How a Veteran PM Invests in Bear Markets—Royce
article , video 03-09-2022

How a Veteran PM Invests in Bear Markets

Charlie Dreifus discusses his take on the sharp market decline, three companies he’s optimistic about, and more.


What’s your take on the sharp market decline?

I think it was overdue and I believe we have more to go. The reason that I think more drawdowns and declines are likely is the Fed has yet to implement the measures they need to take to restrain and hopefully bring down inflation.

I feel that they’re dramatically behind the curve, meaning that they have catch up to do. They should have been removing stimulus and should have been raising rates earlier. They haven’t done so. And that’s ahead of us.

Do you think there are other parallels in your career?

I’ve been doing this professionally for 54 years, which means I was actually a young portfolio manager managing a pension fund in 1972-75, also known as the Nifty Fifty era. And this was at a time when, much like the FANG stocks of today, there was an anointed group that sold at very high valuations. We’ve obviously seen this in the bubble. It repeats itself. So history is a good instructor in these matters.

And the market, from top to bottom, went down 50%. That insight that I learned then was instilled in me by a veteran trader. And he says to me, Charlie, hold your horses. This is the beginning of a bear market. What you’ve got to do is you’ve got to pace your purchases, dollar cost average. You don’t know how long this is going to take.

So what I learned then was a pyramid. What you do is you buy, think of the top of the pyramid, you buy a little. And as the price declines, you buy more. And on days that market goes up, you stop buying, on the presumption it’s going to go down tomorrow or the day after.

What areas are you most optimistic about now?

We adhere to a very disciplined, some would say rigid, and I say guilty to rigid as well, discipline that we don’t bend to suit the market. And at current valuations, even with the drawdown we’ve experienced, it’s hard to find a sufficient number of names that meet all of our strict disciplines. It’s not easy to get into Special Equity in terms of an equity holding. You have to meet a lot of conditions.

So, the names in the portfolio that remain, we like. Some examples would include H&R Block. It’s the tax preparer. Very strong financials, very significant consistent cash flow, decent dividend yield. I should also say that in the environment I foresee, yields are going to be more important. They got a boost last year, meaning tax year 2020 and 2021, when people were getting federal benefits and they had to file taxes. So the question is are they going to lose some taxpayers, tax filers because of the current absence of government programs. They also switched fiscal years, so the numbers are a little messy right now. In terms of getting stickier customers, they’re providing a suite of financial services that their customers typically are not currently getting. So that’s the hope for them, and we think the stock is attractively priced.

So another one would be TEGNA. It’s a local TV provider in many locations. We bought it based on our valuation metrics. Subsequent to our purchase, several potential suitors came by. There’s an activist involved. The stock, in Wall Street terms, is in play in the sense that people expect a deal above its current price and obviously the current price is above the price we paid for it. It’s still attractive enough to hold on. If a deal doesn’t happen, it’s still attractive, so it’s a win-win in that regard.

Another holding is a chemical company called Huntsman, which we acquired initially at half its current price, based on valuation. Here was a company that was going from a commodity chemicals company to a specialty chemicals company. And in the process, deleveraging to a remarkable degree. And so this too has now attracted an activist who is seeking to make some changes.

We will not buy a stock because it’s in play or there’s activist talks. It must be a good investment first. But we’re finding, as I said, increasing instances of this. Our metrics are much like a private equity investor would seek. So it’s not surprising to us that our names are gaining more attention and more potential transactional activity. We would expect that. No guarantees, obviously. But it would make sense that with private equity funding as high as it is that our names might be in the crosshairs of some of these funds.




Important Disclosure Information

Average Annual Total Returns as of 12/31/21 (%) 

Special Equity 8.50 22.50 14.02 7.58 9.68 8.20 9.52 9.12 05/01/98
Russell 2000 Value 4.36 28.27 17.99 9.07 12.03 7.19 9.18 9.76 N/A
Russell 2000 2.14 14.82 20.02 12.02 13.23 8.69 9.36 9.15 N/A

Annual Operating Expenses: 1.23

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 February 8, 2022 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 12/31/2021 (%)

Special Equity

H&R Block




Huntsman Corp.


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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