WTR? (Where's the Risk)


Transcript

At Heartland, our 10 Principles of Value Investing™ remains the bedrock of how we go about constructing portfolios—identifying attractive ideas, whether it’s a micro cap or mega cap, or a Consumer Staple or an Energy company.

But, I think starting with a good company, a good balance sheet, a good strategy is a great first step in terms of mitigating risk. I think the financial crisis and the subsequent volatility that we’ve seen since then has exposed how intertwined a lot of businesses are.

So, we want to continue to look for those great companies, but bad things happen to great companies. Unforeseen things pop up, and stocks come under pressure over short periods of time longer period of time.

We want to mitigate those risks by layering in broader portfolio construction tools and processes to help manage that.

Sector Exposure Guardrails

From a process standpoint, we have put in some guardrails around sector exposure, so we don't get too skewed in terms of one allocation to particular end market, if you will. Importantly, our active share remains very high across all of our strategies.

We’re generally focused on being 50-150% of each respective benchmark’s weightings across all sectors.

I say generally because we want to have that avenue for portfolio managers to capitalize on some tremendous opportunities in a particular sector, perhaps valuations are outstanding, the balance sheets are in great shape.

Conversely, we want to be aware where there is probably pitfalls in the marketplace, valuations might be high, leverage might be high.

Factor Analysis

From a tool standpoint, we’re looking at factor analysis. This matches up well with our 10 Principles of Value Investing™. For instance, we want to remain underweight leverage, which is a factor.

Scenario Analysis

Last but not least, we look at stress testing or scenario analysis. If interest rates were to spike higher or commodities were to plummet, how would the portfolio potentially act?

Impact of Risk Management Strategies

We believe these initiatives from a portfolio construction standpoint ideally should lower the volatility of our strategies—and also dampen the allocation impact on our investment results. And really amplify or heighten the security selection component of our investment results, and that matches up really well with our 10 Principles of Value Investing™.

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Presenter

Heartland Advisors Value Investing Portfolio Manager Will Nasgovitz

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 18 years of industry experience, 14 at Heartland.

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