Portfolio Manager Charlie Dreifus spent his early career focusing on domestic large-caps before turning his attention to smaller-company investing, a universe where until recently he concentrated most of his efforts. With three years now under its belt, Royce Special Equity Multi-Cap Fund tells the story of how Charlie's singular approach applies across the market cap spectrum and what inspired our interest in the larger-cap space after having dedicated more than 40 years in small-caps.
"It seems like Charlie Dreifus has been able to take a small-cap strategy and make it work for larger caps. That's typical of what you see with these smaller funds, in that you had a manager who was really good somewhere else and now they're adapting that strategy to a slightly different universe. It takes bit of a leap of faith, but I feel pretty good about a fund like this. I also like the fact that it's a conservative fund at a time when stocks have already had a good run."
— Russ Kinnel, Director of Fund Research, Morningstar
For more than 40 years, we have invested primarily—for many years exclusively—in small-cap stocks. Throughout his more than three decades as a portfolio manager, Charlie Dreifus has done much the same. So it probably came as a bit of a surprise at the end of 2010 when Royce Special Equity Multi-Cap Fund was launched with Charlie at the helm because the Fund invests primarily in larger-cap stocks.
Yet the portfolio takes full advantage of his 45 years of investment experience. While his emphasis and attention as a portfolio manager has been on the small-cap side for most of his career, Charlie also spent several years during the '70s and '80s as Director of Research at two different companies. Each firm focused its stock selection process on large-caps, and through this work he developed a substantial knowledge base about the domestic large-cap space.
Prior to the Fund's debut, which followed the Financial Crisis of 2008-09, Charlie believed the large-cap asset class looked attractively cheap. Applying his singular approach, which combines classic value analysis and accounting cynicism, he brings a methodology honed over more than 30 years—15 of them at Royce.
He looks for companies with high, sustainable returns on invested capital and strong levels of free cash flow from operations, among other attributes, that are also inexpensive on an absolute basis. In Special Equity Multi-Cap, it is not uncommon to see many household, "dividend aristocrat" type names. In fact, these companies, which are usually defined as those in the S&P 500 Index that have increased their dividend for 25 consecutive years, are well-represented in the portfolio. Charlie believes that they represent some of the highest-quality businesses available to investors. Their compellingly low valuations around the time of the Fund's inception made many of them early selections. While there is no guarantee that a company will continue to pay a dividend, Charlie also believes that the Fund's early emphasis on dividend payers will prove rewarding, especially in the current interest rate environment in which rates are rising but remain low on an absolute basis.
Regardless of market cap, every company that Charlie analyzes receives his strict attention to accounting and financials. Indeed, his well-deserved reputation for close scrutiny of financial reports was something he learned from accounting guru Abe Briloff, who was both his teacher and good friend. (Abe recently passed away at the age of 96.) While large-cap companies are well covered on Wall Street, Charlie thinks that his "special sauce" can be a benefit. It involves a deep dive into the financials that's designed, among other things, to uncover whether the company's accounting practices are aggressive or conservative. He prefers companies with conservative, transparent accounting. His exhaustive analysis should also reveal how inexpensive the business is on an absolute basis.
With three years of history in the books, the early results have been highly encouraging. The Fund outperformed its benchmark, the Russell 1000 Index, for the one- and three-year/since inception (12/31/10) periods ended December 31, 2013. We think that, after 40 years in business, our first foray into a large-cap mutual fund is going pretty well.
Royce Special Equity Multi-Cap Fund (RSEMX)
Average Annual Total Returns as of Period-Ended 12/31/13 (%)
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 180 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. Gross operating expenses reflect the Fund's total gross annual operating expenses and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Fund's net annual operating expenses, at or below 1.24% through April 30, 2014.
Important Disclosure Information
This material is not authorized for distribution unless preceded or accompanied by a currentprospectus. Please read the prospectus carefully before investing or sending money. There is no guarantee that the Fund will be able to achieve its investment goal stated in its prospectus. The Fund invests primarily in mid-cap and large-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) In addition, as of 9/30/13 the Fund 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 Fund's overall value to decline to a greater degree. The Fund may invest up to 25% of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.) 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. 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 performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.