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Newly Reopened Small-Cap Fund a Compelling Investment

Risk-averse small-cap investors can feel good about Royce Special Equity under Charlie Driefus, says Morningstar's Alex Bryan.


Alex Bryan: Royce Special Equity is a defensive small-cap strategy that was recently reopened to new investors. Managers Charlie Driefus and Steven McBoyle scour the small-cap universe for companies with strong returns on invested capital; durable competitive advantages that will allow those returns to persist; conservative accounting practices and balance sheets; and attractive valuations. They won't pay up for future earnings growth, which currently places the fund in small-value territory. 

The managers' preference for profitable, conservatively managed businesses is evident in the portfolio's high average return on invested capital and low debt/capital ratios relative to the Russell 2000 Index. They aren’t afraid to make concentrated bets, and typically hold between 40 and 60 names, and will allow the portfolio's cash balance to climb when they can't find bargains. 

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.