Heartland Mid Cap Value Fund 2Q18 Portfolio Manager Commentary

Executive Summary

  • Stock selection was strong and the Fund beat its Russell Midcap® Value benchmark for the quarter returning 2.70% versus 2.41%.
  • Higher interest rates, a stronger dollar, talk of trade injected uncertainty into an economy that otherwise showed signs of continued strength.
  • New economic uncertainties have led to broad-based selling in many sectors, creating attractive valuations for individual companies.
  • Our bottom-up analysis has led to a portfolio that is less economically sensitive than in the recent past.

Second Quarter Market Discussion

Higher interest rates, a stronger dollar, rising inflation data and concerns about the impact of a global trade war injected uncertainty into an economy that otherwise showed signs of continued strength. The result was an uptick in volatility and swings in sector leadership as investors tried to anticipate which areas of the market are best suited to lead in a more challenged market environment.
Some of the early winners of the debate included cyclical areas and businesses poised to benefit from an uptick in inflation. Conversely, some slow-growth, high-yielding industries continued to face challenges as interest rates continued to climb.
Attribution Analysis
Stock selection was strong and the portfolio beat its Russell Midcap® Value benchmark for the quarter. Industrials stood out on a relative basis, along with the strategy’s Consumer Staples holdings. Our Energy names were up on an absolute basis but lagged those in the benchmark. 
Heartland Advisors Value Investing Industrials Sector IconCleared for takeoff. Higher input costs and the threat of new tariffs sapped Industrials in the broader index. The strategy’s holdings in the space fared better and the group contained a strong contributor. Textron Inc. (TXT), an industrial conglomerate with aerospace, defense and finance operations, was up after announcing its backlog for business jet orders was continuing to grow. 
The company’s private jet division is a high-margin line and management has been investing heavily in a new aircraft line. The new offering could help further strengthen orders and we believe the group could help drive profits levels into the low double digits. We also view Textron’s bid for a large military contract for one of its jets as having the potential to be transformative. 
Heartland Advisors Value Investing Energy Sector IconPumped up. The nearly year-long disconnect between higher oil prices and shares of Energy companies began to fade this quarter and the group was up double digits in the broader market. The Mid Cap portfolio’s names in the space also showed strength and were led by National Oilwell Varco, Inc. (NOV). Shares of the leading global oilfield services company were up as investors grew more confident that firmer energy prices would lead to greater free cash flow generation for the company. 
We view NOV as a best-in-class business trading near the trough of its business cycle. The company has a history of strengthening its business line during downturns and, in our opinion, has done so again. Shares are trading at just 1x book value—near all-time lows. The company has historically generated 15-30% return on invested capital over a full cycle, and should do so next time around at even lower levels of activity with its lower cost structure.  
As the Energy space domestically and abroad continues to mend, we believe NOV’s products will make it a significant beneficiary. 
Heartland Advisors Consumer Discretionary Sector IconLooking for a recovery in discovery. The portfolio’s Consumer Discretionary names were up modestly but the group contained a key detractor. Qurate Retail Inc. (QRTEA), was down due to margin pressures and challenges related to its 2017 purchase of the remaining shares of HSN.
The company, which operates QVC, HSN and Zulily among other brands, is the third largest ecommerce retailer behind only Amazon and Walmart. Qurate has a significant presence in so-called “discovery-based retail” that focuses on attracting online shoppers who may be researching products and items without an initial intent to purchase. These shoppers tend to be younger and more tech savvy than QVC and HSN has traditionally targeted. 
Management is trying to reconfigure HSN’s sales to be less reliant on high-margin, lower-volume electronics and instead focus on beauty and fashion products. While the company expects the shift will produce more consistent sales, the process is putting near-term pressure on margins.
We believe the recent margin softness is temporary and expect management to reap significant cost synergies related to the HSN integration. Additionally, unlike many mall-based retailers, we view the company’s strategy and experience as a benefit in the continual march towards digital retailing. With shares offering more than 12% market cap/free cash flow yield, we believe more patience is warranted for Qurate.

Portfolio Activity

Recent volatility has created opportunities for patient investors. New economic uncertainties have led to broad-based selling in many sectors, creating attractive valuations for individual companies.  
The result of the activity is a portfolio that is less economically sensitive than in the recent past. For example, our bottom-up analysis has led us to scale back some of the strategy’s bank holdings. 
During the past 18 months, banks have benefited from relatively low percentage of loans going bad as well as expectations that rising rates will improve net interest margins. The group began to rally sharply and valuations have moved higher as a result. 
Higher rates could benefit lenders; however, we believe that loan performance is unlikely to improve further and could deteriorate as interest costs for borrowers head higher. While sentiment remains bullish on the group domestically, as shown, investors have been more cautious when viewing European institutions. In the coming quarters, we would not be surprised to see some of that same caution spilling over to shares of U.S.-based banks.  
A Warning From Overseas?
Heartland Advisors Value Investing Banks Chart
Source: FactSet Research Systems Inc. and Standard & Poor’s, 6/28/2013 to 6/29/2018
Past performance does not guarantee future results.

Outlook and Positioning

Heartland Advisors Value Investing Quote Image
The economy remains robust but valuations and profit margins for many businesses are near peak levels. Inflation has begun to make a ripple for some companies, and as interest rates rise, debt servicing costs could become a challenge for leveraged companies. 
While we are monitoring these developments, the results will not change our philosophy or process. The team continues to seek attractively valued companies across all sectors. We remain focused on balance sheet strength and on identifying catalysts that can result in a change in perception by investors. We believe this disciplined application of our process will be key to navigating the months ahead. 
Thank you for the opportunity to manage your capital.
Please wait while we gather your results.

Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

McWey, CFA, is Vice President and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He has 16 years of industry experience, 9 at Heartland.

Heartland Advisors Value Investing Portfolio Manager Will Nasgovitz

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value, Mid Cap Value, and Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 18 years of industry experience, 15 at Heartland.

Fund Returns


Scroll over to view complete data

Since Inception (%)20-Year (%)15-Year (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD* (%)QTD* (%)
Mid Cap Value
Investor Class
Mid Cap Value
Institutional Class
Russell Midcap® Value8.00----8.807.60-0.162.41
*Not annualized

The inception date for the Mid Cap Value Fund is 10/31/2014 for the investor and institutional class.

Email Sign Up

  • I am a financial professional or institutional investor
  • I am an individual investor

©2019 Heartland Advisors | 789 N. Water Street, Suite 500, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

In the prospectus (pdf) dated 5/1/2019, the Net Fund Operating Expenses for the investor and institutional classes of the Mid Cap Value Fund are 1.25% and 0.99%, respectively. The Advisor has contractually agreed to waive its management fees and/or reimburse expenses of the Fund to ensure that Net Fund Operating Expenses for the Fund do not exceed 1.25% of the Fund’s average net assets for the investor class shares and 0.99% for the institutional class shares, through at least 5/1/2020, and subject thereafter to annual reapproval of the agreement by the Board of Directors. Without such waiver and/or reimbursements, the Gross Fund Operating Expenses would be 2.37% for the investor class shares and 2.28% for the institutional class shares.

Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. Performance information for institutional class shares of Funds that existed prior to their initial public offering is based on the performance of investor class shares. The investment return and principal value will fluctuate so that an investor's shares, when redeemed may be worth more or less than the original cost. All returns reflect reinvested dividends and capital gains distributions, but do not reflect the deduction of taxes that an investor would pay on distributions or redemptions. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return.

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.

As of 6/30/2018, Avnet, Inc., of Amazon.com, Inc., National Oilwell Varco, Inc., Qurate Retail Inc., Textron Inc., and Walmart Inc. represented 3.08%, 0.00%, 4.27%, 1.23%, 1.77%, and 0.00% of the Mid Cap Value Fund’s net assets, respectively.

Portfolio holdings are subject to change without notice. Current and future portfolio holdings are subject to risk.

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. The specific securities discussed, which are intended to illustrate the advisor’s investment style, do not represent all of the securities purchased, sold, or recommended by the advisor for client accounts, and the reader should not assume that an investment in these securities was or would be profitable in the future. Certain security valuations and forward estimates are based on Heartland Advisors’ calculations. Any forecasts may not prove to be true.

Economic predictions are based on estimates and are subject to change.

There is no guarantee that a particular investment strategy will be successful.

Sector and Industry classifications are sourced from GICS®.The Global Industry Classification Standard (GICS®) is the exclusive intellectual property of MSCI Inc. (MSCI) and S&P Global Market Intelligence (“S&P”).  Neither MSCI, S&P, their affiliates, nor any of their third party providers (“GICS Parties”) makes any representations or warranties, express or implied, with respect to GICS or the results to be obtained by the use thereof, and expressly disclaim all warranties, including warranties of accuracy, completeness, merchantability and fitness for a particular purpose.  The GICS Parties shall not have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of such damages.

Heartland Advisors defines market cap ranges by the following indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Top 200®.

Because of ongoing market volatility, performance may be subject to substantial short-term changes.

Euro STOXX Banks (Price) Index is a capitalization-weighted index which includes countries that are participating in the European Economic and Monetary Union (EMU) that are involved in the banking sector. The parent index is SXXE. The index was developed with a base value of 100 as of 12/31/1991.

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

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

The Heartland Funds are distributed by ALPS Distributors, Inc.

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

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.

There is no assurance that dividend-paying stocks will mitigate volatility.

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