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: 811-04875

Name of Registrant: Royce
 Value Trust, Inc.
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, 2018
Date of reporting period: January 1, 2018 – June 30, 2018



Item 1.   Reports to Shareholders.






 
 
 
 


 
 

 




 
 
JUNE 30, 2018


 
 
 


 
 
 


 
 
 


 
 
2018 Semiannual


 
 
Review and Report to Stockholders


 
 
 


 
 
 


 
 
 


 
 
 




 
 
 


 
 
 


 
 
 


 
 
Royce Global Value Trust


 
 
 
 


 
 
Royce Micro-Cap Trust


 
 
 
 


 
 
Royce Value Trust


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
 
 


 
 
roycefunds.com



 
 
 
 


 
 
 
 


 
 
 
 





A Few Words on Closed-End Funds
Royce & Associates, LP manages three closed-end funds: Royce Global Value Trust, which invests primarily in
companies with headquarters outside of the United States, Royce Micro-Cap Trust, which invests primarily in
micro-cap securities; and Royce Value Trust, which invests primarily in small-cap securities. A closed-end fund is an
investment company whose shares are listed and traded on a stock exchange. Like all investment companies, including
open-end mutual funds, the assets of a closed-end fund are professionally managed in accordance with the investment
objectives and policies approved by the fund’s Board of Directors. A closed-end fund raises cash for investment by issuing
a fixed number of shares through initial and other public offerings that may include shelf offerings and periodic rights
offerings. Proceeds from the offerings are invested in an actively managed portfolio of securities. Investors wanting to buy
or sell shares of a publicly traded closed-end fund after the offerings must do so on a stock exchange, as with any publicly
traded stock. Shares of closed-end funds frequently trade at a discount to their net asset value. This is in contrast to open-end
mutual funds, which sell and redeem their shares at net asset value on a continuous basis.

A Closed-End Fund Can Offer Several Distinct Advantages


•
A closed-end fund does not issue redeemable securities or
offer its securities on a continuous basis, so it does not need to
liquidate securities or hold uninvested assets to meet investor
demands for cash redemptions.


 
 


•
In a closed-end fund, not having to meet investor redemption
requests or invest at inopportune times can be effective for
value managers who attempt to buy stocks when prices are
depressed and sell securities when prices are high.


 
 


•
A closed-end fund may invest in less liquid portfolio securities
because it is not subject to potential stockholder redemption
demands. This is potentially beneficial for Royce-managed
closed-end funds, with significant investments in small- and
micro-cap securities.


 
 


•
The fixed capital structure allows permanent leverage to be
employed as a means to enhance capital appreciation potential.


 
 


•
Royce Micro-Cap Trust and Royce Value Trust distribute capital
gains, if any, on a quarterly basis. Each of these Funds has adopted
a quarterly distribution policy for its common stock.


We believe that the closed-end fund structure can be an
appropriate investment for a long-term investor who understands
the benefits of a more stable pool of capital.


Why Dividend Reinvestment Is Important
A very important component of an investor’s total return comes
from the reinvestment of distributions. By reinvesting distributions,
our investors can maintain an undiluted investment in a Fund. To
get a fair idea of the impact of reinvested distributions, please see
the charts on pages 54 and 55. For additional information on the
Funds’ Distribution Reinvestment and Cash Purchase Options
and the benefits for stockholders, please see page 56 or visit our
website at www.roycefunds.com.


Managed Distribution Policy
The Board of Directors of each of Royce Micro-Cap Trust and
Royce Value Trust has authorized a managed distribution policy
(“MDP”). Under the MDP, Royce Micro-Cap Trust and Royce
Value Trust pay quarterly distributions at an annual rate of 7%
of the average of the prior four quarter-end net asset values,
with the fourth quarter being the greater of these annualized
rates or the distribution required by IRS regulations. With each
distribution, the Fund will issue a notice to its stockholders and
an accompanying press release that provides detailed information
regarding the amount and composition of the distribution
(including whether any portion of the distribution represents a
return of capital) and other information required by a Fund’s
MDP. You should not draw any conclusions about a Fund’s
investment performance from the amount of distributions or
from the terms of a Fund’s MDP. A Fund’s Board of Directors
may amend or terminate the MDP at any time without prior
notice to stockholders; however, at this time there are no
reasonably foreseeable circumstances that might cause the
termination of any of the MDPs.






This page is not part of the 2018 Semiannual Report to Stockholders







 
 
 
 





Table of Contents
 
 
 


 
 
 
 


 
 
 
 


Semiannual Review
 
 
 


 
 
 
 


Letter to Our Stockholders
 
2
 


 
 
 
 


Performance
 
7
 


 
 
 
 


 
 
 
 


Semiannual Report to Stockholders
 
 
 


 
 
 
 


Royce Global Value Trust
 
 
 


 
 
 
 


Manager’s Discussion of Fund Performance
 
8
 


 
 
 
 


Schedule of Investments
 
10
 


 
 
 
 


Other Financial Statements
 
14
 


 
 
 
 


Royce Micro-Cap Trust
 
 
 


 
 
 
 


Manager’s Discussion of Fund Performance
 
22
 


 
 
 
 


Schedule of Investments
 
24
 


 
 
 
 


Other Financial Statements
 
29
 


 
 
 
 


Royce Value Trust
 
 
 


 
 
 
 


Manager’s Discussion of Fund Performance
 
38
 


 
 
 
 


Schedule of Investments
 
40
 


 
 
 
 


Other Financial Statements
 
45
 


 
 
 
 


History Since Inception
 
54
 


 
 
 
 


Distribution Reinvestment and Cash Purchase Options
 
56
 


 
 
 
 


Directors and Officers
 
57
 


 
 
 
 


Notes to Performance and Other Important Information
 
58
 


 
 
 
 


Board Approval of Investment Advisory Agreements
 
59
 









This page is not part of the 2018 Semiannual Report to Stockholders







 
 
 
 


Letter to Our Stockholders

SMALL-CAP’S FIRST HALF
Value Trails For Now



During the first six months of 2018, small-cap stocks
enjoyed the good times bred by a bull market that at this
writing has not yet slowed down. Although the first half
began with higher volatility and stalled equities prices—and ended
with a series of wild days that made the bullish second quarter feel
more tumultuous than it was—the overall direction of U.S. markets
has remained positive, particularly for smaller stocks. For the year-to-date
period ended June 30, 2018, the small-cap Russell 2000 Index
gained 7.7%, well ahead of both the large-cap Russell 1000 (+2.9%)
and S&P 500 (+2.6%) Indexes, while making a new historical high
on June 20. Returns were even higher for micro-cap stocks—the
Russell Microcap Index advanced 10.7% for the same period.






    This mostly welcome absolute and relative performance took
place against the backdrop of an accelerating U.S. economy, a
strong job market, and, in many cases, sterling corporate profit
growth while at the same time global economic progress slowed,
most notably in China and other large emerging markets. The
major non-U.S. indexes slipped deeper into negative territory
during the first half, as the combination of slower international
growth, rising emerging market instability, a stronger dollar, and
heightened trade war worries led investors to prefer all things
domestic. (In fact, 35 of the 45 non-U.S. small-cap markets that
we follow had declines in the first half of 2018, though only 26
were negative when measured in local currencies.) Still, growth
continued to skew positive outside the U.S., with the important
economies of Japan and Germany continuing to look solid.








Equity Indexes Average Annual Total Return as of 6/30/18 (%)


 









1
Not annualized.




Small-Cap is represented by Russell 2000; Small-Cap Value is represented by Russell 2000 Value, Small-Cap Growth is represented by Russell 2000 Growth, Large-Cap is represented by Russell 1000, Micro-Cap is represented by Russell Microcap. For
details on The Royce Funds’ performance in the period, please turn to the Managers’ Discussions that begin on page 8. Past performance is no guarantee of future results.






2 | This page is not part of the 2018 Semiannual Report to Stockholders







 
 
 
 


LETTER TO OUR STOCKHOLDERS
We expect a leadership shift in the form of a reversion to the mean that would favor
small-cap value outperforming small-cap growth over the next five years.



    In this context, then, you would expect a small-cap specialist
to be quite content, if not happy. This might especially be the
case considering that small-caps—as well as micro-caps—have
been true to their historical habit of outpacing larger companies
through an economic expansion. Yet as much as we were pleased
with first-half results, we find ourselves far from blissful. A closer
look at small-cap performance in the first half reveals some genuine
historical oddities in spite of all looking well on the surface. Our
main concern is the disconnect between the confidence of the
management teams we’ve been meeting with and the relatively
underwhelming performance for many cyclical industries. We
anticipated that stocks in these industries would do better owing
to their recent earnings strength and ongoing prospects as well as
to the healthy state of the U.S. economy (each, of course, being
related to the other).


 


OBSTACLE ON THE TRACK


The Troublesome 10-Year Treasury Yield


Another related concern is the way in which the ongoing weakness of
the 10-year Treasury yield is at odds with the quickened pace of U.S.
economic growth—when the 10-year has been sluggish in the past,
it’s often been seen as a symptom of economic weakness, and not
without some justification. The fact that the economy has arguably
been some distance down the track to normal for at least a couple of
years remains a source of concern to us.






 


Road to Normalization: Economy vs Markets


 





 




1
Quarterly data. Source: Bloomberg







    We invite you to consider the following five points: through the end
of June, the U.S. economy had grown for 109 consecutive months,
GDP growth has converged with its long-term average, unemployment
reached an 18-year low in June, personal consumption expenditure
inflation hit the Fed’s 2% target in May, and short rates were rising.
Additionally, we’re also seeing the early signs of inflation. Most are
registering in increased commodity, raw material, and other input
costs, which is historically familiar economic territory. History also
shows, however, that these developments are also typically coincident
with rising interest rates. So far, though, the 10-year Treasury yield has
stubbornly refused to acquiesce to history—making the 10-year the
major obstacle on the path back to normal in our view.


    From our perspective as highly active, valuation-sensitive small-cap
specialists, the most frustrating have been those periods when
the 10-year yield has fallen back. It seems to us that nearly every time
it has declined over the last 18 months, the market has witnessed
a subsequent flight to high yield or growth stocks while value and
economically sensitive issues struggled to keep pace. It almost seems
as if investors became temporarily convinced that we had slipped
back into the 2010-2015 era of quantitative easing and zero interest
rates. We think it bears emphasizing that, for all its uncertainty, the
current environment could not be more different. Yet the disconnect
persisted into June.


    The critical question, then, is, what happens next? More
pertinently for our investors, the question can be phrased in a more
specific way as, are we likely to see a shift in small-cap style and
sector leadership? We believe that we will. The second quarter saw
an admittedly short-term sign when the Russell 2000 Value Index
shook off five straight quarters of underperformance to outpace its
small-cap growth counterpart, up 8.3% versus 7.2%. But exactly
when, and under what conditions, a longer-running shift materializes
remains to be seen, of course. To be sure, the kind of leadership
change that we expect—from growth to value and from defensives to
cyclicals—seldom occurs without a fair bit of volatility.






This page is not part of the 2018 Semiannual Report to Stockholders | 3







 
 
 
 




SMALL-CAP HIGHS
Returns, Valuations–and Risks


Putting the issue of market turbulence aside for a moment, the
timing does seem apt to us for a change. First, the two-year
cumulative return at the end of June for the Russell 2000 was
46.5%—which is a wonderful, but sadly not a sustainable, pace.
Second, the one-, five-, and 10-year average annual total returns
for the small-cap index for the period ended June 30, 2018 were all
comfortably ahead of their long-term monthly rolling averages.






 


Recent Small-Cap Returns Higher Than History
Russell 2000 through 6/30/18


 









When we look at the same information for the Russell 2000
Growth Index, the contrast is even more stark, with its latest five-year
return significantly in excess of its historical rolling average.
This is one important reason why we expect a leadership shift in the
form of a reversion to the mean that would favor small-cap value
outperforming small-cap growth over the next five years.


    The state of small-cap valuations also looks unsustainably high
to us, particularly if we see a continued, and more consistent, rise in
the 10-year yield. While the P/E ratio for the Russell 2000 did not
look especially rich at the end of June, another valuation metric, the
last twelve months enterprise value to earnings before interest and
taxes (EV/EBIT)—which we use most frequently when examining
companies—tells a different story, one that reveals higher-than-average
historical valuations. The currently elevated state of returns and
valuations could mean that we are entering a longish period of multiple
compression, which is one reason why we prefer select small-caps with
strong earnings prospects and/or modest valuations. If we see increased
volatility over the balance of the year, these types of stocks look better
positioned to cope with it effectively.







    Based on earnings and
cash flow quality—as well
as confident management
teams—we are seeing
superior fundamentals
in selected cyclical areas
that other investors are
avoiding. For example,
the supply/demand dynamics in a number of industries, such as
semiconductors & semiconductor equipment, transportation,
and chemicals, look favorable to us and do not appear to us
to be fully reflected in their current valuations. Many cyclical
companies appear much better positioned for intermediate-term
growth than defensive and/or growth stocks. While most of these
cyclical stocks have lagged the field over the last 18 months, they
are also more reasonably priced than defensives based on EV to
EBIT. We remain convinced that fundamentally strong small-cap
companies, especially those with attractive-to-reasonable valuations,
will become more appealing to investors as confidence in the U.S.
economy continues to build.


 


 


Cyclicals Cheaper than Defensives
Median LTM EV/EBIT1 Ex. Negative EBIT
for Russell 2000 as of 6/30/18






    There’s a related point that may be equally important when
considering valuations: The sheer size and diversity of the small-cap
asset class means that there are almost always opportunities to
find what we think are promising or quality businesses trading at
attractive discounts. Based on EV/EBIT, the bottom three deciles of
the Russell 2000 were trading at sizable discounts compared to the
median for the index as a whole at the end of June.






 


Many Small-Caps Sell at a Significant Discount

Bottom Three Deciles in Russell 2000 Median LTM EV/EBIT1

Ex. Negative EBIT as of 6/30/18












1 Last Twelve Months Enterprise Value/Earnings Before Interest and Taxes






4 | This page is not part of the 2018 Semiannual Report to Stockholders







 


LETTER TO OUR STOCKHOLDERS


VOLATILITY AND INTEREST RATES
Both On the Rise



During the first quarter, the Russell 2000 moved 1% or more in
33% of its trading days compared to 18% in all of 2017. Another
volatility measure, the CBOE Russell 2000 Volatility Index
(“RVX”), measures market expectations of near-term volatility
conveyed by Russell 2000 stock index option prices. The RVX has
averaged 24.0% per year since its inception on 1/2/04. Its average
in 2017 was 15.9%, and its year-to-date average through the end
of June 2018 was 17.5%. Eighteen months of lower volatility
suggests—strongly to us—that increased volatility is likely.


    We also believe that the upward trend in rates is under way—and suspect that the 10-year yield will begin to move up more
consistently over the next year. We see both rising rates and
increased volatility as healthy. In fact, looking once more at history,
we find that periods of rising rates have been favorable for small-cap
stocks on both an absolute and relative basis. When the 10-Year
Treasury yield was rising, the Russell 2000 outperformed the large-cap
Russell 1000 in 70% of monthly rolling one-year periods for
the 20-year period ended 6/30/18, with an average one-year return
of 23.8% versus 19.2% for large-cap. Our expectations for absolute
small-cap returns are more modest, though we do expect this
historical relative return spread pattern to hold up.






 


How Have Small-Caps Performed When Rates Were Rising?
Russell 2000 vs Russell 1000 Trailing Monthly Rolling 1-Year Returns When
10-Year Treasury Yield was Rising From 6/30/98 through 6/30/18


 





10-Year Treasury Yield rose in 92 of 229 periods








    More specifically, we see rising rates as a phenomenon that
should also be helpful to risk-conscious active managers in the
small-cap space—primarily because it fosters an environment
where better balance sheet companies are likely to be rewarded
for their fiscal prudence. In other words, risk management
matters. This is relevant today because of the increased leverage—specifically financial leverage—within the Russell 2000. And
as rates continue to move up, the overall small-cap index looks
increasingly risky. As active managers, we have the ability to
screen and scrutinize small-cap businesses with better balance
sheets and shy away from those that we see as having excess
financial leverage. (It is worth mentioning that the market has
largely ignored better balance sheet companies for much of the
last 10 years.) Most of our strategies gravitate toward companies
with low debt. We would rather focus on companies that have
great operating leverage—but not financial leverage. With rising
rates, inflation, and economic growth becoming established, the
market seems to be transitioning into an environment that will
favor similar qualities.


 


REASONS TO BE CHEERFUL


We are therefore of two minds about the current cycle. On the
one hand, we think that we could see some consolidation or a
correction—the latter certainly seems more probable now than it
did a year ago. Yet we remain optimistic about small-cap earnings
growth and like the fundamentals of our holdings across our
strategies in terms of balance sheets, cash flows, and earnings
strength. It is in cyclical areas, including Industrials, the more
cyclical precincts of technology, and Materials, and that we have
most often uncovered what we judge to be the best combination
of value, quality, and/or growth prospects. And this has always
been a function of our bottom-up process rather than a top down
view of the economy.







This page is not part of the 2018 Semiannual Report to Stockholders | 5







 


LETTER TO OUR STOCKHOLDERS
We see signs of progress that in our view place us squarely on the road to normalization,
which was evident in the modest increases in bond yields and the reemergence of
value’s leadership in 2018’s second quarter.



    This is why many of our portfolios have had perennially higher
weightings in those sectors (and while others we manage have had
high weightings in Financials and Consumer Discretionary). We
also long ago developed the practice of leaning into those areas
of the asset class where we see excess pessimism. Investments in
industries that the rest of the market is abandoning have often
borne fruit, though we have learned through decades of small-cap
asset management that it usually requires a great deal of
patience—measured in years in many cases—before the arrival of a
bountiful harvest.


    We think it’s worth noting that the three changes in the market
environment that we expect—lower returns, higher volatility, and








value/cyclical leadership—have all historically been coincident with
leadership for active management. We see signs of progress that in
our view place us squarely on the road to normalization, which was
evident in the modest increases in bond yields and the reemergence
of value’s leadership in 2018’s second quarter. There were other
equally positive signs in July, including stabilizing macro indicators
from outside the U.S., a welcome rebound in the performance
of many industrial companies, and ongoing earnings strength for
several cyclical areas. We expect to see more signs of normalizing
markets to emerge as the year goes on.










Sincerely,






 

 



Charles M. Royce
 
Christopher D. Clark
 
     Francis D. Gannon


Chairman,
 
Chief Executive Officer, and
 
     Co-Chief Investment Officer,


Royce & Associates, LP
 
Co-Chief Investment Officer,
Royce & Associates, LP
 
     Royce & Associates, LP


 
 
 
 
 


July 31, 2018
 
 
 
 






6 | This page is not part of the 2018 Semiannual Report to Stockholders







 


Performance


 


 


NAV Average Annual Total Returns
As of June 30, 2018 (%)






 
 
YTD1
 
1-YR
 
3-YR
 
5-YR
 
10-YR
 
15-YR
 
20-YR
 
25-YR
 
30-YR
 
SINCE
INCEPTION
 
INCEPTION
DATE


 


Royce Global Value Trust
 
-0.88
 
11.89
 
9.69
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
6.48
 
10/17/13


 


Royce Micro-Cap
 Trust
 
7.84
 
19.79
 
11.16
 
12.51
 
9.92
 
10.76
 
9.81
 
N/A
 
N/A
 
11.19
 
12/14/93


 


Royce Value
 Trust
 
2.78
 
14.37
 
12.03
 
11.45
 
8.81
 
10.04
 
9.15
 
10.53
 
10.97
 
10.74
 
11/26/86


 


 


INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


Russell Global
 Small Cap Index
 
0.67
 
12.38
 
8.52
 
9.65
 
6.87
 
10.10
 
7.65
 
N/A
 
N/A
 
N/A
 
N/A


 


Russell Microcap
 Index
 
10.71
 
20.21
 
10.49
 
12.78
 
10.63
 
9.44
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A


 


Russell 2000
 Index
 
7.66
 
17.57
 
10.96
 
12.46
 
10.60
 
10.50
 
8.03
 
9.59
 
9.85
 
N/A
 
N/A


 


1 Not annualized.
Important Performance and Risk Information
All performance information in this Review and Report reflects past performance, is presented on a total return basis, net of the Fund’s investment advisory fee, 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 sold. Current performance may be higher or lower than performance quoted. Current month-end performance may be obtained at www.roycefunds.com. The Funds are closed-end registered investment companies whose respective shares of common stock may trade at a discount to the net asset value. Shares of each Fund’s common stock are also subject to the market risk of investing in the underlying portfolio securities held by each Fund. Certain immaterial adjustments were made to the net assets of Royce Value Trust at 6/30/18, for financial reporting purposes, and as a result the total return based on that net asset value differs from the adjusted net asset value and total return reported in the Financial Highlights. All indexes referenced are unmanaged and capitalization-weighted. Each index’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 Index is an index of domestic small-cap stocks that 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 Global Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. Index returns include net reinvested dividends and/or interest income. Royce Value, Micro-Cap and Global Value Trust shares of common stock trade on the NYSE. Royce Fund Services, LLC (“RFS”) is a member of FINRA and files certain material with FINRA on behalf of each Fund. RFS is not an underwriter or distributor of any of the Funds.
This page is not part of the 2018 Semiannual Report to Stockholders | 7





 





MANAGERS’ DISCUSSION


Royce Global Value Trust (RGT)









Chuck Royce
David Nadel
Chris Flynn


 


FUND PERFORMANCE
Royce Global Value Trust was
down 0.9% on a net asset value
(“NAV”) basis and 2.8% on a
market price basis for the year-to-date
period ended June 30, 2018,
in both cases underperforming
its unleveraged benchmark, the Russell Global Small Cap Index,
which rose 0.7% for the same period. While U.S. stocks generally
did well, most international indexes slipped into negative territory
during 2018’s first six months, as the combination of a modest
slowdown in international growth, rising emerging market instability, a
stronger dollar, and heightened trade war concerns all affected results.






WHAT WORKED... AND WHAT DIDN’T


Six of the Fund’s 11 equity sectors detracted from first-half results. Led
by Consumer Discretionary and Industrials, their respective negative
impacts were somewhat modest. Vakrangee, which detracted most
at the position level, is an Indian company that operates a network
of outlets providing everyday transactional services to mostly rural
consumers, primarily in under-served areas. During the first quarter, the
company faced questions about corporate governance and its internal
investment policy, among other issues. Although Vakrangee refuted
these allegations, the cloud overhanging the firm’s credibility gave us
pause, and we exited our position in April. Burkhalter Holding is the
leading provider of electrical engineering services in Switzerland. Its
stock price was hurt by increasing talk that competition would pressure
pricing. Seeing these issues as more temporal than structural, we chose
to hold our shares during the first half.

    The stock of California-based laser diode and equipment maker
Coherent underwent a correction in the first half after the company’s
announcement of slightly better-than-expected results came with a
more muted profit outlook. Already reducing our position in 2017,
we held our position in the first half in expectation of a recovery in
its previously strong profitability. The U.K.’s Clarkson is the world’s
largest ship broker. After a few difficult years, the company described
an improving environment for its business in hiring ships to transport
commodities in March. The firm then reversed course in April when it
issued a profit warning, which sent its shares into a tailspin. Thinking
about the long term, we added to our position in the first half.

    Energy was the top-contributing sector in the first half, and the top
contributor at the industry level was energy equipment & services, as
the rebound for oil prices fed through to improved prospects for these
businesses. Norway’s TGS-NOPEC Geophysical, which provides
geoscience data to oil and gas companies worldwide, was the top
contributor in this industry and in the portfolio as a whole. Its revenue
and earnings were boosted by improving exploration and production
spending, higher oil prices, and the longer-term need for energy
companies to replenish reserves, which is driving increased spending
on seismic data. Virtu Financial uses its technology to act as a market
maker and liquidity provider to the global financial markets. Based
in New York City, the firm announced impressive first-quarter results
in profits and earnings thanks to increased market volatility and high
trading volumes. From the Industrials sector, Kirby Corporation has
the largest inland and coastal tank barge fleet in the U.S. and also
draws revenue from servicing and distributing industrial engines,
transmissions, parts, and oil field services equipment. The tank barge
markets seem to be recovering well, thanks to retirements of older
barges, limited new builds, and solid utilization rates. Kirby has also
benefited from two recent acquisitions over the last 18 months that are
allowing it to drive industry consolidation.

    Relative to the Russell Global Small Cap, the major source of
underperformance was ineffective stock selection in the Information
Technology sector, most impactfully in the IT services and electronic
equipment, instruments & components industries. Stock picking
detracted in Health Care, particularly in the health care equipment &
supplies group. Conversely, stock selection was a strength versus the
benchmark in the Energy sector’s energy equipment & services
industry, while a smaller advantage came from stock picks in
Industrials, where the machinery group did best.






 
Top Contributors to Performance
Year-to-Date Through 6/30/18 (%)1
 
 
 


 
 
 
 
 


 
TGS-NOPEC Geophysical
 
0.73
 


 
 
 


 
Virtu Financial Cl. A
 
0.47
 


 
 
 


 
Kirby Corporation
 
0.39
 


 
 
 


 
Bravura Solutions
 
0.33
 


 
 
 


 
Nanometrics
 
0.27
 


 
 
 


 
1 Includes dividends
 
 
 


 
 
 
 
 






 
 
 
 
 


 
Top Detractors from Performance
Year-to-Date Through 6/30/18 (%)2
 
 
 


 
 
 
 
 


 
Vakrangee
 
-0.31
 


 
 
 


 
Burkhalter Holding
 
-0.28
 


 
 
 


 
Coherent
 
-0.26
 


 
 
 


 
Clarkson
 
-0.24
 


 
 
 


 
ManpowerGroup
 
-0.23
 


 
 
 


 
2 Net of dividends
 
 
 


 
 
 
 
 






CURRENT POSITIONING AND OUTLOOK


The market’s recent behavior looks curious to us. We hear optimism
and solid progress from the management teams we meet with, see
solid earnings reports, and observe consistently strong macroeconomic
data. On the other hand, small-cap market leadership in the U.S. has
stubbornly remained with defensive and yield-oriented stocks, while
cyclicals have lagged. In addition, the rate of change in global growth
has slowed, as measured by global PMIs (the Purchasing Managers’
Index, an indicator of economic health for manufacturing and service
sectors), while the effects of tariffs are just now registering—and are
only likely to intensify before a resolution is reached. All of this raises
the degree of difficulty for U.S. equities to maintain their recent
performance pace and for non-U.S. stocks to rebound. We do believe,
however, that the portfolio holds companies that are well positioned
to execute effectively in a more challenging environment.






8 | 2018 Semiannual Report to Stockholders







 






PERFORMANCE AND PORTFOLIO REVIEW
 
SYMBOLS     MARKET PRICE RGT NAV XRGTX









Performance


Average Annual Total Return (%) Through 6/30/18


 
 
JAN-JUN 20181
 
1-YR
 
3-YR
 
SINCE INCEPTION (10/17/13)


 


RGT (NAV)
 
-0.88
 
11.89
 
9.69
 
6.48


 


1  Not Annualized
 
 
 
 
 
 
 
 









Market Price Performance History Since Inception (10/17/13)