A Look at Our Mid Cap Value Strategy

Presenters

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Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund, the Value Fund, and their corresponding Mid Cap Value and Small Cap Value Strategies. He also is President and Director of Heartland Funds. He has 20 years of industry experience, 16 at Heartland.

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 18 years of industry experience, 11 at Heartland.

Transcript

Colin McWey, CFA: At Heartland we have a traditional value style that focuses on a few key valuation metrics:

price-to-earnings,
price/book, and
price-to-cash flow.

Attractive portfolio candidates for our portfolio will demonstrate those characteristics.

They will also have favorable balance sheet characteristics. We’re really looking for companies that ideally have less leverage than the typical stock in the broad market.

Heartland Mid Cap Value Fund dividends graphic

And then we’re marrying this with qualitative assessment, essentially a company’s business strategy, the capabilities of its management team—and really trying to identify what are the key things that will change the market's current perception of a holding.

Will Nasgovitz: Mid Cap Value Fund is focused on dividend-paying companies.

About 85% of the holdings today are dividend payers.

What’s important here is that we’re not looking for the highest-yielding securities. We think that could be a sign of actually weakness. We think about dividends. We think of it as quality, franchise value, strength if you will. So we’re looking for those businesses that have the potential to grow their dividends. We think that could be the key ingredient for total return potential.

There is a sliver the portfolio that does not pay dividends. We think those companies have the potential to pay dividends down the road. So that could be a catalyst for those individual holdings.

When we think about risk, we break it down into three buckets.

Heartland Mid Cap Value Fund risk graphic

Systemic risk is the biggest one, and it’s obviously the market risk, but within that are things like geographic risk, currency risk, and interest rate risk.
The other two buckets of risk we think about are operational risk. What could happen at the company, and specifically what could go wrong? To dampen that or alleviate that component of risk, we try to buy business that we think are trading at historical low levels of valuation versus their peers or versus themselves.
Financial risk is pretty self-explanatory. So, we just think that debt can be toxic. We have companies that have debt, but it's a manageable level of debt. So we try to keep the overall portfolio financial risk low relative to the broader market.

McWey: We remain extremely focused on style purity.

One of the best attributes about our portfolio over the last several years is that we demonstrate a return pattern that's consistent, on various market environments, with what we condition investors and prospective investors to expect.

Because of this rigorous focus on style purity, there are times—like extreme growth markets that we saw in parts of 2014 and ’15—where we need a lot of stock specific catalyst to become realized just to keep up with the broad market.

However, when we’re given a market backdrop that's favorable to a traditional style like ours, a traditional value style, and our stock-specific catalyst are being realized, the portfolio is capable of delivering significant excess returns.

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Past performance does not guarantee future results.

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.

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

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.

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

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

The above individuals are registered representatives of ALPS Distributors, Inc.

CFA® is a registered trademark owned by the CFA Institute.

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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