial Banks - 1.4% | |||||
City Holding Company | 327,740 | 12,765,473 | |||
Insurance - 5.4% | |||||
Allied World Assurance Company Holdings | 173,125 | 15,842,669 | |||
Aspen Insurance Holdings | 294,754 | 10,932,426 | |||
Montpelier Re Holdings | 276,021 | 6,903,285 | |||
Reinsurance Group of America | 201,000 | 13,891,110 | |||
47,569,490 | |||||
Thrifts & Mortgage Finance - 3.3% | |||||
Genworth MI Canada | 819,700 | 19,126,593 | |||
TrustCo Bank Corp. NY | 1,814,423 | 9,870,461 | |||
28,997,054 | |||||
Total (Cost $84,894,927) | 115,352,357 | ||||
Health Care – 8.2% | |||||
Biotechnology - 0.0% | |||||
Emergent Biosolutions 1 | 30,386 | 438,166 | |||
Health Care Providers & Services - 6.3% | |||||
Chemed Corporation | 248,377 | 17,989,946 | |||
Magellan Health Services 1 | 281,123 | 15,765,378 | |||
MEDNAX 1 | 123,910 | 11,347,678 | |||
U.S. Physical Therapy | 375,361 | 10,374,978 | |||
55,477,980 | |||||
Pharmaceuticals - 1.9% | |||||
Hi-Tech Pharmacal | 497,503 | 16,517,100 | |||
Total (Cost $55,229,887) | 72,433,246 | ||||
Industrials – 7.5% | |||||
Aerospace & Defense - 1.7% | |||||
Cubic Corporation | 302,000 | 14,526,200 | |||
Electrical Equipment - 0.7% | |||||
AZZ | 170,145 | 6,560,791 | |||
Machinery - 2.3% | |||||
Alamo Group | 343,187 | 14,008,893 | |||
Kennametal | 94,195 | 3,657,592 | |||
Miller Industries | 195,517 | 3,007,052 | |||
20,673,537 | |||||
Road & Rail - 0.6% | |||||
Knight Transportation | 327,800 | 5,513,596 | |||
Trading Companies & Distributors - 2.2% | |||||
Applied Industrial Technologies | 391,415 | 18,917,087 | |||
Total (Cost $50,981,685) | 66,191,211 | ||||
Information Technology – 19.5% | |||||
Communications Equipment - 4.6% | |||||
NETGEAR 1 | 789,108 | 24,099,358 | |||
Plantronics | 374,065 | 16,428,935 | |||
40,528,293 | |||||
Electronic Equipment, Instruments & Components - 7.3% | |||||
Fabrinet 1 | 1,456,984 | 20,397,776 |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. | Royce Capital Fund 2013 Semiannual Report to Shareholders | 15 |
Schedules of Investments | June 30, 2013 (unaudited) |
Royce Capital Fund–Small-Cap Portfolio (continued) |
SHARES | VALUE | |||||
Information Technology (continued) | ||||||
Electronic Equipment, Instruments & Components (continued) | ||||||
600,922 | $ | 6,219,543 | ||||
Littelfuse | 140,211 | 10,461,143 | ||||
MTS Systems | 45,200 | 2,558,320 | ||||
Rofin-Sinar Technologies 1 | 211,380 | 5,271,817 | ||||
Vishay Intertechnology 1 | 1,427,799 | 19,832,128 | ||||
64,740,727 | ||||||
IT Services - 3.5% | ||||||
Convergys Corporation | 1,018,200 | 17,747,226 | ||||
ManTech International Cl. A | 511,470 | 13,359,596 | ||||
31,106,822 | ||||||
Office Electronics - 1.2% | ||||||
Zebra Technologies Cl. A 1 | 237,266 | 10,306,835 | ||||
Semiconductors & Semiconductor Equipment - 2.9% | ||||||
GSI Technology 1 | 397,915 | 2,514,823 | ||||
Integrated Silicon Solution 1 | 325,779 | 3,570,538 | ||||
IXYS Corporation | 770,193 | 8,518,334 | ||||
Teradyne 1 | 563,800 | 9,905,966 | ||||
Ultra Clean Holdings 1 | 148,296 | 897,191 | ||||
25,406,852 | ||||||
Total (Cost $162,042,166) | 172,089,529 | |||||
Materials – 3.8% | ||||||
Chemicals - 3.4% | ||||||
Innophos Holdings | 218,030 | 10,284,475 | ||||
Innospec | 444,068 | 17,842,653 | ||||
Intrepid Potash | 84,942 | 1,618,145 | ||||
29,745,273 | ||||||
Containers & Packaging - 0.4% | ||||||
UFP Technologies 1 | 180,566 | 3,535,482 | ||||
Total (Cost $29,083,447) | 33,280,755 | |||||
Miscellaneous 4 – 0.4% | ||||||
Total (Cost $3,286,186) | 3,377,711 | |||||
VALUE | ||||||
TOTAL COMMON STOCKS | ||||||
(Cost $668,960,897) | 839,394,726 | |||||
REPURCHASE AGREEMENT – 4.8% | ||||||
Fixed Income Clearing Corporation, | ||||||
0.01% dated 6/28/13, due 7/1/13, | 42,362,000 | |||||
TOTAL INVESTMENTS – 100.1% | ||||||
(Cost $711,322,897) | 881,756,726 | |||||
LIABILITIES LESS CASH | ||||||
AND OTHER ASSETS – (0.1)% | (604,345 | ) | ||||
NET ASSETS – 100.0% | $ | 881,152,381 | ||||
16 | Royce Capital Fund 2013 Semiannual Report to Shareholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. |
Statements of Assets and Liabilities | June 30, 2013 (unaudited) |
Micro-Cap | Small-Cap | |||||||
Portfolio | Portfolio | |||||||
ASSETS: | ||||||||
Investments at value (including collateral on loaned securities) | ||||||||
Non-Affiliated Companies | $ | 498,864,982 | $ | 833,175,183 | ||||
Affiliated Companies | – | 6,219,543 | ||||||
Repurchase agreements (at cost and value) | 69,794,000 | 42,362,000 | ||||||
Cash and foreign currency | 159,039 | 448 | ||||||
Receivable for investments sold | 1,362,294 | – | ||||||
Receivable for capital shares sold | 73,776 | 331,903 | ||||||
Receivable for dividends and interest | 352,772 | 469,164 | ||||||
Prepaid expenses and other assets | 2,902 | 3,763 | ||||||
Total Assets | 570,609,765 | 882,562,004 | ||||||
LIABILITIES: | ||||||||
Payable for collateral on loaned securities | 7,576,072 | – | ||||||
Payable for investments purchased | 1,813,069 | 41,411 | ||||||
Payable for capital shares redeemed | 395,455 | 481,935 | ||||||
Payable for investment advisory fees | 582,377 | 733,276 | ||||||
Accrued expenses | 123,821 | 153,001 | ||||||
Total Liabilities | 10,490,794 | 1,409,623 | ||||||
Net Assets | $ | 560,118,971 | $ | 881,152,381 | ||||
ANALYSIS OF NET ASSETS: | ||||||||
Paid-in capital | $ | 476,707,302 | $ | 618,497,724 | ||||
Undistributed net investment income (loss) | (816,629 | ) | 9,540,098 | |||||
Accumulated net realized gain (loss) on investments and foreign currency | 38,663,556 | 82,680,729 | ||||||
Net unrealized appreciation (depreciation) on investments and foreign currency | 45,564,742 | 170,433,830 | ||||||
Net Assets | $ | 560,118,971 | $ | 881,152,381 | ||||
Investment Class | $ | 523,575,945 | $ | 687,235,054 | ||||
Service Class | 36,543,026 | 193,917,327 | ||||||
SHARES OUTSTANDING (unlimited number of $.001 par value): | ||||||||
Investment Class | 46,289,586 | 55,409,835 | ||||||
Service Class | 3,259,419 | 15,826,023 | ||||||
NET ASSET VALUES (Net Assets ÷ Shares Outstanding): | ||||||||
(offering and redemption price per share) | ||||||||
Investment Class | $11.31 | $12.40 | ||||||
Service Class | 11.21 | 12.25 | ||||||
Investments at identified cost | $ | 453,292,320 | $ | 668,960,897 | ||||
Market value of loaned securities | 7,630,392 | |||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. | Royce Capital Fund 2013 Semiannual Report to Shareholders | 17 |
Statements of Changes in Net Assets |
Micro-Cap Portfolio | Small-Cap Portfolio | |||||||||||||||
Six months ended | Six months ended | |||||||||||||||
6/30/13 | Year ended | 6/30/13 | Year ended | |||||||||||||
(unaudited) | 12/31/12 | (unaudited) | 12/31/12 | |||||||||||||
INVESTMENT OPERATIONS: | ||||||||||||||||
Net investment income (loss) | $ | (1,004,850 | ) | $ | 2,330,748 | $ | 38,320 | $ | 9,505,137 | |||||||
Net realized gain (loss) on investments and foreign currency | 28,379,977 | 17,880,619 | 33,292,760 | 49,554,361 | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments and foreign currency | (8,624,438 | ) | 23,099,628 | 63,382,277 | 35,711,985 | |||||||||||
Net increase (decrease) in net assets from investment operations | 18,750,689 | 43,310,995 | 96,713,357 | 94,771,483 | ||||||||||||
DISTRIBUTIONS: | ||||||||||||||||
Net investment income | ||||||||||||||||
Investment Class | – | – | – | (667,778 | ) | |||||||||||
Service Class | – | – | – | (39,734 | ) | |||||||||||
Net realized gain on investments and foreign currency | ||||||||||||||||
Investment Class | – | (11,906,469 | ) | – | (15,369,932 | ) | ||||||||||
Service Class | – | (786,410 | ) | – | (3,569,688 | ) | ||||||||||
Total distributions | – | (12,692,879 | ) | – | (19,647,132 | ) | ||||||||||
CAPITAL SHARE TRANSACTIONS: | ||||||||||||||||
Value of shares sold | ||||||||||||||||
Investment Class | 24,630,972 | 58,248,188 | 46,744,328 | 209,348,184 | ||||||||||||
Service Class | 6,136,668 | 16,020,218 | 27,898,753 | 60,473,384 | ||||||||||||
Distributions reinvested | ||||||||||||||||
Investment Class | – | 11,906,469 | – | 16,037,710 | ||||||||||||
Service Class | – | 786,410 | – | 3,609,422 | ||||||||||||
Value of shares redeemed | ||||||||||||||||
Investment Class | (62,148,962 | ) | (125,493,292 | ) | (60,476,694 | ) | (319,208,920 | ) | ||||||||
Service Class | (7,530,569 | ) | (7,399,459 | ) | (2,170,487 | ) | (3,749,290 | ) | ||||||||
Net increase (decrease) in net assets from capital share transactions | (38,911,891 | ) | (45,931,466 | ) | 11,995,900 | (33,489,510 | ) | |||||||||
NET INCREASE (DECREASE) IN NET ASSETS | (20,161,202 | ) | (15,313,350 | ) | 108,709,257 | 41,634,841 | ||||||||||
NET ASSETS: | ||||||||||||||||
Beginning of period | 580,280,173 | 595,593,523 | 772,443,124 | 730,808,283 | ||||||||||||
End of period | $ | 560,118,971 | $ | 580,280,173 | $ | 881,152,381 | $ | 772,443,124 | ||||||||
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) AT END OF PERIOD | $ | (816,629 | ) | $ | 188,221 | $ | 9,540,098 | $ | 9,501,778 |
18 | Royce Capital Fund 2013 Semiannual Report to Shareholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. |
Statements of Operations | Six Months Ended June 30, 2013 (unaudited) |
Micro-Cap | Small-Cap | |||||||
Portfolio | Portfolio | |||||||
INVESTMENT INCOME: | ||||||||
Income: | ||||||||
Dividends | $ | 2,868,181 | $ | 4,452,742 | ||||
Foreign withholding tax | (220,340 | ) | (80,645 | ) | ||||
Interest | 9,470 | 5,427 | ||||||
Securities lending | 133,553 | 226,962 | ||||||
Total income | 2,790,864 | 4,604,486 | ||||||
Expenses: | ||||||||
Investment advisory fees | 3,553,527 | 4,178,062 | ||||||
Distribution fees | 44,771 | 216,785 | ||||||
Custody | 84,267 | 37,458 | ||||||
Administrative and office facilities | 33,697 | 40,924 | ||||||
Trustees’ fees | 22,363 | 25,830 | ||||||
Audit | 20,901 | 15,965 | ||||||
Shareholder reports | 18,265 | 31,092 | ||||||
Shareholder servicing | 6,541 | 6,429 | ||||||
Legal | 3,305 | 4,003 | ||||||
Registration | – | 4 | ||||||
Other expenses | 8,893 | 9,657 | ||||||
Total expenses | 3,796,530 | 4,566,209 | ||||||
Compensating balance credits | (52 | ) | (43 | ) | ||||
Expenses reimbursed by investment adviser | (764 | ) | – | |||||
Net expenses | 3,795,714 | 4,566,166 | ||||||
Net investment income (loss) | (1,004,850 | ) | 38,320 | |||||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: | ||||||||
Net realized gain (loss): | ||||||||
Investments | 28,479,733 | 33,302,827 | ||||||
Foreign currency transactions | (99,756 | ) | (10,067 | ) | ||||
Net change in unrealized appreciation (depreciation): | ||||||||
Investments and foreign currency translations | (8,620,538 | ) | 63,382,277 | |||||
Other assets and liabilities denominated in foreign currency | (3,900 | ) | – | |||||
Net realized and unrealized gain (loss) on investments and foreign currency | 19,755,539 | 96,675,037 | ||||||
NET INCREASE (DECREASE) IN NET ASSETS FROM INVESTMENT OPERATIONS | $ | 18,750,689 | $ | 96,713,357 |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. | Royce Capital Fund 2013 Semiannual Report to Shareholders | 19 |
This table is presented to show selected data for a share outstanding throughout each period, and to assist shareholders in evaluating a Fund’s performance for the periods presented. Per share amounts have been determined on the basis of the weighted average number of shares outstanding during the period. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Realized | Distributions from Net | Ratio of Expenses to Average Net Assets | Ratio of Net | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Asset Value, Beginning of Period | Net Investment Income (Loss) | and Unrealized Gain (Loss) on Investments and Foreign Currency | Total from Investment Operations | Distributions from Net Investment Income | Realized Gain on Investments and Foreign Currency | Total Distributions | Net Asset Value, End of Period | Total Return | Net Assets, End of Period (in thousands) | Prior to Fee Waivers and Balance Credits | Prior to Fee Waivers | Net of Fee Waivers | Investment Income (Loss) to Average Net Assets | Portfolio Turnover Rate | |||||||||||||||||||||||||||||||||||||||||||||
Micro-Cap Portfolio – Investment Class | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
†2013 | $ | 10.95 | $ | (0.02 | ) | $ | 0.38 | $ | 0.36 | $ | – | $ | – | $ | – | $ | 11.31 | 3.29 | %1 | $ | 523,576 | 1.32 | %2 | 1.32 | %2 | 1.32 | %2 | (0.34 | )%2 | 16 | % | ||||||||||||||||||||||||||||
2012 | 10.41 | 0.04 | 0.74 | 0.78 | – | (0.24 | ) | (0.24 | ) | 10.95 | 7.60 | 543,516 | 1.33 | 1.33 | 1.33 | 0.39 | 21 | ||||||||||||||||||||||||||||||||||||||||||
2011 | 12.18 | (0.03 | ) | (1.45 | ) | (1.48 | ) | (0.29 | ) | – | (0.29 | ) | 10.41 | (12.10 | ) | 569,498 | 1.32 | 1.32 | 1.32 | (0.31 | ) | 35 | |||||||||||||||||||||||||||||||||||||
2010 | 9.52 | (0.01 | ) | 2.87 | 2.86 | (0.20 | ) | – | (0.20 | ) | 12.18 | 30.10 | 676,654 | 1.32 | 1.32 | 1.32 | (0.09 | ) | 35 | ||||||||||||||||||||||||||||||||||||||||
2009 | 6.03 | (0.01 | ) | 3.50 | 3.49 | – | – | – | 9.52 | 57.88 | 522,092 | 1.33 | 1.33 | 1.33 | (0.13 | ) | 33 | ||||||||||||||||||||||||||||||||||||||||||
2008 | 13.47 | 0.13 | (5.99 | ) | (5.86 | ) | (0.30 | ) | (1.28 | ) | (1.58 | ) | 6.03 | (43.27 | ) | 328,059 | 1.32 | 1.32 | 1.32 | 1.05 | 51 | ||||||||||||||||||||||||||||||||||||||
Micro-Cap Portfolio – Service Class | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
†2013 | $ | 10.87 | $ | (0.03 | ) | $ | 0.37 | $ | 0.34 | $ | – | $ | – | $ | – | $ | 11.21 | 3.13 | %1 | $ | 36,543 | 1.58 | %2 | 1.58 | %2 | 1.58 | %2 | (0.60 | )%2 | 16 | % | ||||||||||||||||||||||||||||
2012 | 10.35 | 0.03 | 0.73 | 0.76 | – | (0.24 | ) | (0.24 | ) | 10.87 | 7.45 | 36,764 | 1.59 | 1.59 | 1.55 | 0.27 | 21 | ||||||||||||||||||||||||||||||||||||||||||
2011 | 12.13 | (0.11 | ) | (1.39 | ) | (1.50 | ) | (0.28 | ) | – | (0.28 | ) | 10.35 | (12.26 | ) | 26,096 | 1.60 | 1.60 | 1.49 | (0.46 | ) | 35 | |||||||||||||||||||||||||||||||||||||
2010 | 9.49 | (0.08 | ) | 2.91 | 2.83 | (0.19 | ) | – | (0.19 | ) | 12.13 | 29.90 | 17,022 | 1.63 | 1.63 | 1.40 | (0.12 | ) | 35 | ||||||||||||||||||||||||||||||||||||||||
2009 | 6.02 | (0.03 | ) | 3.50 | 3.47 | – | – | – | 9.49 | 57.64 | 6,907 | 1.73 | 1.73 | 1.58 | (0.36 | ) | 33 | ||||||||||||||||||||||||||||||||||||||||||
2008 | 13.45 | 0.05 | (5.92 | ) | (5.87 | ) | (0.28 | ) | (1.28 | ) | (1.56 | ) | 6.02 | (43.44 | ) | 3,725 | 1.92 | 1.92 | 1.58 | 0.70 | 51 | ||||||||||||||||||||||||||||||||||||||
Small-Cap Portfolio – Investment Class | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
†2013 | $ | 11.03 | $ | 0.00 | $ | 1.37 | $ | 1.37 | $ | – | $ | – | $ | – | $ | 12.40 | 12.42 | %1 | $ | 687,235 | 1.04 | %2 | 1.04 | %2 | 1.04 | %2 | 0.06 | %2 | 22 | % | |||||||||||||||||||||||||||||
2012 | 10.07 | 0.15 | 1.10 | 1.25 | (0.01 | ) | (0.28 | ) | (0.29 | ) | 11.03 | 12.50 | 623,830 | 1.06 | 1.06 | 1.06 | 1.37 | 62 | |||||||||||||||||||||||||||||||||||||||||
2011 | 10.45 | 0.01 | (0.35 | ) | (0.34 | ) | (0.04 | ) | – | (0.04 | ) | 10.07 | (3.28 | ) | 651,243 | 1.05 | 1.05 | 1.05 | 0.11 | 36 | |||||||||||||||||||||||||||||||||||||||
2010 | 8.68 | 0.04 | 1.74 | �� | 1.78 | (0.01 | ) | – | (0.01 | ) | 10.45 | 20.52 | 630,227 | 1.06 | 1.06 | 1.06 | 0.47 | 34 | |||||||||||||||||||||||||||||||||||||||||
2009 | 6.42 | 0.01 | 2.25 | 2.26 | – | – | – | 8.68 | 35.20 | 467,401 | 1.07 | 1.07 | 1.07 | 0.20 | 46 | ||||||||||||||||||||||||||||||||||||||||||||
2008 | 9.96 | 0.00 | (2.72 | ) | (2.72 | ) | (0.06 | ) | (0.76 | ) | (0.82 | ) | 6.42 | (27.18 | ) | 291,898 | 1.07 | 1.07 | 1.07 | 0.07 | 45 | ||||||||||||||||||||||||||||||||||||||
Small-Cap Portfolio – Service Class | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
†2013 | $ | 10.91 | $ | (0.01 | ) | $ | 1.35 | $ | 1.34 | $ | – | $ | – | $ | – | $ | 12.25 | 12.28 | %1 | $ | 193,917 | 1.29 | %2 | 1.29 | %2 | 1.29 | %2 | (0.18 | )%2 | 22 | % | ||||||||||||||||||||||||||||
2012 | 9.98 | 0.15 | 1.06 | 1.21 | (0.00 | ) | (0.28 | ) | (0.28 | ) | 10.91 | 12.22 | 148,613 | 1.31 | 1.31 | 1.30 | 1.41 | 62 | |||||||||||||||||||||||||||||||||||||||||
2011 | 10.38 | (0.01 | ) | (0.36 | ) | (0.37 | ) | (0.03 | ) | – | (0.03 | ) | 9.98 | (3.55 | ) | 79,565 | 1.30 | 1.30 | 1.26 | (0.02 | ) | 36 | |||||||||||||||||||||||||||||||||||||
2010 | 8.64 | 0.03 | 1.72 | 1.75 | (0.01 | ) | – | (0.01 | ) | 10.38 | 20.26 | 41,505 | 1.34 | 1.34 | 1.30 | 0.36 | 34 | ||||||||||||||||||||||||||||||||||||||||||
2009 | 6.40 | (0.00 | ) | 2.24 | 2.24 | – | – | – | 8.64 | 35.00 | 5,160 | 1.62 | 1.62 | 1.36 | (0.04 | ) | 46 | ||||||||||||||||||||||||||||||||||||||||||
2008 | 9.94 | (0.02 | ) | (2.73 | ) | (2.75 | ) | (0.03 | ) | (0.76 | ) | (0.79 | ) | 6.40 | (27.50 | ) | 1,438 | 1.96 | 1.96 | 1.36 | (0.21 | ) | 45 |
† | Six months ended June 30, 2013 (unaudited). |
1 | Not annualized |
2 | Annualized |
20 | Royce Capital Fund 2013 Semiannual Report to Shareholders | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. |
Notes to Financial Statements (unaudited) | |
Summary of Significant Accounting Policies: |
Royce Micro-Cap Portfolio and Royce Small-Cap Portfolio (the “Fund” or “Funds”) are the two series of Royce Capital Fund (the “Trust”), a diversified open-end management investment company organized as a Delaware statutory trust. Shares of the Funds are offered to life insurance companies for allocation to certain separate accounts established for the purpose of funding qualified and non-qualified variable annuity contracts and variable life insurance contracts. Micro-Cap Portfolio and Small-Cap Portfolio commenced operations on December 27, 1996. |
Valuation of Investments: |
Securities are valued as of the close of trading on the New York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern time) on the valuation date. Securities that trade on an exchange, and securities traded on Nasdaq’s Electronic Bulletin Board, are valued at their last reported sales price or Nasdaq official closing price taken from the primary market in which each security trades or, if no sale is reported for such day, at their bid price. Other over-the-counter securities for which market quotations are readily available are valued at their highest bid price, except in the case of some bonds and other fixed income securities which may be valued by reference to other securities with comparable ratings, interest rates and maturities, using established independent pricing services. The Funds value their non-U.S. dollar denominated securities in U.S. dollars daily at the prevailing foreign currency exchange rates as quoted by a major bank. Securities for which market quotations are not readily available are valued at their fair value in accordance with the provisions of the 1940 Act, under procedures approved by the Fund's Board of Trustees, and are reported as Level 3 securities. As a general principle, the fair value of a security is the amount which the Fund might reasonably expect to receive for the security upon its current sale. However, in light of the judgment involved in fair valuations, there can be no assurance that a fair value assigned to a particular security will be the amount which the Fund might be able to receive upon its current sale. In addition, if, between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and may make the closing price unreliable, a Fund may fair value the security. The Funds use an independent pricing service to provide fair value estimates for relevant non-U.S. equity securities on days when the U.S. market volatility exceeds a certain threshold. This pricing service uses proprietary correlations it has developed between the movement of prices of non-U.S. equity securities and indices of U.S.-traded securities, futures contracts and other indications to estimate the fair value of relevant non-U.S. securities. When fair value pricing is employed, the prices of securities used by a Fund may differ from quoted or published prices for the same security. Investments in money market funds are valued at net asset value per share. |
Various inputs are used in determining the value of each Fund’s investments, as noted above. These inputs are summarized in the three broad levels below: | |||
Level 1 – quoted prices in active markets for identical securities. | |||
Level 2 – other significant observable inputs (including quoted prices for similar securities, foreign securities that may be fair valued and repurchase agreements). The table below includes all Level 2 securities. Any Level 2 securities with values based on quoted prices for similar securities would be noted in the Schedules of Investments. | |||
Level 3 – significant unobservable inputs (including last trade price before trading was suspended, or at a discount thereto for lack of marketability or otherwise, market price information regarding other securities, information received from the company and/or published documents, including SEC filings and financial statements, or other publicly available information). | |||
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. | |||
The following is a summary of the inputs used to value each Fund’s investments as of June 30, 2013. For a detailed breakout of common stocks by sector classification, please refer to the Schedules of Investments. |
Level 1 | Level 2 | Level 3 | Total | ||||||||||
Micro-Cap Portfolio | |||||||||||||
Common Stocks | $491,110,405 | $ | – | $178,505 | $491,288,910 | ||||||||
Cash Equivalents | 7,576,072 | 69,794,000 | – | 77,370,072 | |||||||||
Small-Cap Portfolio | |||||||||||||
Common Stocks | 839,394,726 | – | – | 839,394,726 | |||||||||
Cash Equivalents | – | 42,362,000 | – | 42,362,000 |
For the six months ended June 30, 2013, certain securities have transferred in and out of Level 1 and Level 2 measurements as a result of the fair value pricing procedures for international equities. The Funds recognize transfers between levels as of the end of the reporting period. At June 30, 2013, securities valued at $58,013,672 were transferred from Level 2 to Level 1 for Royce Micro-Cap Portfolio within the fair value hierarchy. |
Royce Capital Fund 2013 Semiannual Report to Shareholders | 21 |
Notes to Financial Statements (unaudited) (continued) | |
Valuation of Investments (continued): |
Level 3 Reconciliation: | ||||||||||
Realized and Unrealized | ||||||||||
Balance as of 12/31/12 | Gain (Loss)1 | Balance as of 6/30/13 | ||||||||
Micro-Cap Portfolio | ||||||||||
Common Stocks | $190,631 | $(12,126) | $178,505 |
Gross Amount of Derivative Assets | ||||||||||||
in the Statements of Assets and | ||||||||||||
Liabilities1 | Collateral Received2 | Net Amount | ||||||||||
Micro-Cap Portfolio | ||||||||||||
Securities on Loan | $ | 7,576,072 | $ | (7,576,072 | ) | $ | – |
Gross Amount of Derivative | ||||||||||||
Liabilities in the Statements of | ||||||||||||
Assets and Liabilities1 | Collateral Pledged2 | Net Amount | ||||||||||
Micro-Cap Portfolio | ||||||||||||
Collateral on Loaned Securities | $ | 7,576,072 | $ | (7,576,072 | ) | $ | – |
The Funds pay any dividends and capital gain distributions annually in December. Dividends from net investment income are determined at a class level and distributions from capital gains are determined at a Fund level. Because federal income tax regulations differ from generally accepted accounting principles, income and capital gain distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements.
22 | Royce Capital Fund 2013 Semiannual Report to Shareholders |
Notes to Financial Statements (unaudited) (continued) | |
Capital Share Transactions (in shares):
Shares issued for | Net increase (decrease) in | |||||||||||||||||||||||||||||||
Shares sold | reinvestment of distributions | Shares redeemed | shares outstanding | |||||||||||||||||||||||||||||
Period ended | Period ended | Period ended | Period ended | |||||||||||||||||||||||||||||
6/30/13 | Year ended | 6/30/13 | Year ended | 6/30/13 | Year ended | 6/30/13 | Year ended | |||||||||||||||||||||||||
(unaudited) | 12/31/12 | (unaudited) | 12/31/12 | (unaudited) | 12/31/12 | (unaudited) | 12/31/12 | |||||||||||||||||||||||||
Micro-Cap Portfolio | ||||||||||||||||||||||||||||||||
Investment Class | 2,208,661 | 5,282,384 | – | 1,127,507 | (5,559,706 | ) | (11,493,769 | ) | (3,351,045 | ) | (5,083,878 | ) | ||||||||||||||||||||
Service Class | 553,083 | 1,466,845 | – | 74,967 | (676,730 | ) | (679,581 | ) | (123,647 | ) | 862,231 | |||||||||||||||||||||
Small-Cap Portfolio | ||||||||||||||||||||||||||||||||
Investment Class | 3,918,152 | 19,500,699 | – | 1,494,661 | (5,080,142 | ) | (29,094,754 | ) | (1,161,990 | ) | (8,099,394 | ) | ||||||||||||||||||||
Service Class | 2,385,963 | 5,660,111 | – | 339,870 | (184,751 | ) | (349,380 | ) | 2,201,212 | 5,650,601 |
Investment Adviser and Distributor: |
Investment Adviser: Under the Trust’s investment advisory agreements with Royce, Royce is entitled to receive Investment Advisory fees that are computed daily and payable monthly, at an annual rate of 1.25% and 1.00% of the average net assets of Micro-Cap Portfolio and Small-Cap Portfolio, respectively. Royce has contractually committed to reimburse class-specific expenses (excluding acquired fund fees and expenses) to the extent necessary to maintain the net annual operating expense ratios to average net assets at or below 1.58% for the Service Class of Micro-Cap Portfolio through April 30, 2014. For the six months ended June 30, 2013, Micro-Cap Portfolio recorded advisory fees of $3,553,527 and Small-Cap Portfolio recorded advisory fees of $4,178,062. |
Distributor: Royce Fund Services, Inc. (“RFS”), the distributor of the Trust’s shares, is a wholly owned subsidiary of Royce. RFS is entitled to receive distribution fees from each Fund’s Service Class that are computed daily and payable monthly, at an annual rate of 0.25% of the average net assets of each Class. For the six months ended June 30, 2013, Micro-Cap Portfolio-Service Class recorded net distribution fees of $44,771 and Small-Cap Portfolio-Service Class recorded net distribution fees of $216,785. |
Purchases and Sales of Investment Securities: |
For the six months ended June 30, 2013, the costs of purchases and the proceeds from sales of investment securities, other than short-term securities and collateral received for securities loaned, were as follows: |
Purchases | Sales | |||||
Micro-Cap Portfolio | $ 81,250,365 | $146,866,281 | ||||
Small-Cap Portfolio | 186,775,062 | 174,189,867 |
Royce Capital Fund 2013 Semiannual Report to Shareholders | 23 |
Notes to Financial Statements (unaudited) (continued) | |
Class Level | ||||||||||||||||||||||||||||
Net | Transfer Agent | Expenses Reimbursed by | ||||||||||||||||||||||||||
Distribution | Shareholder | Shareholder | Balance | Investment | ||||||||||||||||||||||||
Fees | Servicing | Reports | Registration | Credits | Total | Adviser | ||||||||||||||||||||||
Micro-Cap Portfolio – Investment Class | $ | – | $ | 3,434 | $ | 17,301 | $ | – | $ | (2 | ) | $ | 20,733 | $ | – | |||||||||||||
Micro-Cap Portfolio – Service Class | 44,771 | 3,107 | 964 | – | – | 48,842 | 764 | |||||||||||||||||||||
44,771 | 6,541 | 18,265 | – | (2 | ) | 764 | ||||||||||||||||||||||
Small-Cap Portfolio – Investment Class | – | 3,340 | 27,785 | 3 | (2 | ) | 31,126 | – | ||||||||||||||||||||
Small-Cap Portfolio – Service Class | 216,785 | 3,089 | 3,307 | 1 | – | 223,182 | – | |||||||||||||||||||||
216,785 | 6,429 | 31,092 | 4 | (2 | ) |
Tax Information:
At June 30, 2013, net unrealized appreciation (depreciation) based on identified cost for tax purposes was as follows:
Net Unrealized | |||||||||||||
Appreciation | Gross Unrealized | ||||||||||||
Tax Basis Cost | (Depreciation) | Appreciation | Depreciation | ||||||||||
Micro-Cap Portfolio | $523,245,723 | $ 45,413,259 | $111,422,724 | $66,009,465 | |||||||||
Small-Cap Portfolio | 711,729,858 | 170,026,868 | 187,878,720 | 17,851,852 |
Shares | Market Value | Cost of | Cost of | Realized | Dividend | Shares | Market Value | ||||||||||||||||||||
Affiliated Company | 12/31/12 | 12/31/12 | Purchases | Sales | Gain (Loss) | Income | 6/30/13 | 6/30/13 | |||||||||||||||||||
Small-Cap Portfolio | |||||||||||||||||||||||||||
Key Tronic | $6,467,633 | – | – | – | 600,922 | $6,219,543 | |||||||||||||||||||||
$6,219,543 |
24 | Royce Capital Fund 2013 Semiannual Report to Shareholders |
Understanding Your Fund’s Expenses (unaudited) | |
As a shareholder of a mutual fund, you pay ongoing expenses, including management fees and other Fund expenses including, for some funds, distribution and/or service (12b-1) fees. Using the information below, you can estimate how these ongoing expenses (in dollars) affect your investment and compare them with the ongoing expenses of other funds. You may also incur one-time transaction expenses which are not shown in this section and would result in higher total costs. The example is based on an investment of $1,000 invested at January 1, 2013, and held for the entire six-month period ended June 30, 2013. Service Class shares are generally available only through certain insurance companies who receive service fees from the Fund for services that they perform.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, this section is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Actual | Hypothetical (5% per year return before expenses) | ||||||||||||||||||||||
Beginning | Ending | Expenses Paid | Beginning | Ending | Expenses Paid | Annualized | |||||||||||||||||
Account Value | Account Value | During the | Account Value | Account Value | During the | Expense | |||||||||||||||||
1/1/13 | 6/30/13 | Period1 | 1/1/13 | 6/30/13 | Period1 | Ratio2 | |||||||||||||||||
Investment Class | |||||||||||||||||||||||
Micro-Cap Portfolio | $1,000.00 | $1,032.88 | $6.65 | $1,000.00 | $1,018.25 | $6.61 | 1.32% | ||||||||||||||||
Small-Cap Portfolio | 1,000.00 | 1,124.21 | 5.48 | 1,000.00 | 1,019.64 | 5.21 | 1.04% | ||||||||||||||||
Service Class | |||||||||||||||||||||||
Micro-Cap Portfolio | 1,000.00 | 1,031.28 | 7.96 | 1,000.00 | 1,016.96 | 7.90 | 1.58% | ||||||||||||||||
Small-Cap Portfolio | 1,000.00 | 1,122.82 | 6.79 | 1,000.00 | 1,018.40 | 6.46 | 1.29% |
Royce Capital Fund 2013 Semiannual Report to Shareholders | 25 |
Trustees and Officers |
All Trustees and Officers may be reached c/o The Royce Funds, 745 Fifth Avenue, New York, NY 10151 |
Charles M. Royce, Trustee1, President
Age: 73 | Number of Funds Overseen: 34 | Tenure: Since 1982
Non-Royce Directorships: Director of TICC Capital Corp.
Principal Occupation(s) During Past Five Years: President, Co-Chief Investment Officer, and Member of Board of Managers of Royce & Associates, LLC (“Royce”), the Trust’s investment adviser.
Patricia W. Chadwick, Trustee
Age: 64 | Number of Funds Overseen: 34 | Tenure: Since 2009
Non-Royce Directorships: Trustee of ING Mutual Funds and Director of Wisconsin Energy Corp.
Principal Occupation(s) During Past 5 Years: Consultant and President of Ravengate Partners LLC (since 2000).
Richard M. Galkin, Trustee
Age: 75 | Number of Funds Overseen: 34 | Tenure: Since 1982
Non-Royce Directorships: None
Principal Occupation(s) During Past Five Years: Private investor. Mr. Galkin’s prior business experience includes having served as President of Richard M. Galkin Associates, Inc., telecommunications consultants, 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
Age: 73 | Number of Funds Overseen: 34 | Tenure: Since 1989
Non-Royce Directorships: None
Principal Occupation(s) During Past Five Years: Attorney and President of Health Policy Associates, Inc., consultants. Mr. Isaacs prior business experience includes having served on as President of The Center for Health and Social Policy (from 1996 to 2012); Director of Columbia University Development Law and Policy Program, and Professor at Columbia University (until August 1996).
Arthur S. Mehlman, Trustee
Age: 71 | Number of Funds Overseen: 48 | Tenure: Since 2004
Non-Royce Directorships: Director/Trustee of registered investment companies constituting the 14 Legg Mason Funds.
Principal Occupation(s) During Past Five Years: Director of The League for People with Disabilities, Inc. and Director of University of Maryland Foundation (non-profits). Formerly: Director of Municipal Mortgage & Equity, LLC (from October 2004 to April 2011); Director of University of Maryland College Park Foundation (non-profit) (from 1998 to 2005); Partner, KPMG LLP (international accounting firm) (from 1972 to 2002) and Director of Maryland Business Roundtable for Education (from July 1984 to June 2002).
David L. Meister, Trustee
Age: 73 | Number of Funds Overseen: 34 | Tenure: Since 1982
Non-Royce Directorships: None
Principal Occupation(s) During Past Five Years: Consultant. Chairman and Chief Executive Officer of The Tennis Channel (from June 2000 to March 2005). Mr. Meister’s prior business experience includes having served as Chief Executive Officer of Seniorlife.com, a consultant to the communications industry, President of Financial News Network, Senior Vice President of HBO, President of Time-Life Films, and Head of Broadcasting for Major League Baseball.
G. Peter O’Brien, Trustee
Age: 67 | Number of Funds Overseen: 48 | Tenure: Since 2001
Non-Royce Directorships: Director/Trustee of registered investment companies constituting the 14 Legg Mason Funds; Director of TICC Capital Corp.
Principal Occupation(s) During Past Five Years: Trustee Emeritus of Colgate University (since 2005) and Board Member of Hill House, Inc. (since 1999); Formerly: Trustee of Colgate University (from 1996 to 2005), President of Hill House, Inc. (from 2001 to 2005) and Managing Director/Equity Capital Markets Group of Merrill Lynch & Co. (from 1971 to 1999).
John D. Diederich, Vice President and Treasurer
Age: 61 | Tenure: Since 2001
Principal Occupation(s) During Past Five Years: Chief Operating Officer, Managing Director and member of the Board of Managers of Royce; Chief Financial Officer of Royce; Director of Administration of the Trust; and President of RFS, having been employed by Royce since April 1993.
Jack E. Fockler, Jr., Vice President
Age: 54 | Tenure: Since 1995
Principal Occupation(s) During Past Five Years: Managing Director and Vice President of Royce and Vice President of RFS, having been employed by Royce since October 1989.
W. Whitney George, Vice President
Age: 55 | Tenure: Since 1995
Principal Occupation(s) During Past Five Years: Co-Chief Investment Officer, Managing Director and Vice President of Royce, having been employed by Royce since October 1991.
Daniel A. O’Byrne, Vice President and Assistant Secretary
Age: 51 | Tenure: Since 1994
Principal Occupation(s) During Past Five Years: Principal and Vice President of Royce, having been employed by Royce since October 1986.
John E. Denneen, Secretary and Chief Legal Officer
Age: 46 | Tenure: 1996-2001 and Since April 2002
Principal Occupation(s) During Past Five Years: General Counsel, Principal, Chief Legal and Compliance Officer, and Secretary of Royce and Secretary and Chief Legal Officer of The Royce Funds.
Lisa Curcio, Chief Compliance Officer
Age: 53 | Tenure: Since 2004
Principal Occupation(s) During Past Five Years: Chief Compliance Officer of The Royce Funds (since October 2004) and Compliance Officer of Royce (since June 2004).
Trustees will hold office until their successors have been duly elected and qualified or until their earlier resignation or removal. The Statement of Additional Information, which contains additional information about the Trust’s trustees and officers, is available and can be obtained without charge at www.roycefunds.com or by calling (800) 221-4268.
26 | Royce Capital Fund 2013 Semiannual Report to Shareholders |
Notes to Performance and Other Important Information |
The thoughts expressed in this report concerning recent market movements and future prospects for small company stocks are solely the opinion of Royce at June 30, 2013, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Royce’s investment intentions with respect to those securities reflect Royce’s opinions as of June 30, 2013 and are subject to change at any time without notice. There can be no assurance that securities mentioned in this report will be included in any Royce-managed portfolio in the future. Sector weightings are determined using the Global Industry Classification Standard (“GICS”). GICS was developed by, and is the exclusive property of, Standard & Poor’s Financial Services LLC (“S&P”) and MSCI Inc. (“MSCI”). GICS is the trademark of S&P and MSCI. “Global Industry Classification Standard (GICS)” and “GICS Direct” are service marks of S&P and MSCI. 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. All indexes referenced are unmanaged and capitalization weighted. Each indexes’s returns include net reinvested dividends and/or interest income. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index along with the next smallest eligible securities as determined by Russell. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities in the Russell 1000 Index. The Russell 1000 Index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 Index. The Russell Global ex-U.S. Small Cap Index is an index of global small-cap stocks, excluding the United States. The Russell Global ex-U.S. Large-Cap Index is an index of global large-cap stocks, excluding the United States. The CBOE Volatility Index (VIX) measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor’s based on market size, liquidity, and industry grouping, among other factors. The Nasdaq Composite is an index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Returns for the market indexes used in this report were based on information supplied to Royce by Russell Investments. Royce has not independently verified the above described information. The Royce Funds is a service mark of The Royce Funds. Distributor: Royce Fund Services, Inc. Royce Capital Fund–Micro-Cap Portfolio invests primarily in securities of micro-cap companies and Royce Capital Fund–Small-Cap Portfolio invests primarily in securities of small-cap companies that may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Royce Capital Fund–Micro-Cap Portfolio (up to 35%) and Royce Capital Fund– Small-Cap Portfolio (up to 25%) may each invest its assets in foreign securities that may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see “Investing in Foreign Securities” in the prospectus.) Please read the prospectus carefully before investing or sending money. |
Forward-Looking Statements | |
This material contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including, among others, statements as to: | |
• | the Funds’ future operating results, |
• | the prospects of the Funds’ portfolio companies, |
• | the impact of investments that the Funds have made or may make, |
• | the dependence of the Funds’ future success on the general economy and its impact on the companies and industries in which the Funds invest, and |
• | the ability of the Funds’ portfolio companies to achieve their objectives. |
This review and report use words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements for any reason. | |
The Royce Funds have based the forward-looking statements included in this review and report on information available to us on the date of the report, and we assume no obligation to update any such forward-looking statements. Although The Royce Funds undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, you are advised to consult any additional disclosures that we may make through future shareholder communications or reports. |
Proxy Voting | ||
A copy of the policies and procedures that The Royce Funds use to determine how to vote proxies relating to portfolio securities and information regarding how each of The Royce Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, on The Royce Funds’ website at www.roycefunds.com, by calling (800) 221-4268 (toll-free), and on the website of the Securities and Exchange Commission (“SEC”) at www.sec.gov. | ||
Form N-Q Filing | ||
The Funds file their complete schedules of investments with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on The Royce Funds’ website at www.roycefunds.com and on the SEC’s website at www.sec.gov. The Funds’ Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. To find out more about this public service, call the SEC at (202) 942-8090. The Funds’ complete schedules of investments are updated quarterly and are available at www.roycefunds.com. | ||
Royce Capital Fund 2013 Semiannual Report to Shareholders | 27 |
Board Approval of Investment Advisory Agreement |
28 | Royce Capital Fund 2013 Semiannual Report to Shareholders |
The trustees noted that R&A had, from time to time, waived advisory fees in order to maintain expense ratios at competitive levels. The trustees also considered fees charged by R&A to institutional and other clients and noted that, given the greater levels of service that R&A provides to registered investment companies such as the Fund as compared to other accounts, the Funds’ advisory fees compared favorably to these other accounts.
It was noted that no single factor was cited as determinative to the decision of the Board. Rather, after weighing all of the considerations and conclusions discussed above, the entire Board, including all the non-interested trustees, determined to approve the renewal of the existing Investment Advisory Agreements, concluding that a contract renewal on the existing terms was in the best interest of the shareholders of each Fund and that each investment advisory fee rate was reasonable in relation to the services provided.
Royce Capital Fund 2013 Semiannual Report to Shareholders | 29 |
2013 In Quotes |
It’s not during up years that great investment track records are made. - Charles de Vaulx, International Value Advisers, The Art of Value Investing |
Points to Ponder The reversion-to-the-mean effect shows up most over longer periods. Investors selecting a sector on the basis of its prior five-year performance would have earned much higher returns over the following five years by selecting the worst-performing sector than the best. The gap is more than 30 percentage points. In the long term it pays to be contrarian. - The Economist, January 12, 2013 Supply will be constrained, and demand will be strong, coming from corporate buyers and individual and institutional investors, who will begin to reallocate funds toward the equity market and out of bonds. There will be a great migration or great rotation, or whatever you want to call it. It will intensify as the year continues. - Brian Rodgers, Barron’s, January 26, 2013 Active managers earn their fees building a long-term performance record through time arbitrage...Value investors succeed not by chasing relative returns, but by embracing the fundamentals of value investing, finding the strongest, highest-quality companies at the best possible prices. - Chuck Royce, Barron’s, May 11, 2013 While absolute skill tends to improve, relative skill tends to become more uniform. In plain words, that means that the difference between the best and the average is less than what it used to be. So, the best hitter in baseball is closer to an average player today than was the case 50 years ago. - Michael Mauboussin, Morningstar Advisor, April/May 2013 With interest rates at all-time lows, stocks continue to offer investors the best prospects. - Jeremy J. Siegel, Kiplinger’s Personal Finance, June 2013 Throughout the post-World War II era, the average stock-market decline in a bear market is about 25% and lasts about 10 months. So the bear market that ended in March of ’09 was twice as severe as the average. Most bear markets are induced by economic contractions. During the average recession in the postwar period, real gross domestic product goes down 2% from peak to trough. The most recent recession was about twice as severe in magnitude, so you had a bear market twice as severe as the average bear market, and the market discounted twice as severe an economic contraction. - Leon Cooperman, Barron’s, May 18, 2013 In Absolute Agreement For any period of less than five years you are evaluating serendipity rather than skill. - Bill Nygren, Kiplinger’s Personal Finance, March 2013 American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.) - Warren Buffett, Berkshire Hathaway 2013 annual report letter, March 1, 2013 Cocktail Conversation Commodities are not an investment. An investment by definition is either current income or a stream of future income. When you buy a commodity, you have to be assuming that you are going to be able to sell it at a higher price to someone else, because it has no income. Thus, it is not investing—it is speculating. - Barton Biggs, Diary of a Hedgehog Many who abandoned equities in the “flight to safety” have begun to slowly migrate from cash and bonds to high dividend, low volatility stocks, and very recently, to more cyclical stocks. The timid move back into equities is in early stages with much money still on the sidelines, but flows could occur sporadically. - Longleaf Partners Fund, First Quarter 2013 Report The Dow Jones Industrial Index has risen in 17 of the past 20 months, the longest such streak since 1951. - Sandra Ward, Barron’s, June 1, 2013 Timeless Tidbits When all is said and done, more is said than done. - Lou Holtz There are more fools among buyers than among sellers. - Proverb A creative man is motivated by the desire to achieve, not by the desire to beat others. - Ayn Rand Try not to become a man of success, but rather try to become a man of value. - Albert Einstein There are no secrets to success. It is the result of preparation, hard work, and learning from failure. - Colin Powell |
The thoughts expressed above represent solely the opinions of the persons quoted and, of course, there can be no assurance of future market trends or performance. |
30 | This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
This page is intentionally left blank. |
This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders | 31 |
This page is intentionally left blank. |
32 | This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
Searching for Super Small-Cap Companies Through the Macro Noise |
Portfolio Manager and Principal Chris Clark offers insights into our disciplined, long-term investment process by emphasizing the role that contrarian thinking plays in our portfolios.
Watching Man of Steel on its opening weekend, the latest movie based on the iconic Superman comic books, I was struck by the fact that one “tail risk” not regularly appearing on the seemingly endless list of macroeconomic concerns is the possibility, however slight, that a well-armed villain from another galaxy might unexpectedly show up and wreak havoc on our sometimes peaceful and unprepared planet. It may be the one global catastrophe that we have not been warned about by market pundits.
Without giving away the plot, let’s just say that some variation of this unlikely turn of events does indeed occur, and while the film made no reference to the impact this unfriendly visit had on financial markets (sadly for me), it’s no stretch to conclude that there would probably be more sellers than buyers during the initial period of panic and uncertainty.
Not wanting to miss the full effects of this thriller, I convinced my wife and daughters to see the movie in IMAX 3D. In hindsight, this was probably not a great call on my part. To say that the whole experience overwhelmed the senses understates the continuous visual and audio assault that exhausted more than it entertained several moviegoers, my wife and youngest daughter included.
Other viewers had a similar experience, with several congregating outside the theater doors also attempting to regain their lost senses. I was able to make it through to the ending but felt disoriented by the whole experience. It took several hours for the effects to fully wear off.
Clearly the theater’s supersized viewing screen and deafening Dolby Surround Sound, combined with the movie’s exhilarating action and awesome 3-D imagery, had the desired effect of hijacking the senses. However, it also had the unintended consequence of numbing the viewer to the underlying plot.
Although no one will pay hard-earned dollars to watch the action on trading floors or Ben Bernanke’s press conferences, the corollaries to today’s investment climate are otherwise surprisingly close. Systemic risks abound and while clearly different and (perhaps) less fantastic than those depicted in the movie, they are no less unsettling when followed to their potential conclusion.
The most dramatic systemic risks imply the end of civilization due to natural resource exhaustion, civil strife over wealth disparity, wars over unpaid liabilities (people generally like to get paid back), and religious fanaticism. Of course, risks are one thing and outcomes can be entirely different—therein lies the true challenge for today’s would-be heroic investor.
The prognostications from market pundits through the various media outlets are overwhelming and constant. Much like the IMAX 3-D experience, the extreme noise can make the underlying plot tough to discern. And weighing the probabilities of any outcome is another challenge entirely.
One recent favorite of the pundits has been the inherently flawed eurozone currency structure. Another doomsday scenario centers on Japanese Prime Minister Shinzo Abe’s attempt to target inflation through extreme monetary and fiscal policies. A third recent view sees China struggling with demographic and environmental catastrophe while also facing an economic hard landing that will unleash massive social upheaval in the world’s most populous country. And there’s always the old favorite involving the respective pursuits of nuclear weapons by North Korea and Iran, as well as each nation’s stated goals of annihilating their adversaries (a list that often includes the U.S.).
The investment team at Royce is often asked to weigh in on macroeconomic issues and while we oblige, somewhat reluctantly, we always offer the same caveat—our expertise is evaluating and understanding companies, their value, quality, and future prospects, not predicting economic, political, or strategic outcomes, especially those that resemble the plot of a summer blockbuster. For us, the multitude of variables that go into that type of analysis would cause sensory and intellectual overload. Even more importantly, we might miss the underlying story.
This is important because we invest in companies, not headlines or economic statistics. Like the best-drawn movie characters, companies can be resilient and dynamic entities that more often than not self-determine their long-term success or failure. There is no question that macroeconomic factors provide relevant inputs. Yet from our perspective they are often far less important than investors believe.
So whether or not the investment community decides to sell everything because chaos and destruction appear imminent is less of a concern to us than which companies look likely to survive, adapt, and ultimately grow stronger in whatever the aftermath. That is our business, and we are sticking with it. All that loud noise is like Kryptonite to us.
The thoughts in this essay concerning the stock market are solely those of Royce & Associates and, of course, there can be no assurance with regard to future market movements.
This page is not part of the Royce Capital Fund 2013 Semiannual Report to Shareholders |
About The Royce Funds Wealth Of Experience With approximately $36 billion in total assets under management, Royce & Associates is committed to the same small-company investing principles that have served us well for 40 years. Charles M. Royce, our President and Co-Chief Investment Officer, enjoys one of the longest tenures of any active mutual fund manager. Royce’s investment staff also includes Co-Chief Investment Officer W. Whitney George, 18 Portfolio Managers, four assistant portfolio managers and analysts, and nine traders. Multiple Funds, Common Focus Our goal is to offer both individual and institutional investors the best available smaller-cap portfolios. Unlike a lot of mutual fund groups with broad product offerings, we have chosen to concentrate on smaller-company investing by providing investors with a range of funds that take full advantage of this large and diverse sector. Consistent Discipline Our approach emphasizes paying close attention to risk and maintaining the same discipline, regardless of market movements and trends. The price we pay for a security must be significantly below our appraisal of its current worth. This requires a thorough analysis of the financial and business dynamics of an enterprise, as though we were purchasing the entire company. Co-Ownership Of Funds It is important that our employees and shareholders share a common financial goal; our officers, employees, and their families currently have approximately $168 million invested in The Royce Funds. This review and report must be accompanied or preceded by a current prospectus for the Funds. Please read the prospectus carefully before investing or sending money. | |||||||||||||||||||
Contact Us | |||||||||||||||||||
General Information Additional Report Copies and Prospectus Inquiries (800) 221-4268 | |||||||||||||||||||
Item 2. Code(s) of Ethics. Not applicable to this semi-annual report.
Item 3. Audit Committee Financial Expert. Not applicable to this semi-annual report.
Item 4. Principal Accountant Fees and Services. Not applicable to this semi-annual report.
Item 5. Audit Committee of Listed Registrants. Not Applicable
Item 6. Investments.
(a) See Item 1.
(b) Not Applicable
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not Applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not Applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not Applicable
Item 10. Submission of Matters to a Vote of Security Holders. Not Applicable.
Item 11. Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control over Financial Reporting. There were no significant changes in Registrant’s internal control over financial reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses during the second fiscal quarter of the period covered by this report.
Item 12. Exhibits. Attached hereto.
(a)(1) Not applicable to this semi-annual report.
(a)(2) Separate certifications by the Registrant’s Principal Executive Officer and Principal Financial Officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(a)(3) Not Applicable
(b) Separate certifications by the Registrant’s Principal Executive Officer and Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROYCE CAPITAL FUND |
BY: /s/ Charles M. Royce |
Charles M. Royce |
President |
Date: August 23, 2013 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ROYCE CAPITAL FUND | ROYCE CAPITAL FUND | |
BY: /s/ Charles M. Royce | BY: /s/ John D. Diederich | |
Charles M. Royce | John D. Diederich | |
President | Chief Financial Officer | |
Date: August 23, 2013 | Date: August 23, 2013 | |