Dave Gentry: Bill, thanks for being with us today.
Bill Nasgovitz: Pleasure to be here, Dave.
Gentry: You are the founder and the CIO of the Heartland Funds, and I want you to talk to us about your value proposition. There's a lot of places investors can put their money today, a lot of funds. What is different about your Fund?
Nasgovitz: Okay. Why Heartland?
First of all, the advisory company is unique in that we are independent. We are owned by the key people at the Firm. So, portfolio managers own the Firm.
We have a vested interest in making sure that our clients are successful, successful investors. So, we also invest our own money. We eat our own cooking.
And we're a bit contrarian.
We are value-based. All of our Funds, all of our products are value-based.
It's a disciplined process, which over the long term has worked.
Gentry: You know most of our viewers are those who invest in the smaller-cap stocks, so what's the overall investment strategy for the smaller-cap Funds?
Nasgovitz: Well, personally, I love small-, micro- cap stocks. It's been my life, really:
I began investing way back when with paper route money, when I was 12, in small companies
Moved onto a small-cap brokerage firm
And then started the Firm to focus the Heartland Value Fund as a small-, micro-cap Fund
Historically that's the best place to put money if you are interested in building your net worth.
Gentry: Well I noticed, if I look at your performance on that Fund, if I invested $1 million in 1988, that would be worth about $23 million today. So, very consistent performance over the years on that Fund. What's that, about 12% I think?
Nasgovitz: We do have a long-term record of 12% net to shareholders. Of course some years are really good and some years are not so good, but for long-term investors, this is a good place to invest.
Gentry: Some of your Funds emphasize dividends, but what's the ultimate goal you're trying to achieve for your investors? And why should they invest in your Funds rather than the ETFs or the S&P 500?
Nasgovitz: Boy that's a loaded question, Dave, especially today with the popularity of index funds and so forth. Certainly they're low cost, however we believe this is developing into a mania, that too much money is being funneled into index and ETF areas. Passive investing is the rage, without much interest in what is in that fund I'm buying or that ETF.
So we believe this is a great time to be an active investor looking for values that perhaps are outside of the indexes.
Gentry: What kind of value, what sorts of stocks are you looking for in this small-, micro-cap Fund?
Nasgovitz: Let's just take an area that has been a poor performer over the years, and that's anything to do with mining, gold mining in particular. Most of those miners have gone through a severe depression, bear market, off 80-90% from their highs. And today you can buy the businesses, in some cases with:
Little debt or more cash than debt
Solid cash flows
Some pay dividends
And you're paying multiples of maybe a fraction of what the S&P is trading at—a fraction, meaning 10x earnings or less
To us that makes sense in the value market.
Gentry: What's one of your best picks over the last five years?
Nasgovitz: Lately of course the bank stocks have been terrific performers since the election, and we've had some regional bank stocks go up 50% here in the past six months. It's an area that has performed, and one in which we think perhaps people should be a little bit careful in terms of selecting bank stocks going forward.
Gentry: One of your most recently launched Funds is the Mid Cap Value Fund.
I believe it was the second best performer in its category last year, I believe.
I want you to talk to us about that Fund and its strategy and its goals.
Nasgovitz: Okay. The Mid Cap Fund was launched in 2014. It's a small, young Fund, however again based on our value, disciplined process.
And we think it's in the sweet spot of the marketplace, meaning that historically mid-cap stocks have outperformed large companies by 20% percent on average per year.
That particular Fund had a terrific 2016, and we think that the future bodes well for mid-cap stocks because, perhaps, just the law of numbers. Their median market cap today is $7 billion. That's about 1/100th the size of Apple, for example. So it's easier to move a $7 billion dollar stock, perhaps, than a $700 billion dollar stock.
And mid-cap companies can be purchased, in some cases, still at book value, when the S&P is trading at 3.0 or 3.2x book value. So there's still value within the mid-cap sector.
Gentry: Are there any industries or sectors that you like in the mid-cap space?
Nasgovitz: Well one in particular I know. Colin McWey and Will Nasgovitz run that Fund. I know one of the recent purchases is an electronics distributor. Here's a company:
That's doing $18-20 billion in sales
Has a market value of $6 billion
Is selling just above book value, at a very low multiple, again a fraction of the S&P
And with a good record of growth
Gentry: The market today: How do you feel about it? We're hitting record highs, it seems every week.
Nasgovitz: Every day.
Gentry: Every day. Where do you see it going?
Nasgovitz: Twelve days in a row there for a bit for the Dow, wasn't it?
Well the market, as measured by the popular indices, is not cheap. It's extended. We've had a wonderful run here. Optimism rules.
I think it's time for everybody to catch their breath and sit back and start to pay attention to valuation and the numbers. That's what we do every day at Heartland Advisors for our Funds and our private accounts. And I'd urge all investors to make sure they know what they're buying today.
Gentry: What are the trends that will drive the overall market in 2017?
Nasgovitz: Some of the trends which will drive the market: I think, on the negative side, the Fed's talking about raising interest rates two or three times. That's not good for stocks. It's a competitive threat.
Other trends, perhaps which we need to pay attention to, is the aforementioned high level of optimism today. Our collective expectations are very high.
We're looking for change, perhaps, out of D.C. We'll see if there's progress in health care, progress on the tax front. Those are big issues, and I think they're going to take some time.
So perhaps we need a pause that refreshes here.
Gentry: What is a typical investor in your Fund? What is his profile?
Nasgovitz: Well it can vary. We have both:
Retail, individual investors whom have been with us for these past 32 years
And others who could be an institution, a pension fund, profit sharing plan
These are no load Funds, so there's the low transaction costs and a low expense ratio. The institutional shares are 99 basis points.
Gentry: I want to go back, and closing again, I want you to tell our investors today: What is the essential value proposition for them to become part of the Heartland Fund family?
Nasgovitz: Again, over the long term, value investing outperforms. That's all we do. We're focused on value.
We're independently owned.
We're a bit contrarian, so we don't run with the herd. We anticipate the future.
Over the long term it's worked, and we believe it will in the years to come.
Gentry: Makes sense to me. Bill, thanks for being with us today.
Nasgovitz: David, good to be with you.