Charlie Dreifus is Morningstar's Domestic-Stock Fund Manager of the Year

Charlie Dreifus

CNBC Talks to Charlie About His Fund Strategy
Legg Mason's Interview with Charlie
Morningstar Announces Managers of the Year for 2008
View Royce & Associates' press release

We have a winner! Royce & Associates, LLC is pleased to announce that Charlie Dreifus, portfolio manager and principal of Royce & Associates, LLC, has won the prestigious Morningstar Domestic-Stock Fund Manager of the Year award for 2008.

In nominating Charlie in December, Morningstar said, "Every portfolio should have at least one fund like this [Royce Special Equity Fund]. When times get tough..., Dreifus' portfolios are an oasis of calm."

Shortly after joining Royce & Associates in early 1998, Charlie began to manage the portfolio that combines classic value analysis with accounting cynicism, Royce Special Equity Fund, which made its debut on 5/1/98.

"When selecting our Fund Managers of the Year, we look for superior long- and short-term performance, proven strategies executed by experienced teams rather than trend-chasing, and strong stewardship," said Russ Kinnel, director of mutual fund research for Morningstar. "Two thousand eight was such a challenging year for fund investors and managers," Kinnel added. "We have seen how crucial it is for managers to be able to successfully limit investors' losses. For example, Domestic-Stock Fund Manager of the Year Charlie Dreifus lost 19.6% in 2008, whereas the market as a whole lost 37%. Despite these losses, he has made it a lot easier for investors to get back into the black than many of his peers… We have a lot of confidence in Dreifus' investing skills, especially when markets go south. His strategy shields against losses in bad markets even though it also means that Royce Special Equity lags in big market rallies."

Established in 1988, the Morningstar Fund Manager of the Year award recognizes portfolio managers who demonstrate excellent investment skill and the courage to differ from the consensus to benefit investors. To qualify for the award, managers' funds must have not only posted impressive returns for the year, but the managers also must have a record of delivering outstanding long-term performance and of aligning their interests with shareholders'. The Fund Manager of the Year award winners are chosen based on Morningstar's proprietary research and in-depth evaluation by its fund analysts.

We sat down with Charlie Dreifus for his reaction to being named Morningstar Domestic-Stock Fund Manager of the Year award for 2008.

What is your response to winning such a prestigious award?

I'm very honored to have won. It's particularly noteworthy that this accolade comes during such a difficult year, a year in which I wasn't especially pleased with Royce Special Equity Fund's (RYSEX) performance on an absolute basis. I also want to offer congratulations to the other nominees—it was a very impressive list of managers, which makes the honor that much more gratifying, as does the fact that an organization as strong as Morningstar is giving out the award. It means a great deal to be singled out by such a well-regarded company. It is also noteworthy that the award was given to me as a member of Royce & Associates, a wonderful, nurturing firm.

Did going through such a difficult year change anything about your approach to stock selection?

No. I believe very strongly in the discipline I've developed and the approach I've used over the years. I continue to adhere to the same principles and methodology. If anything, I've become even stricter in my selection standards, in order to take account of the greater uncertainty and lack of visibility. I hope, and expect to continue, to confirm the confidence investors have demonstrated in the approach by investing in Royce Special Equity Fund.

Any thoughts on what lies ahead for the stock market?

Our previous decade's growth was unsustainable—enhanced by the easy and cheap credit available. We are now experiencing a reversion to the mean. It probably is too optimistic to think that problems that were building over a long timeframe can be resolved quickly. We expect more bad earnings pre-announcements this month, further layoffs and store closings and/or company bankruptcies. There will be a "winner takes all" outcome as a result of survivorship. The largest earnings declines in 2009 will likely be in the energy and technology areas, though many businesses in those sectors seem to have incorporated that already in their share prices. The first half of 2009 seems bleak, with the hope that all of the actions that have been and will be taken can stem the decline in the second half.

Perhaps November was a bottom for the stock market, but we still need greater thawing out in credit markets, and, at a minimum, a slowing rate of economic deterioration for any genuine recovery to begin.

What kind of companies have you been looking at for inclusion in the Fund's portfolio?

My preference remains for securities that are inexpensive, pay dividends, are highly focused domestically, with little leverage and in prosaic businesses. I think that we will see more of a focus on balance sheets and that liquidity will separate the survivors from those that perish. Access to debt, as well as its cost, will be important elements in distinguishing among companies.

Have rapidly collapsing stock prices opened the floodgates of opportunity?

If anything, I have been even more exacting, raising the standard of what may qualify for inclusion in the portfolio amid the plunging prices and growing number of purchase candidates for the portfolio. In today's environment, I am tightening my belt and pulling up my suspenders by placing greater importance on already important elements. Some of the other metrics that have begun to assume an even higher priority include Net-Net Working Capital (with an ample supply of that capital in cash) and yield.

Visibility, in terms of both individual company earnings and growth for the economy, remains far too cloudy for anyone to see clearly. The greater level of uncertainty creates additional pressure to find businesses that provide economic rationality; in other words, companies that possess absolute value in the form of those qualities listed above. A balance must be struck between acting opportunistically to take advantage of low prices and not buying too much of a company too soon since whether or not the market has reached a bottom seems eminently unclear. Purchases in the Fund's portfolio are typically being made in a dollar-cost-averaging style that resembles a cautious wade into the shallow end of the small-cap pool.

Stock pickers with discipline should do well. The challenges remain, but portfolios that defend well and participate, even if only to a degree, with the occasional dramatic up moves, should benefit. I hope to be among those whom the market will reward, and so I remain enthusiastic about the Fund.