Charlie Dreifus Celebrates 20 Years on Royce Special Equity Fund and 50 Years on Wall Street | Royce
article , video 04-27-2018

Charlie Dreifus Celebrates 20 Years on Royce Special Equity Fund and 50 Years on Wall Street

Charlie Dreifus celebrates 20 years managing Royce Special Equity Fund and 50 years on Wall Street while looking at the biggest changes he’s seen during these years.


Steve Lipper We’re here celebrating the 20th anniversary of the launch of the Royce Special Equity Fund; it's a great accomplishment. What we’re interested in hearing is your perspective on the journey and things along the way. What are some of the things that have surprised you?

Charlie Dreifus Well, there are many things, of course, that surprise me. The one thing that is a recurring theme, but yet is surprising how often it happens, is how irrational the market can get. And how out of sync with economic reality. Which, you know, works ultimately to the advantage of investors like us, but at times can be very challenging.

The one thing that is a recurring theme, but yet is surprising how often it happens, is how irrational the market can get. And how out of sync with economic reality. Which, you know, works ultimately to the advantage of investors like us, but at times can be very challenging.

Along with that, I guess, there are some, observations that, you know, we focus on one being accounting purity or pristineness of the financials. And obviously in the current age, the proliferation of non-GAAP and how the Street has embraced that. The Street seems to be both the buy and the sell-side, I think, behind the times regarding accounting developments, which ultimately I believe gives Steve McBoyle and myself an advantage because we pay a lot of heed to that.

The other one which is sort of related is the issue of valuation. There's much more use of enterprise value to EBITDA. We of course use a modified version—enterprise value to EBIT, which is a more conservative way. PE’s are a way of describing valuation, but frankly, not very useful because they don’t incorporate the entire value of the business and what it would cost you to buy the business.

SL That accounting matters, but it doesn't seem to stick.

CD Something that when a problem strikes, people are sensitive to it, as they were in 2002 and they were in 2008, and then they forget about it.

SL As the world evolves, there is the need to adapt. So how have you adapted the implementation of the principles over these past 20 years?

CD I've been managing mutual funds on this basis since May of 1980. And the basic philosophical tenets are the same. The implementation has changed a bit because we have access to more information. This is also not only the 20th anniversary of the Fund, but coincides with actually my 50th anniversary working on Wall Street.

SL So it's interesting that some of the enhanced disclosure probably helps on that building conviction with management, and understanding their character.

CD Sarbanes-Oxley made a very big difference. We have much more disclosure in the proxy statement these days. Starting first of all with the greater independence of the board.

And one of the things that I find still lacking, though, is in terms of what you mentioned, Steve, the incentive compensation these days too often is based on non-GAAP figures, such that a company management of a company gets paid heads or tails.

The audit committee should work in tandem with the compensation committee. There should be some connection which I have not yet observed between the audit committee and the compensation committee in terms of the metric that is used for things like incentive compensation.

SL So disruption from ecommerce is a bigger deal than at any time in your career. I guess that's an example of something where you have to adapt the practice to say: Well, you know, how strong is this business model?

CD And it's beyond retailing per se. You know, we see it in all forms of distribution industrial distribution. We’re now seeing potentially inroads in terms of wholesale drug distribution.

And at the Berkshire annual meeting two years ago Warren Buffett mentioned that they, who you know, deal mainly in industrial types of products in terms of other than insurance they don’t make an acquisition anymore without thinking about the Amazon effect.

But clearly as investors, you have to be aware of the challenges it has to the ability to have the kind of sales outcomes at the prices or the margins that you had in the past. So that's something that clearly has impacted how we go about selecting securities.

SL You have the benefit of 20 years of managing the Special Equity here at Royce, and as you reference, 50 years in the business. One thing that people with perhaps less experience might do is mistake something that's been existing for a couple of years as permanent. How can you help us put, you know, where we are within historical context?

CD That's a great question, Steve. And the current experience with the favoring of growth over value, which clearly has been a headwind particularly to me has historical precedence, and is not the norm. We have part of the current reason we’re in that, obviously, was the great Financial Crisis. And how central banks responded, and bringing interest rates down to zero. And trying to create growth, and growth really didn't happen until more recently.

And so people favored growth. But over my career, not only did I see the tech bubble of ’99-2000, but I actually when I reflect on it I smile, because to me it seems a bit interesting that at an age of not yet quite 30, in 1973-74, I was managing pension funds. And in that era, it was known as the ‘Nifty Fifty.’ And there was an anointed group then also.

So we go through these periods where people get infatuated with types of businesses; some of whom are really great businesses, and the model allows them to continue to prosper virtually indefinitely.

I think within the need that investors believe they have currently, to pay up for growth in a world that until now has been growth deprived, is going to prove, as it has in the past, a mistake.

Important Disclosure Information

Average Annual Total Returns as of 3/31/18 (%) 

Special Equity -5.00 2.80 5.06 7.40 8.76 9.63 9.05 05/01/98
Russell 2000 -0.08 11.79 8.39 11.47 9.84 11.50 7.35 N/A

Annual Operating Expenses: 1.17% 

1 Not annualized.

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 at 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.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2018 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.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

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