Heartland Advisors

What Remains after the Thaw?

The nuclear winter for value may have seen a bit of a thaw.  The question remains: What or who is left? 

A wicked combination of prolonged low interest rates, scarcity of growing businesses, and a crush of assets flowing into passive products, seems to have decimated both buy side and sell side investment firms focused on active value.

Through the cycle, many buy-siders (i.e., asset managers) tapped out and either liquidated their small value funds or closed-up shop altogether. In fact, of the 103 small cap value funds that were around at the end of 2010, only 57 of them remained in the category as of March 31, 2023, according to Morningstar. And of the 119 funds in Morningstar’s mid cap value category in December 2010, only 44 remain. While new players have come in, many, if not most, were not around for the last value cycle.

Meanwhile, the pain was rolling downhill to the sell-side as the number of research analysts at investment banks and brokerages who cover small stocks rapidly declined. In 2008, there were 10.7 analysts covering the average stock with a market cap of less than $10 billion. That has since fallen to 7.4 analysts, a decline of 30.8%. By contrast, the number of analysts following companies with a market value of $100 billion or more has risen from an average of 19.8 in 2008 to 28.9 today.

This trend is even more pronounced among the types of businesses Heartland gravitates towards — small companies with healthy balance sheets, strong free cash flow, and not planning an acquisition spree. These well-capitalized firms are not looking for assistance with a debt offering or an equity raise.  This may have impacted the sell side interest in these companies.

The freeze seems to have created a scorched earth effect, destroying many of the mechanisms that create greater efficiency in the market. The thaw reveals new, fertile soil to be taken advantage of by those who persevered and came out the other side. 

One of two outcomes is likely. The marketplace will remain devoid of many of its efficiency-driving components, leaving wide-open spaces for those still rolling up their sleeves and doing the hard work. Or, there will be a rebuild and redevelopment due to a resurgent interest in the asset class. In either case, it could be good for the long-term, enterprising investor.

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Heartland Advisors Value Investing Portfolio Manager Bradford A. Evans

Bradford A. Evans

Senior Vice President and Portfolio Manager


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