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