Why Value? Why Heartland? Why Now?

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Bill Nasgovitz

Nasgovitz is Chairman and CIO, and Portfolio Manager of the Value Fund and its corresponding separately managed account strategy. He also is President and Director of Heartland Funds. He has 48 years of industry experience, 34 at Heartland.

Transcript

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
  • Good earnings
  • 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.

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Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. Performance information for institutional class shares of Funds that existed prior to their initial public offering is based on the performance of investor class shares. The investment return and principal value will fluctuate so that an investor's shares, when redeemed may be worth more or less than the original cost. All returns reflect reinvested dividends and capital gains distributions, but do not reflect the deduction of taxes that an investor would pay on distributions or redemptions. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days (90 days for the International Value Fund) of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return.

In the prospectus (pdf) dated 5/1/2017, the gross expense ratios for investor class shares of the Select Value, Value Plus, and Value Funds are 1.23%, 1.19%, and 1.09%, respectively, and the gross expense ratios for institutional class shares of the Select Value, Value Plus, and Value Funds are 0.99%, 0.97%, and 0.92%, respectively. The Advisor has voluntarily agreed to waive fees and/or reimburse expenses with respect to the institutional class, to the extent necessary to maintain the institutional class “Net Annual Operating Expenses” at a ratio not to exceed 0.99% of average daily net assets. This voluntary waiver/reimbursement may be discontinued at any time. Without such waiver and/or reimbursements, the Select Value Fund institutional class Total Annual Fund Operating Expenses would be 1.00%. Also, through 11/30/2001, the Advisor voluntarily waived a portion of the Select Value Fund's expenses. Without such waivers, total returns would have been lower. In the prospectus (pdf) dated 5/1/2017, the Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement for investor and institutional class shares of the Mid Cap Value and International Value Funds is 1.25% and 0.99%, respectively. The Advisor has contractually agreed to waive its management fees and/or reimburse expenses of the Mid Cap Value and International Value Funds to ensure that Total Annual Fund Operating Expenses for the Fund do not exceed 1.25% of the Fund’s average net assets for investor class shares and 0.99% for institutional class shares, through at least 5/1/2019, and subject thereafter to annual reapproval of the agreement by the Board of Directors. Without such waiver and/or reimbursements, the Total Annual Fund Operating Expenses would be 3.22% for the investor class shares and 3.46% for the institutional class shares of the Mid Cap Value Fund and 1.89% for the investor class shares and 1.63% for the institutional class shares of the International Value Fund.

In the prospectus (pdf) dated 5/1/2017, the gross expense ratios for the investor and institutional classes of the Value Fund are 1.09% and 0.92%, respectively. The Advisor has voluntarily agreed to waive fees and/or reimburse expenses with respect to the institutional class, to the extent necessary to maintain the institutional class “Net Annual Operating Expenses” at a ratio not to exceed 0.99% of average daily net assets. This voluntary waiver/ reimbursement may be discontinued at any time. Without such waivers and/or reimbursements, total returns may have been lower.

An investor should consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information may be found in the prospectus (pdf). To obtain a print prospectus, call 800-432-7856. Please read the prospectus carefully before investing.

The Mid Cap Value Fund invests in a smaller number of stocks (generally 30 to 60) than the average mutual fund. The performance of these holdings generally will increase the volatility of the Fund’s returns. The Fund also invests in mid–sized companies on a value basis. Mid-sized securities generally are more volatile and less liquid than those of larger companies. There can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Board of Directors may determine to liquidate the Fund.

The Value Fund primarily invests in small companies selected on a value basis. Such securities generally are more volatile and less liquid than those of larger companies.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The Funds are designed for long-term investors who can accept the special risks associated with Value Investing.

Bill Nasgovitz, Colin McWey, and Will Nasgovitz are registered representatives of ALPS Distributors, Inc.

The growth of $10,000 illustration is a hypothetical example of an investment in the Value Fund representing historical returns.

There is no assurance that the investment process will consistently lead to successful investing.

One cannot invest directly in an index.

Lipper, Inc. – A Reuters Company, is a nationally recognized organization that ranks the performance of mutual funds within a universe of funds that have similar investment objectives. Rankings are historical and are based on total return with capital gains and dividends reinvested. As of 12/31/2016, the since inception (10/31/2014) ranking for the Mid Cap Value Fund investor share class was 17/131. As of 3/31/2017, the 1-year and since inception (10/31/2014) rankings for the Mid Cap Value Fund investor share class were 2/151 and 17/133, respectively.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

Heartland’s investing glossary provides definitions for several terms used on this page.

Sector and industry classifications as determined by Heartland Advisors may reference data from sources such as FactSet Research Systems, Inc. or the Global Industry Classification Codes (GICS) developed by Standard & Poor’s and Morgan Stanley Capital International.

Heartland Advisors defines market cap ranges by the following indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Top 200®.

The Heartland Funds are distributed by ALPS Distributors, Inc.

Separately managed accounts and related investment advisory services are provided by Heartland Advisors, Inc., a federally registered investment advisor. ALPS Distributors, Inc., is not affiliated with Heartland Advisors, Inc.

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