RMT: A High-Performing Micro-Cap CEF Trading at a Discount—Why It's a Strategic Buy for Income and Growth

The global capital markets have long been dominated by the allure of megacap stocks and the relentless focus on high-growth tech darlings. Yet, in the shadows of this spotlight lies a far less crowded but historically rewarding corner of the market: micro-cap equities. For investors seeking both income and capital appreciation, the Royce Micro-Cap Trust (RMT) offers a compelling case. A closed-end fund (CEF) with a 31-year track record, RMT has consistently outperformed major indices, demonstrated resilience during market stress, and now trades at a double-digit discount to its net asset value (NAV). This combination of disciplined value investing, sector diversification, and undervaluation makes it a strategic opportunity for patient capital.

A Legacy of Long-Term Outperformance

RMT's investment thesis is rooted in a simple but powerful principle: buying companies that are mispriced by the market. The fund focuses on micro-cap stocks—typically defined as firms with market capitalizations below the largest stock in the Russell Microcap® Index—and applies a rigorous value-investing framework. Unlike passive strategies that merely track indices, RMT's active management seeks to exploit inefficiencies in a segment of the market where liquidity is low and analyst coverage is sparse.

The results speak for themselves. As of June 30, 2025, RMT has outperformed the Russell 2000 across nearly all time horizons—1-year, 3-year, 5-year, and even 30-year periods—since its inception in 1993. Over the past 25 years, it has outpaced the Russell 2000 in 68% of all 10-year rolling periods and 63% of 1-year periods. This is not a fluke but a testament to the fund's patient, bottom-up approach. Portfolio managers Jim Stoeffel and Andrew Palen, with decades of experience, focus on companies with strong fundamentals, a margin of safety, and the potential for durable growth.

Resilience in Downturns: A Key Differentiator

The true test of any investment strategy is how it performs during market stress. RMT has consistently proven its mettle in this regard. Since 1993, it has outperformed the Russell 2000 in seven out of nine downturns of 15% or more. For example, from the peak of November 25, 2024, to June 30, 2025, RMT fell by 4.5%, while the Russell 2000 plummeted 10.1%. This resilience stems from two factors: first, the fund's focus on companies with strong balance sheets and cash flows, which are less susceptible to panic-driven sell-offs; second, its active management, which allows managers to rotate into undervalued sectors or companies that others overlook.

The fund's sector allocations further reinforce this resilience. Industrials (28.3%), information technology (21.1%), and financials (17.5%) form the backbone of its portfolio. These sectors are cyclical but have historically rebounded strongly during economic recoveries. Notably, RMT's top holdings—such as Magnite, Sprott, and American Superconductor—are all positioned to benefit from structural trends like AI-driven infrastructure, energy transition, and financial sector consolidation.

Undervaluation as a Tailwind

While RMT's performance is impressive, its current market discount to NAV offers an additional layer of appeal. As of July 2025, the fund trades at $9.57 per share, compared to a NAV of $10.94, representing a 12.52% discount. This discount has averaged -11.74% over the past 52 weeks, with the 52-week range spanning from -9.47% to -13.52%. Such discounts are common for CEFs, particularly those focused on niche sectors like micro-cap stocks, but RMT's discount is unusually large given its consistent outperformance.

The discount is not a flaw but an opportunity. When a fund with a proven track record trades below its intrinsic value, it creates a margin of safety for new investors. Historically, RMT's discount has narrowed during periods of market confidence, as the fund's performance attracts new capital. For instance, during the 2020-2021 recovery, RMT's discount contracted from over 15% to single digits, lifting share prices in tandem with NAV growth. A similar dynamic could unfold here, especially as micro-cap stocks regain favor in a low-growth environment.

Income Potential: A 7.8% Yield with Caution

RMT also offers an attractive income stream for income-focused investors. As of July 2025, its dividend yield stands at 7.84%, significantly higher than the 1.54% average of the past four quarters. While the current distribution is sourced entirely from return of capital (not income), the yield is a compelling draw in a low-interest-rate world. The fund's 10-year historical yield average of 7.02% suggests that this level of income is not an anomaly but part of a long-term trend.

However, investors should approach the yield with caution. The distribution is not guaranteed and may fluctuate based on the fund's cash flows and board decisions. The recent $0.18 quarterly distribution (paid on June 25, 2025) reflects a consistent policy, but future payouts could be adjusted. For those seeking stable income, RMT's yield should be viewed as part of a broader strategy to capture both capital appreciation and dividend growth over the long term.

Strategic Implications for Investors

The case for RMT is built on three pillars: long-term outperformance, market resilience, and undervaluation. For investors with a time horizon of five years or more, the fund offers a rare combination of active management in an underfollowed asset class and a compelling entry point. The current discount to NAV acts as a catalyst, while the fund's sector allocations and value-investing approach provide a durable framework for growth.

That said, micro-cap investing is not without risks. The segment is inherently more volatile than large-cap stocks, and RMT's portfolio turnover rate of 53% (as of December 2024) indicates a moderate level of trading activity. Investors should also be mindful of the fund's structure as a CEF, which introduces the risk of liquidity mismatches between NAV and share price.

For those willing to embrace these risks, RMT represents a strategic buy. Its disciplined approach to value investing, proven track record in downturns, and current discount to NAV make it an attractive vehicle for investors seeking both income and capital appreciation in a market where the easy wins are increasingly scarce.

In conclusion, the Royce Micro-Cap Trust is more than a high-yield CEF—it is a masterclass in how to harness the power of micro-cap investing. As the market continues to grapple with structural shifts and macroeconomic uncertainty, RMT's focus on mispriced opportunities and its current undervaluation position it as a standout choice for investors with a long-term horizon.