How bad was the U.S. stock market over the past year? The best performers among diversified U.S. stock funds were those that specialize in small, undervalued companies -- and that group still lost an average of 29%. Royce Special Equity (symbol RYSEX), one of the category's stars, lost just half as much.
Charlie Dreifus, manager of Special Equity since its 1998 inception, says his stock-picking approach is an amalgam of the teachings of three legendary financial figures. In a nod to Benjamin Graham, considered the father of security analysis, Dreifus buys stocks only when they're dirt-cheap. Like Warren Buffett, he looks for companies with a sustainable competitive advantage. And following the tenets of Abraham Briloff, his accounting professor at City College of New York, Dreifus brings, as he says, a cynical eye to "trying to gauge the veracity of financial statements."
Special Equity did even better in this decade's first bear market. During the 2000-02 downturn, the fund gained 53%, compared with a loss of 41% for the Russell 2000 index of small-company stocks. Dreifus says his fund has held up better than most during the current bloodbath because his holdings "have two precious commodities: abundant equity and abundant cash."
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This cautious fund often lags when the stock market sizzles, but it has excelled over the long haul. Over the past ten years through December 31, it gained 8% annualized, beating Morningstar's small-value-fund index by an average of two percentage points per year.
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