article 02-15-2017

Navigating the Small-Cap Resurgence: Charlie Dreifus on WealthTrack

Following the terrific year for small-caps, Portfolio Manager Charlie Dreifus talks with Consuelo Mack WealthTrack about the small-cap market, the importance of staying true to his investing discipline, and how to 'de-risk' a portfolio.

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Courtesy of Consuelo Mack WealthTrack. All Rights Reserved.

On February 10, 2017, Portfolio Manager Charlie Dreifus was a guest on Consuelo Mack WealthTrack. He talked about what contributed to the strong performance in 2016 for Royce Special Equity Fund, current events in the market that could impact his small-cap stocks, and how to 'de-risk' a portfolio.

Royce Special Equity Fund has outperformed the Russell 2000 for the quarter, 1-year, 10-year, 15-year, and since inception (05/01/98) periods as of 12/31/16. 2016 was actually the best calendar year return in the Fund's history.

Charlie discussed the Fund's strategy, and why the Fund can defend well in down markets: "It has to do with the whole methodology. I select securities that have a margin of safety. I often describe it as a margin of safety squared. My colleague Steve McBoyle and I look for companies that are absolutely inexpensive."

Charlie describes his selection criteria: "An insistence that it's a good company, that it has high return on invested capital, and it's productive. In Warren Buffet's addition to Ben Graham's work, the idea of a moat, a niche, something unique to the company, and that coupled with the third ingredient, which is a stress of the company's accounting and governance."

He continued, "To make it into our portfolios, perhaps one out of fifteen of those we look at ultimately get in because it has to have the attraction of the absolute value, margin of safety, it has to have a high return on invested capital, it has to meet all of these governance and accounting standards, and then some other accounting metrics, free cash flow, low leverage, things like that and, so it's very demanding. I like to refer to it as disciplined. It has worked. I've seen over many periods of time how that has contributed to the defensive characteristics of the portfolio."

Charlie added how he is positioning the portfolio, saying, "It's not a direct market call, it's not a macro market call—but it's a bottom-up market call which I think is even more important when you can't find merchandise. If you have a discipline that has worked for many years and there are no new opportunities, don't force it. Don't do something that is not part of the discipline."

Charlie Dreifus has 48 years of investment industry experience and joined Royce in 1998. He is portfolio manager of Royce Special Equity Multi-Cap Fund and Royce Special Equity Fund.

Watch Charlie Dreifus's full Consuelo Mack WealthTrack interview here.

Average Annual Total Returns (%) as of 12/31/16

  QTR* 1YR 3YR 5YR 10YR SINCE
INCEPT.
DATE
Special Equity 15.48 32.21 5.42 11.82 8.50 9.54 05/01/98
Special Equity Multi-Cap 5.54 13.92 2.62 10.52 N/A 9.96 12/31/10
Russell 2000 8.83 21.31 6.74 14.46 7.07 N/A N/A
Russell 1000 3.83 12.05 8.59 14.69 7.08 N/A N/A
Special Equity Annual Operating Expenses: 1.15%
Special Equity Multi-Cap Annual Operating Expenses: 1.01%

*Not Annualized

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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 redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses. All performance and risk information presented in this material prior to the commencement date of Royce Special Equity Multi-Cap Investment Class shares on 3/1/12 reflects Service Class results. Shares of the Special Equity Multi-Cap Fund's Service Class bear an annual distribution expense that is not borne by the Investment Class. 

Important Disclosure Information

Charlie Dreifus is a Portfolio Manager of Royce & Associates, LP, investment adviser to The Royce Funds. He is the portfolio manager of Royce Special Equity Fund and Royce Special Equity Multi-Cap Fund. The thoughts and opinions expressed in the interview 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 Multi-Cap Fund invests primarily in mid-cap and larger-cap stocks, and Royce Special Equity Fund invests primarily in small-cap stocks. Investments in securities of small-cap and mid-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Funds generally invest a significant portion of their assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund's 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.)

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 1000 index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

As of 12/31/16, Vanguard Life Strategy Moderate Growth Fund was 0.0% of Royce Special Equity Fund's assets, and 0.0% of Royce Special Equity Multi-Cap Fund's assets.

There can be no assurance that any of the securities mentioned in the video will be included in these portfolios in the future. References to specific securities in this video are not intended as recommendations and should not be relied upon as the basis for anyone to buy, sell, or hold any security.

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