The Power of And

Investing is discussed in terms of “either or”—buy or sell, bull or bear, large or small. But a look at the chart below highlights the opportunities that exist in occasionally replacing or with and. As the graph shows, investors who put their money in a portfolio of mid-cap stocks that were inexpensive and high-quality, have enjoyed an advantage over a strategy that holds high-quality names regardless of valuation. In fact, the combination meaningfully outpaces the returns of the mega-cap dominated S&P 500 and adds to the long history of mid-caps outperforming large-cap stocks as a group.

Source: Kailash Concepts. Monthly, 4/30/1963 to 12/31/2020. All indices are unmanaged. It is not possible to invest directly in an index. Past Performance does not guarantee future results.
Intuitively the performance gap makes sense. Investors are buying more of a good thing (quality as measured by earnings before interest and taxes/total assets) at a lower price as measured by price/earnings. The challenge comes from uncovering quality names that are overlooked by the broader market and still trading at a discount. Heartland’s adherence to our time-tested 10 Principles of Value Investing™ has made the task manageable, in our view, as it is designed to identify quality companies and seeks out names that may be facing temporary setbacks that have had an outsized impact on valuations. 
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Colin McWey

McWey, CFA, is Vice President and Portfolio Manager for the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund and it’s corresponding Mid Cap Value Strategy. He has 19 years of industry experience, 12 at Heartland.


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