This Leaner Fund Leans

Karin Anderson: The fund we're talking about today is Royce Special Equity Multi-Cap. It was launched in December 2010 and is managed by Charlie Dreifus of Royce & Associates. He has been running actually a small-cap fund with a very similar name, Royce Special Equity, since 1998.

The process for the large-cap fund is the same. Dreifus is looking for conservatively run firms. Many of them have long histories of paying dividends, and he looks to buy them when they're trading at very large discounts to intrinsic value. He's looking for a solid margin of safety in every holding he owns. He only owns about 30 stocks and is willing to forgo entire market sectors if those companies don't meet his criteria. So you have a very asymmetric portfolio in terms of its sector weightings.

Given the focus on downside performance and this cautious overall approach to stock selection, you'd expect a fund that does better on the downside and lags a bit in rallies. So far, that's mostly been true. In 2011, the fund outperformed and was quite resilient; it actually had a 7% return. Last year, it did well too because of the heavy concentration in consumer discretionary.

Investors in this type of fund need to be comfortable with some very large sector skews to the fund, which can cause some occasional pops in performance and perhaps some lagging at times.

The fund is Bronze-rated. Currently, we have it a Neutral for performance because it does have a relatively short track record. And fees are high for the moment. So, that's holding it back from a higher rating at this point.