Thinking big with large cap stocks

Mar 3, 2014 @ 12:00 am

Runtime: 7:08

Small company stock manager Charlie Dreifus closed his small blend fund to investors in 2012 and is now embracing large caps with the Royce Special Equity Multi-Cap Fund. Find out what prompted him to make the shift.

Video Transcript

This week on Wealth Track, they say the best things come in small packages. The great investor Charlie Dreifus says the time to think big is now. The noted small company stock manager explains why he has closed his small cap fund to new investors and has opened to large caps in his Royce Special Equity Multi-Cap Fund. A rare interview with Charlie Dreifus is next on Consuelo Mack WealthTrack. -Large caps did extremely well from 1982-- August of 1982 into March of 2000. And I think the S&P number is roughly about 18 percent compounded over that period of time. For 18 years and for 100 years including that time period, it's roughly 9 percent, so way over achieved. So, it was sort of regression to the mean. This-- Even if the financial crisis hadn't happened, the likelihood of hadn't happened, the likelihood that those stocks were to underperform, and so you had the confluence of an asset class that was overvalued coming into the decade with some concerns, and particularly one of the concerns to this very day in these large stocks is their international exposure and specifically their emerging market exposure. This is-- It used to be thought of as a positive. These days it's thought of as a negative. So the valuations were attractive. I went-- I did some of my metrics to just sort of test and see. Is my perception substantiated by the figures? Ultimately everything rests on the numbers. Okay? -For you. -For me. -Yes. -Right. So, I went to Chuck and asked him if-- what his thoughts were about us launching a large cap fund. -I can imagine the reaction you got. -Yeah, it wasn't positive, although he didn't rule it out entirely. He said, "Let's think about it." So I thought about it a couple of days, and I went back to him, and I said, "Well, how about this? If you have no problems and I go to Compliance and they have no problem, would it be okay with you if I started buying some of these and did some real research for my own account?" -Uh-huh. -And he said, "Absolutely. Fine. Go do it." And it turned out I found names and I started making money. -For your personal account. -For my personal account. -Right, in large caps. -With the blessing-- With the blessing of the firm in large cap, and so I went back to Chuck, and I showed him, you know, the results. And I said, "You know, the values are still there", this is 2009-- -Uh-huh. Uh-huh. -and early 2010. We launched the fund December 31, 2010, ultimately. -Right. -So-- -This is the Royce Special Equity Multi-Cap Fund. -The Fund which just celebrated its third anniversary, therefore. -And it's beaten the market. It's gotten great returns three years. Congratulations. -Thank you, thank you. So yeah, three years is a short period of time, but we're encouraged by what we've seen. So I kept on working with Chuck. And, you know, he kept on saying, correctly so, "Remember, we're a small cap shop," largely, and so we finally came up with a name for it which is multi-cap. It's not all cap. Multi-cap, the distinction there is basically the lowest market cap area generally will be $5 billion, so things below 5 billion will most often be excluded from the multi-cap portfolio, but it has no upper cap. So it's a matter of public record. There are names in the portfolio such as Microsoft and Intel with-- -Very large cap. -Very large caps. So, the-- Well-- And there are some in the portfolio with, you know, 5- to 15-billion dollar market caps. The average weighted one is in the 40 to 50 billion dollar which is still by most measures large cap. -But why? It was a valuation. It was a valuation. -You decided you're a small cap manager, has been for 15 years, and you've decided looking at the valuations that small caps had done well and large caps had lagged, so that was-- that was-- it was a macro call then, right? -It was, but I also always-- I take my responsibility as everyone at Royce does, and I'd like to believe most in our industry do. You know, I'm a fiduciary to my clients. And, you know, whether it hurts my wallet or not, I have a duty to give them my best advice. -Uh-huh. -And if that means suggesting that a different asset class is better, or if that means reducing our fees, or if that means shutting the product down, we have to do it. I should also mention we just, on that basis, we now have about $185 million in the multi-cap product, and I went to the board and asked them to reduce the fees. We reduced it from 100 basis-point management fee to 85 basis-points-- -Right. -management fee recently as of January 1 actually. -Thank you. I mean, I appreciate that as an investor, and I might add along those same lines that the Royce Special Equity Fund, which is your small blend fund, you closed it to investors in 2012. -Two years ago. -And the reason was? -The capacity issue. I just couldn't find-- I mean, we could take in more money, but it wouldn't serve the clients-- -Right. -good. It would help Royce and Charlie Dreifus, but in the long run it wouldn't really help Royce and Charlie Dreifus because we would tarnish our reputation for being good stewards. It's the second time I actually closed my Special Equity Small Cap Fund and, you know, it's the confluence of monies coming in, selling securities, and the process that I use for multi-cap is the same process that I use for small cap. And part of that is quantitative and part of it is qualitative. The quantitative, the first and foremost is valuation. Rate of return is a function of entry level, and the math is the math, and, you know, the market in general, not only small stocks, large stocks also, it's elevated. -Uh-huh. -There's no-- There's no arguing about that. Okay? The point is, can it go higher, and I believe it can.


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