article , video 09-19-2014

Why Large-Caps Looked Attractive to This Small-Cap Portfolio Manager

For Portfolio Manager and Principal Charlie Dreifus, combining a business-buyer's mentality with accounting cynicism can help reveal stock-price disparities.


Dave Gruber: You've been running Royce Special Equity Fund for the last sixteen-and-a-half years here, and three-and-a-half years ago you launched Royce Special Equity Multi-Cap Fund, which is really focused on mid- to large-cap companies. Tell us why you launched it and really what you bring to the table in that area.

Charlie Dreifus: The basis of my whole approach to investing was formulated on large-cap stocks. But I noticed in doing that that the greater values were in the small-cap names. So what I started seeing around the time of the financial crisis was that large-cap companies were significantly underpriced in my estimation.

So I went ahead and started getting back into analyzing the large-cap companies. And I discovered something, which I think is the unique aspect that I bring to the table regarding large-caps. Large-caps are obviously well followed, as contrasted to the discovery factor in the smaller-cap names. Even if they are covered by sell-side analysts—small-cap stocks—there are usually very few of them, and there are still instances where there are none.

In large-cap there are many industry specialists who follow these companies, but universally, it was apparent to me immediately in reading the research reports on these companies, and having read the financial documents on these companies myself, that these people who cover these companies are terrific in knowing the ins and outs of their respective industries.

But they don't approach it as a buyer of the business would. They don't do that accounting due diligence, that deep dive into the accounting, first for the veracity—the integrity of the numbers—but more importantly sort of those hidden assets, those items that would reduce your cost basis were you to acquire the entire company and reduce your investment, most importantly.

What is prevalent, particularly in those companies that I selected, was that these companies, because of their niche and the stability of their earnings and their cash flows, many had been able to raise their dividends sequentially, consecutively. And these become known as dividend aristocrats.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Royce Special Equity Fund invests primarily in small-cap and micro-cap stocks, which may involve considerably more risk than investing in larger-cap stocks, and Royce Special Equity Multi-Cap Fund invests primarily in mid-cap and large-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) As of 6/30/14, the Funds held a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Funds' overall value to decline to a greater degree. Royce Special Equity Multi-Cap Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)



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