Institutional Investors

How A Cautious Manager Is Handling A High Priced Small Cap Market

Charlie Dreifus discusses his self-governing discipline around cash and how changing consumer behavior has affected his picks in that area.

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Institutional Investors

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Why is your portfolio holding more cash than it has historically?

My normal cash position is 8-10%; that’s what I feel comfortable with. We’re currently 18, 19% in cash. It’s not a market call, it’s not market timing. It’s a natural byproduct of the market, and the discipline that I employ.

The cash level is not a top-down call. There are no values out there currently, new names, that I wish to buy, what I could buy under my discipline. Whereas names that I do own have risen to the point where they have to be either reduced or eliminated. So the cash position is higher than normal. It could go higher, depending on what the market does.

How do you account for changes in consumer behavior when you’re evaluating consumer stocks?

You have to be aware of the risks that are within business models that are susceptible. And you have to find companies that are reacting in a way that they can navigate that.

Children’s Place saw the threat early. And embarked on a substantial physical store, brick-and-mortar store, reduction. That will end up from the beginning through the end of next year with a 30% reduction in the number of stores. They also approached this whole omnichannel—they, early on, got in touch via smartphones, with their consumer base. Such that the consumer could order online, return it back to the company, or take it to one of their brick-and-mortar stores, and it was a way of constantly bringing to the customer’s attention those new offerings that pertained to that specific customer’s children’s ages. So and finally what they did, again 3, 4 years ago, is they set up a relationship with Amazon and they started with, I don’t know, 500 SKUs and they’re up to 4,000 or 5,000 SKUs now with Amazon. So they’ve negotiated it rather well.

Another name people are likening the magazine business to the newspaper business. So I own Meredith. Now, Meredith has Better Homes & Gardens and names like Family Circle. But beyond that, they have 17 local TV stations, which bring in over 60% of operating income for the total company, which is not really affected by print demand. And the other very interesting thing, the guaranteed circulation. Magazines have to tell their advertisers: We guarantee that between subscriptions and newsstand, we will have at least X amount of copies sold or issued. And over the last 10 years, that number, apples for apples, excluding any titles they acquired, is up 12%, which again is misunderstood. And finally what they’ve done, they’ve made a huge inroad into digital advertising.

So on the top of the list of companies with unique visitors is, you know, Google, Facebook, Amazon, and tenth on the list is Meredith. They have 140 million unique visitors.

What gives you confidence in your strategy going forward?

I believe based on everything that’s out there and the recent market action, we are closer to an inflection point where my strategy will not only do well on an absolute basis, which it has done, but it will also do well on a relative basis. And the reasons for saying that, first of all I’m not doing anything different.

In an environment where the market is expensive, where growth has outperformed, where volatility is rising, where interest rates are rising, where there’s greater Black Swan event risk, is the perfect storm based on past, where we should expect Special Equity to outperform, and its risk moderation characteristics kick in. We’re in that kind of cycle, in my belief. So this is an opportune time to, you know, evaluate what other investments you have, and, you know, see how this fits in the profile of your desired risk level.

Article by The Royce Funds


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