Investment Universe

Our investment universe is comprised of three markets: micro-cap, small-cap and mid-cap companies.

Micro-Cap: Market Caps up to $500 million

The U.S. micro-cap segment consists of approximately 4,000 companies with more than $400 billion in total capitalization. It offers many choices, but faces significant trading difficulties, including limited trading volumes and higher volatility.

Small-Cap: Market Caps between $500 million and $2.5 billion

The U.S. small-cap segment encompasses more than 1,000 companies with a total capitalization of approximately $1.2 trillion. It is more efficient, offering greater trading volumes and narrower bid/ask spreads.

Mid-Cap: Market Caps between $2.5 billion and $10 billion

The U.S. mid-cap segment includes companies with generally more established businesses that attract greater institutional interest and therefore enjoy greater liquidity. Royce focuses primarily on those mid-caps with market caps up to $5 billion, a universe of more than 280 companies with more than $980 billion in total capitalization.

Foreign Securities

The Funds may also invest in foreign securities to varying degrees. The foreign smaller-company market consists of more than 15,000 companies, of which more than 6,000 are domiciled in Europe.

Portfolio Approach

Funds are diversified according to our view of the attendant risks within each portfolio’s investment universe and approach. A Fund investing primarily in micro-caps, for example, generally holds relatively smaller positions in a larger number of securities, while a small- and/or mid-cap oriented fund may hold larger positions in a relatively limited number of securities.

Diversified

A diversified portfolio at Royce is one that generally holds more than 100 securities and whose top positions generally do not exceed 2% of net assets.

Limited

A limited portfolio at Royce is one that either (i) generally invests in no more than 100 companies, and whose top positions generally exceed 2% of net assets, or (ii) invests primarily in a single sector.

Bottom-up Stock Selection Process

We employ a bottom-up approach to choosing portfolio holdings, one that focuses on individual stock selection. Our goal is primarily to identify promising companies that have the following characteristics:

• Strong balance sheets

• High internal rates of return

• Ability to generate free cash flow

We like our companies to demonstrate strong historical track records as businesses and to show potential for successful futures. Interviews with senior management aid us in making these assessments, as do interviews with customers, suppliers and competitors. (Royce Discovery Fund is managed with a slightly different approach.)

Buy/Sell Discipline

Generally, we seek to purchase companies trading at discounts of 50% or more to our estimate of their value as businesses. We will generally sell a position when the company reaches our estimate of its value.

• We are price-driven, not position-driven

• We generally set buy and sell targets for positions

• Cash is a byproduct of our investment process

Time-Tested Managers of Risk with a Long-Term Orientation

Our value investing approach employs a rational decision-making process that strives to compound wealth while reducing risk over the long term. From our experience, paying attention to risk does not diminish long-term returns.

Our basic belief is that the price one pays for an investment makes a significant difference in the long-term returns that an investor receives. As value investors, we take a contrary view to the often emotional process of buying and selling stocks. We seek to reduce risk at times when others are ignoring it and to pursue risk opportunities at times when others may avoid them in an attempt to capitalize on valuation discrepancies.

It's important for us to attempt to select companies that provide a "margin of safety." In other words, we assess how much risk we are taking in order to achieve our desired reward. Our methods concentrate on managing risk in three ways:

Business Risk

To reduce business risk, we generally look for companies that have strong balance sheets, high internal rates of return and excess cash flow. Our estimate of a company's ability to withstand economic adversity is a significant measure of its financial good health. We want to know what the potential risk is of "permanent capital impairment," i.e., the likelihood of a business not being able to generate sustainable returns on assets or, even worse, becoming insolvent.

Valuation Risk

We attempt to reduce valuation (or price) risk by buying stocks that are trading at what we believe are bargain prices. The price we pay for a company must be significantly lower than our estimate of its current worth.

Portfolio Risk

We seek to reduce portfolio risk by owning a wide variety of stocks, across many sectors and industries.