Royce Special Equity Fund Wins by Losing Less
A hefty chunk of cash has helped this small-company fund’s performance.
Cash is always king at Royce Special Equity (RYSEX). Managers Charles Dreifus and Steve McBoyle want to have ample funds to snap up shares when they see opportunities. The small-company stock fund typically holds 8% to 10% of its assets in ready money—more than its peers (funds that invest in value-priced small-cap stocks), which maintain a roughly 3% cash position.
The cash also cushions the fund when stocks slide. In 2018, for instance, the Russell 2000 small-company stock index sank 26.9% between September and late December. Special Equity held up much better, with a 16.9% loss. That’s a key reason the fund ranks well, relative to its peers, over the past 12 months.
But the managers aren’t afraid to let cash build when small-cap stocks soar, and that can be a drag on performance. Since the start of 2019, the Russell 2000 has gained 14.5%. Special Equity is up just 5.6%. The fund’s cash position at last report: 21% of assets.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Overall, the fund’s strategy of winning over time by losing less has earned mixed results. Special Equity’s five-, 10- and 15-year annualized returns, for instance, lag its typical peer and the Russell 2000 index. But the fund has been roughly 15% to 20% less volatile than its peers over those stretches. And since its 1998 inception, Special Equity has bested the index by an average of 1.5 percentage points per year.
Dreifus and McBoyle favor small, profitable firms that trade at a discount. A stock is a bargain if, among other measures, it trades below its enterprise value, which Dreifus says is the price you’d have to pay to buy the company outright. Then they home in on stocks that score well on profitability measures such as return on assets and free cash flow (cash profits left after capital outlays). In particular, the managers are looking for companies that report their financial results with no embellishment. “We want firms that are cheap, good and ethical,” says Dreifus. Few companies make the cut. The current portfolio comprises just 38 stocks.
The managers took advantage of the 2018 market sell-off to add five stocks to the fund. One of them, Johnson Outdoors (JOUT), makes outdoor recreation gear. It has gained 38.4% so far this year.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Ryan joined Kiplinger in the fall of 2013. He wrote and fact-checked stories that appeared in Kiplinger's Personal Finance magazine and on Kiplinger.com. He previously interned for the CBS Evening News investigative team and worked as a copy editor and features columnist at the GW Hatchet. He holds a BA in English and creative writing from George Washington University.
-
Harris or Trump: Whose Tax Plans Are More Popular with Voters?
Election 2024 A new poll is shedding light on what voters think about election tax policy.
By Kelley R. Taylor Published
-
How This Vanguard Emerging Markets Bond Fund Outperforms Its Peers
The Vanguard Emerging Markets Bond Fund took a cautious positioning at the start of the year, which has helped it beat the majority of its peers.
By Nellie S. Huang Published
-
The 5 Best Actively Managed Fidelity Funds to Buy Now
mutual funds In a stock picker's market, it's sometimes best to leave the driving to the pros. These Fidelity funds provide investors solid active management at low costs.
By Kent Thune Last updated
-
The 12 Best Bear Market ETFs to Buy Now
ETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
By Kyle Woodley Published
-
Don't Give Up on the Eurozone
mutual funds As Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multinationals.
By Rivan V. Stinson Published
-
Best Bond Funds to Buy
Investing for Income The best bond funds provide investors with income and stability – and are worthy additions to any well-balanced portfolios.
By Jeff Reeves Last updated
-
Vanguard Global ESG Select Stock Profits from ESG Leaders
mutual funds Vanguard Global ESG Select Stock (VEIGX) favors firms with high standards for their businesses.
By Rivan V. Stinson Published
-
Kip ETF 20: What's In, What's Out and Why
Kip ETF 20 The broad market has taken a major hit so far in 2022, sparking some tactical changes to Kiplinger's lineup of the best low-cost ETFs.
By Nellie S. Huang Published
-
ETFs Are Now Mainstream. Here's Why They're So Appealing.
Investing for Income ETFs offer investors broad diversification to their portfolios and at low costs to boot.
By Nellie S. Huang Published
-
Do You Have Gun Stocks in Your Funds?
ESG Investors looking to make changes amid gun violence can easily divest from gun stocks ... though it's trickier if they own them through funds.
By Ellen Kennedy Published