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The Royce Funds
Financial Advisor Flash
Double Rule
January 3, 2012
We believe that fundamentals are much better than the headlines; that equities, and especially small-caps, will stage a nice rally in 2012. In addition, we believe that quality will continue to be an important driver of long-term outperformance and that non-U.S. small-caps will enjoy significant performance improvement as well.
 Market Comments
Domestic equities of all sizes rebounded in 2011’s dynamic fourth quarter. After severely underperforming in the third quarter, small-caps led the way. The small-cap Russell 2000 Index was up 15.5% in the fourth quarter, compared to a gain of 11.8% for both the S&P 500 and Russell 1000 large-cap indexes, and 7.9% for the more tech-oriented Nasdaq Composite.

Despite the strong fourth-quarter rally, small-caps were unable to supplant their large-cap counterparts as 2011’s performance leader. In 2011, the Russell 2000 was off 4.2%, while the S&P 500 and Russell 1000 were up 2.1% and 1.5%, respectively, and the Nasdaq Composite finished the year down 1.8%.

After leading the charge in the first quarter, the Russell 2000 reached a new peak on April 29 and lost ground through the end of the third quarter, declining 13.5% from its late April peak through 12/31/11. Neither the Russell 1000 or S&P 500 surpassed their respective highs made on 10/9/07.

The turning of the calendar resulted in strong three-year returns for domestic equities of all market caps. Dropping off returns from the fourth quarter of 2008 resulted in double-digit three-year average annual total returns for the period ended 12/31/11, with the Russell 2000 up 15.6%, the S&P 500 up 14.1%, Russell 1000 up 14.8%, and the Nasdaq Composite up 18.2%.

Non-U.S. equities fared considerably worse during the year’s final quarter and concluded 2011 substantially behind their U.S. equivalents, with the Russell Global ex-U.S. Small Cap Index up 0.1%, while the Russell Global ex-U.S. Large Cap Index gained 3.6%. For the full year, both the non-U.S. small-cap and large-cap indexes were significantly in the red, down 18.7% and 13.8%, respectively.

According to Bank of America Merrill Lynch, intraday trading spreads for the Russell 2000 exceeded 1% in 83% of all trading days, and exceeded 2% in 39% of all trading days in 2011 through the end of November.

Within small-cap, the Russell 2000 Value Index edged out the Russell 2000 Growth Index for the second consecutive quarter, up 16.0% versus a gain of 15.0%. For the full year, small-cap growth finished on top, although both style indexes were in the red: -2.9% versus -5.5%.

Micro-caps, as measured by the Russell Microcap Index, also enjoyed strong fourth-quarter performance, up 13.8%, though they trailed their larger-cap siblings for the full year, losing 9.3%.

icon  Small-Caps And Active Management: The Combination That Adds Value
All 11 Royce Funds with 10 years of history outperformed the Russell 2000 for the 10-year period ended 12/31/11
icon  Chuck Royce on 4Q 2011: Quality Small-Caps Look Poised to Rebound
icon  Whitney George on 2011: High Volatility and Attractive Valuations
We are listing our portfolios according to our Fund Guide categories. The Fund Guide is an informative resource designed to help financial professionals better understand how we think about our portfolios. For a more detailed look, visit us online.
 Fund Performance Comments
Important Information on Performance
All performance information reflects past performance, is presented on a total return basis and reflects the reinvestment of distributions. Returns are those of the Funds’ oldest Class (Investment Class or Service Class, as the case may be). Consultant, R, K and/or Service Class shares bear an annual distribution expense that is not borne by, or is higher than, the Funds’ oldest Class. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the most recent month-end may be obtained at Investment return and principal value will fluctuate, so that shares may be worth more or less than their original cost when redeemed. For detailed information on the one-, five-, 10-year and since inception performance as of quarter-end and for expense information for The Royce Funds please view our performance table.

Fourth Quarter 2011 2011 3-Year AATR Peak to Current 4/29/11 – 12/31/11
Russell 2000 Index
15.5% -4.2% 15.6% -13.5%
Royce Pennsylvania Mutual Fund
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