Nasgovitz Notes - February 2012

Video Transcript:  
Why we continue to believe in small-cap stocks

Will Nasgovitz­Hello. I'm glad to join you today.

I have been a value investor my entire career and am confident it is the best way to help protect investors on the downside while allowing the opportunity for capital appreciation. In addition, I have a passion for smaller companies, searching for the under-valued that are often overlooked by Wall Street. But in these volatile and challenging markets, why continue to believe in small cap stocks?

We've been thinking about this question, and have several graphs to illustrate our optimism for the sector. The first shows how small cap value stocks have out-performed other equity styles since the inception of the Russell Indices in 1978. One dollar invested in 1978 would now be worth $57. And note that value investing outpaced growth by a wide margin.
 

The Case for Value Investing:
$1 invested, 12/31/78 – 12/31/11

Past performance does not guarantee future results. 
Source: Furey Research Partners, Inc. Styles Represented by: Small-cap Value=Russell 2000 Value Index; All Value=Russell 3000 Value Index; Large-cap Value=Russell 1000 Value Index; Large-cap=Russell 1000 Index; Small-cap=Russell 2000 Index; Large-cap Growth=Russell 1000 Growth Index; All Growth=Russell 3000 Growth Index; Small-cap Growth=Russell 2000 Growth Index.

However, small caps had a tough time last year as investors fled stocks in general. This table shows the 2011 annual performance of the Russell 2000, an index comprised of small companies, which we've broken down by quintiles as defined by market value. Quintile one represents the largest companies, and quintile five the smallest of the small. As you can see, the results from last year are dramatically skewed. The largest companies generated a positive return of 11% while the smallest returned a negative 49%, a remarkable 60% difference—60%!

 

Russell 2000 Index - Market Cap Quintile
12/31/10 – 12/31/11


Past performance does not guarantee future results.
Source: FactSet Research Systems, Inc.

The Heartland Value Fund, a portfolio of small- and micro-cap stocks, was impacted by this selloff last year and generated a negative return of 6.92%. Does this mean that a portfolio of small companies is a bad investment? We don't think so. To us, last year's bear market smacks of indiscriminate selling, and thus could provide an opportunity for value conscious investors. We feel the Value Fund is positioned to take advantage of this opportunity. Historically, this approach has worked.
 
My final slide shows how, since inception, a $10,000 investment in the Fund would have grown to over $230,000.
 

The Merits of Long-Term Investing
Growth of Hypothetical $10,000 - Cumulative Returns Chart 

Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. 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. To obtain performance through the most recent month end, call 800-432-7856, or visit our Funds' Returns page on the website. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return.
The above chart represents a hypothetical example of an investment in the Value Fund representing historical returns. In the prospectus dated 5/1/11, the gross expense ratio for the Heartland Value Fund Investor Class was 1.14%

We will continue to utilize our time-tested, disciplined approach based on fundamental research and the 10 Principles of Value InvestingTM to identify compelling opportunities in small companies. In today's challenging markets, I firmly believe small cap value investing is the most intelligent way to build your net worth.
 
Thank you for listening, and your interest in the Heartland Value Fund. 

 

Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. 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. To obtain performance through the most recent month end, call 800-432-7856, or visit our Funds' Returns page on the website. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days 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 dated 5/1/12, the gross expense ratio for the Heartland Value Fund Investor Class was 1.10%.

The value of the Fund's investments will vary from day to day in response to the activities of individual companies and general market and economic conditions, which may cause loss of principal. The Value Fund invests in primarily 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.

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

Because of ongoing market volatility, fund performance may be subject to substantial short-term changes.

Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. It represents approximately 90% of the U.S. market. Russell 2000 Index includes the 2,000 firms from the Russell 3000 Index with the smallest market capitalizations. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Russell 3000 Value Index measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values. The stocks in this index are also members of either the Russell 1000 Value or the Russell 2000 Value Indexes. Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. All indices are unmanaged. It is not possible to invest directly in an index. Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values.

Bill Nasgovitz is a Registered Representative of ALPS Distributors, Inc.

The statements and opinions expressed herein are those of the presenter. Any discussion of investments and investment strategies represents the Funds' investments and portfolio managers' views as of the date of the video, and are subject to change without notice. All information is historical, not indicative of future results and subject to change. Audience should not assume that an investment in the securities mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell.

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