How A Cautious Manager Is Handling A High Priced Market—Royce
article , video 11-20-2018

How A Cautious Manager Is Handling A High Priced Market

Charlie Dreifus discusses his self-governing discipline around cash and how changing consumer behavior has affected his picks in that area.


Why is your portfolio holding more cash than it has historically?

My normal cash position is 8-10%; that's what I feel comfortable with. We’re currently 18, 19% in cash. It's not a market call, it's not market timing. It's a natural byproduct of the market, and the discipline that I employ.

The cash level is not a top-down call. There are no values out there currently, new names, that I wish to buy, what I could buy under my discipline. Whereas names that I do own have risen to the point where they have to be either reduced or eliminated. So the cash position is higher than normal. It could go higher, depending on what the market does.

How do you account for changes in consumer behavior when you're evaluating consumer stocks?

You have to be aware of the risks that are within business models that are susceptible. And you have to find companies that are reacting in a way that they can navigate that.

Children’s Place saw the threat early. And embarked on a substantial physical store, brick-and-mortar store, reduction. That will end up from the beginning through the end of next year with a 30% reduction in the number of stores. They also approached this whole omnichannel—they, early on, got in touch via smartphones, with their consumer base. Such that the consumer could order online, return it back to the company, or take it to one of their brick-and-mortar stores, and it was a way of constantly bringing to the customer’s attention those new offerings that pertained to that specific customer’s children’s ages. So and finally what they did, again 3, 4 years ago, is they set up a relationship with Amazon and they started with, I don't know, 500 SKUs and they're up to 4,000 or 5,000 SKUs now with Amazon. So they've negotiated it rather well.

Another name people are likening the magazine business to the newspaper business. So I own Meredith. Now, Meredith has Better Homes & Gardens and names like Family Circle. But beyond that, they have 17 local TV stations, which bring in over 60% of operating income for the total company, which is not really affected by print demand. And the other very interesting thing, the guaranteed circulation. Magazines have to tell their advertisers: We guarantee that between subscriptions and newsstand, we will have at least X amount of copies sold or issued. And over the last 10 years, that number, apples for apples, excluding any titles they acquired, is up 12%, which again is misunderstood. And finally what they've done, they've made a huge inroad into digital advertising. 

“I believe based on everything that's out there and the recent market action, we are closer to an inflection point where my strategy will not only do well on an absolute basis, which it has done, but it will also do well on a relative basis.” —Charlie Dreifus

So on the top of the list of companies with unique visitors is, you know, Google, Facebook, Amazon, and tenth on the list is Meredith. They have 140 million unique visitors.

What gives you confidence in your strategy going forward?

I believe based on everything that's out there and the recent market action, we are closer to an inflection point where my strategy will not only do well on an absolute basis, which it has done, but it will also do well on a relative basis. And the reasons for saying that, first of all I’m not doing anything different.

In an environment where the market is expensive, where growth has outperformed, where volatility is rising, where interest rates are rising, where there's greater Black Swan event risk, is the perfect storm based on past, where we should expect Special Equity to outperform, and its risk moderation characteristics kick in. We’re in that kind of cycle, in my belief. So this is an opportune time to, you know, evaluate what other investments you have, and, you know, see how this fits in the profile of your desired risk level.

Royce Special Equity Fund


Important Disclosure Information

Average Annual Total Returns as of 9/30/18 (%) 

Special Equity 0.23 4.50 12.30 6.06 9.44 8.81 10.00 9.09 05/01/98
Russell 2000 3.58 11.51 15.24 17.12 11.07 11.11 10.12 9.45 N/A
Russell 2000 Value 1.60 9.33 16.12 9.91 9.52 9.50 9.83 9.83 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 October 15, 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.

Percentage of Fund Holdings As of 9/30/2018 (%)

  Royce Special Equity Fund

Children's Place 




Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

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