Royce Symposium

As part of our due diligence process, I recently embarked on a trip to the Royce & Associates headquarters in New York City. Royce & Associates, whose Royce Special Equity and Royce Total Return funds we have in client accounts, invited advisors from across the country to come and learn more about their investment philosophy, approach, and process.

Chuck Royce, the founder of the firm, has long been a “value investor.” The goal of his portfolio managers is to find a quality company with a strong balance sheet and capable management that is selling at a significant discount to what they believe is the true, intrinsic value of the business. By repeating this process, they believe they are able to offer investors an opportunity to grow their wealth as the companies held in their mutual funds become more appropriately priced. Though this investment philosophy was first pioneered in the 1920s, it was made popular by the fairly successful value investor Warren Buffett.

Portfolio manager of the Royce Special Equity Fund, Charlie Dreifus, talked specifically about trying to limit his debt exposure when selecting companies to add to his fund. Due to this conviction, his pool of investment worthy candidates is dwindled when he sees onerous debt levels on company balance sheets. Dreifus believes that limiting the amount of debt a company carries helps reduce financial risk when economic downturns inevitably happen. This aids in his search for both undervalued and quality companies to invest in. From Charlie’s perspective – finding cheap companies is easy; finding quality companies takes time; finding cheap and quality companies takes expertise. The “expertise” required to employ this ideology includes a rigorous process for companies who pass the initial screening process.

We frequently have clients ask us why we use mutual funds versus investing in individual stocks. Our common response is, “We do invest in individual stocks…and we let the mutual managers tell us which ones to buy.” At Royce, it can take years of research before a position is added to the portfolio because they want to know all that they can about a company. This often includes face-to-face interviews with company CFOs and a laundry list of questioning by a room full of portfolio managers. So why does NorthWest Financial let the managers decide which stocks to pick? Because they have the resources, time, and expertise to evaluate companies that we simply cannot or would not be able to thoroughly investigate.

Through our due diligence process, we believe that Royce & Associates, and more specifically Charlie Dreifus, employ the value philosophy that we adhere to. They’ve proven their commitment to this strategy through bull and bear markets, and have given us confidence in their philosophy, approach, and process.

Matt Yeiter, CFP®