Heartland Mid Cap Value Fund 3Q21 Portfolio Manager Commentary

Executive Summary

  • Security selection was mixed with holdings in Real Estate and Financials leading on the upside.
  • Bottlenecks in the global supply chain resulted in cost spikes throughout the supply chain for businesses. 
  • Shares of many businesses appear priced for perfection and could disappoint investors if profit margins shrink or if sales growth fails to materialize

Past performance is no guarantee of future results and investment returns and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance quoted. Call 800-432-7856 or visit heartlandadvisors.com for current month end performance.

Third Quarter Market Discussion

After riding high for the past several months on unbridled economic optimism, investors had to grapple with the emergence of new headwinds. Employment numbers came in weaker than expected despite businesses struggling to fill open positions, and inflation pressures persisted as supply disruptions stemming from the pandemic-related shutdowns over the past 18 months remained unresolved. The bottlenecks in the global supply chain resulted in a cost spike for everything from raw materials to, as shown below, a quadrupling of international shipping rates from pre-pandemic levels. The headwinds, combined with a resurgence in Covid-19 infections, also weighed on consumer confidence  
Cargo Crunch?

Heartland Advisors Value Investing Personal Income vs. Retail Sales Chart
Source: Bloomberg L.P., Standard & Poor’s, weekly data from 1/7/2011 to 9/24/2021. This chart represents the Shanghai Containerized Freight Index. This index reflects the ocean freight and the associated seaborn surcharges of individual shipping routes on the spot market. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

Investors initially responded to the challenges with a shrug, but as the period wore on they began gravitating to larger names. As a result, shares of many businesses appear priced for perfection, and we believe could disappoint investors should inflation weigh on margins or the economy fail to generate robust top-line growth. 

Consequently, we’ve been finding what we view as attractively valued opportunities in less economically sensitive companies with prospects for operational improvement that are within their own control where investor euphoria has been more muted. 

Attribution Analysis

Security selection was mixed with holdings in Real Estate and Financials leading on the upside, but the Strategy lagged its Russell Mid Cap® Value Index benchmark for the period. Holdings in Materials detracted from relative performance. The portfolio continued to outpace its benchmark year to date through September 30.

Through the first three quarters of the year, the Strategy was up double-digits and outperformed its benchmark.

Heartland Advisors Value Investing Materials Sector IconAttractive options? Financials in the broad market continued their strong run, with leadership during the period broadening beyond banks, which had led the group for much of the year. The portfolio’s holdings in the sector outperformed on a relative basis, and the group included Cboe Global Markets, Inc. (CBOE), a contributor from the capital markets industry.  

CBOE, also known as the Chicago Board of Options Exchange, is one of four publicly traded U.S. financial exchanges. The company’s niche is in two areas: 1.) Cash equity and options trading where CBOE holds a roughly 30% market share of all exchange-based trading and 2.) Proprietary products including VIX and SPX futures, which are hedging tools tied to expected market volatility and S&P 500 Index performance, respectively. 

Shares of CBOE languished during the second half of last year as volatility—and consequently trading of VIX futures—dropped following a tumultuous first half of 2020. Additionally, the company continues to invest in building a European financial derivatives platform. The costs have put what we view as temporary pressure on margins and earnings.

We took a position in CBOE early this year based on our research suggesting that trading volume in its proprietary products had likely troughed and investments made in the European derivatives platform business today should generate operating leverage in the future as expenditures tied to the buildout begin to subside. Our thesis was validated during the second quarter of this year as trading volume for the company’s VIX and SPX products improved.

While shares have appreciated since we first initiated a stake in CBOE, they still trade at a meaningful discount to its peers. At current levels, we continue to view valuations as compelling given the quality of the company and its unique position in a high-margin industry with few competitors.

Heartland Advisors Value Investing Financial Sector IconPower aid. A renewed interest in less-volatile industries and income-generating businesses helped propel less volatile names in areas such as Utilities. Our holdings in the sector were up modestly during the period and outperformed the benchmark on a relative basis, led by Exelon Corp (EXC). 

The company is a large multi-state utility with regulated as well as unregulated operations. Following a strategic review, Exelon announced a plan this year to separate the two businesses. Since the time of the announcement, investors have gotten a clearer view into prospects of both operations and have seen improvements in results, and shares have appreciated. The decision and recent improvements, in our view, set the stage for a further re-rating of the company. 

Based on our analysis, investors appear to be undervaluing Exelon’s two business lines under the current operating structure. We believe the regulated line has desirable transmission/distribution assets and strong opportunities for rate base growth. Meanwhile, the unregulated merchant power segment trades at less than 5x enterprise value/earnings before interest, taxes, depreciation, and amortization, which represents a steep discount to the average multiple for publicly traded power companies.

We also believe Exelon’s merchant business, with its nuclear fleet and an inventory of alternative energy assets, is poised to benefit from an increased emphasis on clean energy from the Biden administration.

With shares trading at a discount to our sum-of-the parts analysis, Exelon, in our view, remains a compelling opportunity relative to fully regulated utilities

Heartland Advisors Value Investing Health Care Sector IconNarrowing the spectrum. While investors spent much of the period bidding up businesses based on sales growth expectations, we continue to be drawn to companies that have an improved outlook through self-help measures. Spectrum Brands Holdings (SPB), a household products company, is one such example.

Spectrum sells a variety of home goods through its market-leading brands including Black and Decker, Pfister and Remington. During the past 18 months, management has undertaken an initiative to exit non-core business lines such as auto care and batteries, reduce debt and improve efficiencies. The latest of these efforts came in mid -September when the company announced it was selling its home improvement segment for a sum greater than the market capitalization of the entire company. 

Management expects to use the proceeds to further bolster Spectrum’s balance sheet, continue to buy back shares and do tuck-in acquisitions to increase scale in its secular growth businesses, such as Pet and Home and Garden lines. 

Despite recent improvements in its share price, the company still trades at a meaningful discount to its peers on an enterprise value/earnings before interest, taxes, depreciation and amortization basis. 

Portfolio Activity  

As investors have rushed into cyclical names and large growth companies, the team has had an opportunity to invest in high-quality businesses at historically attractive valuations that are less sensitive to various phases of the business cycle. We believe this is a prudent approach that is counter to the bidding up of businesses that are running on waning stimulus funds

The ABCs of quality. AmerisourceBergen Corp. (ABC), a leading national pharmaceutical distributor, provides an example of our approach. The company has been quietly bolstering its business model during the past few years to include animal health products for the European market and an expanded line of higher-margin, value-added services that reach beyond drug distribution. During these efforts, valuations for the company have been under pressure due to liability issues stemming from opioid litigation as well as concerns about increased scrutiny of drug prices by politicians. 

Our team has been following these developments and believes the strides management has made on the business side are not being fully recognized by the market. As more clarity has emerged related to opioid litigation, we’ve increased the portfolio’s stake in AmerisourceBergen and believe the investment provides the portfolio with additional exposure to a high-quality business that is well positioned to grow despite operating in a mature industry.   

Outlook and Positioning

As companies grapple with emerging economic headwinds, the broad indices could see increased volatility in the coming quarters. However, we believe the potential challenges offer ample opportunities for individual companies to distinguish themselves in the eyes of investors. This dynamic should benefit active investors who focus on fundamentals and identifying catalysts for positive change. 
As we sort through the businesses that hit our radar, we will continue to let our research lead us to attractive opportunities and not make investments to fit some vague macro-economic view. The team continues to focus on valuations, balance sheet strength and 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 quarters ahead.
Thank you for your continued trust and confidence.
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Portfolio Management Team

Colin McWey

Vice President and Portfolio Manager

Will Nasgovitz

CEO and Portfolio Manager

Troy McGlone

Vice President and Portfolio Manager

Fund Returns


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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® Value9.19---10.5910.2842.4018.24-1.01
*Not annualized

Source: FactSet Research Systems Inc., Russell®, and Heartland Advisors, Inc.

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

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©2022 Heartland Advisors | 790 N. Water Street, Suite 1200, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

In the prospectus dated 5/1/2022, the Net Fund Operating Expenses for the investor and institutional classes of the Mid Cap Value Fund are 1.10% and 0.85%, 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 1.10% of the Fund’s average net assets for the investor class shares and 0.85% for the institutional class shares, through at least 4/5/2024, 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 1.17% for the investor class shares and 0.98% for the institutional class shares.

Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. Performance for institutional class shares prior to their initial 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. To obtain performance through the most recent month end, call 800-432-7856 or visit heartlandadvisors.com.

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 Funds' prospectus. To obtain a prospectus, please call 800-432-7856 or visit heartlandadvisors.com. Please read the prospectus carefully before investing.

As of 9/30/2021, AmerisourceBergen Corp., CBOE Global Markets, Inc., Exelon Corp, and Spectrum Brands Holdings, represented 1.95%, 2.06%, 2.58%, and 2.98% of the Mid Cap Value Fund’s net assets, respectively.

Statements regarding securities are not recommendations to buy or sell.

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The Mid Cap Value Fund invests in a smaller number of stocks (generally 40 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. 

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

The Mid Cap Value Fund seeks long-term capital appreciation and modest current income.

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

The Heartland Funds are distributed by ALPS Distributors, Inc.

The statements and opinions expressed in this article are those of the presenter(s). 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.

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.

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

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

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indices. Russell® is a trademark of the Frank Russell Investment Group.

Data sourced from FactSet: Copyright 2022 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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

Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) Ratio is a financial indicator used to determine the value of a company and is calculated by dividing the entire economic value of the company (enterprise value) by its earnings before interest, taxes, depreciation, and amortization (EBITDA). Market Capitalization the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. Operating Leverage is a measurement of the degree to which a firm or project incurs a combination of fixed and variable costs. A business that makes sales providing a very high gross margin and fewer fixed costs and variable costs is considered to have high leverage. The higher the degree of operating leverage, the greater the magnitude of changes in sales to potential profits. Russell Midcap® Value Index measures the performance of those Russell Midcap® Index companies with lower price/book ratios and lower forecasted growth characteristics. All indices are unmanaged. It is not possible to invest directly in an index. S&P 500 Index is an index of 500 U.S. stocks chosen for market size, liquidity and industry group representation and is a widely used U.S. equity benchmark. All indices are unmanaged. It is not possible to invest directly in an index. Volatility is a statistical measure of the dispersion of returns for a given security or market index which can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.