Heartland Mid Cap Value Fund 4Q19 Portfolio Manager Commentary

Executive Summary

  • Stock selection was strong in several areas and the portfolio beat its Russell Midcap® Value benchmark returning 7.91% versus 6.36%. 
  • With concerns of a near-term slowdown subsiding, investors gravitated toward some economically sensitive areas.
  • We believe the recent runup in valuations has reduced the margin for error in today’s markets.

Fourth Quarter Market Discussion

Economic optimism emerged in early fall, providing traction for equities as they marched higher. Improving sentiment got a significant boost in late October when the Federal Reserve opted to reduce rates. The cut was widely viewed as an insurance policy to prevent some recent softness in manufacturing from gaining traction and spreading. The generally positive outlook spurred the major indices to end the year near record highs.

With concerns of a near-term slowdown subsiding, investors gravitated toward some economically sensitive areas. As a result, attractively valued businesses in cyclical industries received a boost. The upbeat outlook also cooled the appetite for yield. For example, banks have outperformed real estate investment trusts (REITs) despite a weakening rate environment, as illustrated in the chart below.

Retreat on REITs
Heartland Advisors High Beta/Low Volatility

Source: FactSet Research Systems Inc., MSCI, and Heartland Advisors, Inc., 6/20/2005 to 12/31/2019
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with
respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create
indices or financial products. This report is not approved or produced by MSCI. All indices are unmanaged. It is
not possible to invest directly in an index.
Past performance does not guarantee future results.

Despite the generally favorable economic outlook, Energy continued to slump.
Attribution Analysis
Stock selection was strong in several areas, and the portfolio beat its Russell Midcap® Value benchmark for the quarter. Consumer Discretionary stood out on a relative basis, along with the strategy’s Health Care names. Holdings in Information Technology lagged. 
Heartland Advisors Value Investing Health Care Sector IconGo big and go home. While the outlook for brick and mortar retailers remains unsettled, we continue to see positive results in Consumer Discretionary among manufacturers and sellers of big-ticket household items. Leggett & Platt, Incorporated (LEG), a manufacturer of mattresses, furniture, and automotive seating products, was one such name.

Leggett & Platt shares were up as the company increased sales and gained traction with some of its higher-margin premium offerings in the mattress space. The company has also been able to weather elevated input costs by passing price increases on to customers.

As shares of Leggett & Platt have appreciated during the second half of the year, valuations have become stretched and we’ve reduced exposure to the name.
Power struggle.The uptick in investor optimism caused some defensive areas of the market, such as Utilities, to fall out of favor. Our holdings in the space mildly outperformed the benchmark on a relative basis, but the group was still down for the period and contained a key detractor, Exelon Corporation (EXC).

The company is a large multi-state utility with regulated as well as unregulated operations. Shares faltered recently as authorities began an investigation into the company’s lobbying efforts in Illinois. Additionally, merchant power prices have softened, which is expected to put pressure on Exelon’s revenue.

Although we’ve been disappointed by recent weakness for shares of the company, we view the downward pressure as temporary. In our view, Exelon remains a compelling opportunity relative to fully regulated utilities, and we believe its valuations could mitigate downside pressure if the Utilities sector were to falter as a whole.
Heartland Advisors Value Investing Information Technology Sector IconBank shot. Financials in the broad market were up as investor economic optimism grew, which caused the yield curve to steepen and bank stocks to rise. The portfolio’s holdings in the sector outperformed on a relative basis and we continue to find value among regional banks including names such as UMB Financial Corporation (UMBF).

Shares of Missouri-based UMB came under pressure in 2018 due to erosion of fee income stemming in part from the sale of its Scout Mutual Funds as well as the write-down of a small portfolio of asset-backed loans that it inherited as part of its 2014 acquisition of Marquette Financial Companies.

Since our initial investment in the company in mid-2019, UMB has enjoyed sales growth and pricing power from its Funds Servicing group. Additionally, losses from the acquired asset-backed lending portfolio have begun to moderate and leadership has shown a commitment to managing the business consistent with the bank’s conservative underwriting legacy.

With shares of the bank trading at a double-digit discount based on its long-term average of price/tangible book value, we remain attracted to UMB based on its high concentration of fee-based businesses and its history as a conservative lender—over multiple economic cycles loan impairments have been one-third or less of the industry average.

Portfolio Activity

A strong run for equities in recent months has provided opportunities to harvest gains and redeploy assets into new names that offer an attractive risk/reward profile. Through our research, we have sought companies that are poised to succeed against a variety of backdrops or those that are priced at significant discounts to mid-cycle earnings levels.

For example, we initiated a position in Skyworks Solutions, Inc. (SWKS), a manufacturer of semiconductors used in multiple end markets including aerospace and defense, medical, consumer electronics and wireless communication products.

Advancements in technology are expected to lead to greater opportunities for Skyworks in the consumer smart phone market, as well as in higher margin commercial applications, which currently account for one-third of total revenue. Sales growth in the industrial, defense and medical lines should help diversify sources of income and improve margins, while advancements in smart phones are expected to drive the use of more Skyworks products in each handset sold.

While Skyworks has enjoyed a sharp move higher since our purchase and long runway for sales growth, shares still trades at a more than 10% discount to the S&P 500 based on forward earnings.

Outlook and Positioning

Despite mixed economic data and extreme corporate debt levels, we would not be surprised to see the markets surge higher in the near-term as investors who were sitting on the sidelines jump back into equities out of fear of missing out on the next big rally. Yet we believe the recent runup in valuations has reduced the margin for error in today’s markets.

So, while equities have marched higher through much of 2019, we are seeing investors rewarding or punishing businesses based on underlying fundamentals even more than we have in the recent past. We believe the gap between winners and losers among equities could widen in the coming months. In our view, the prudent course is to get past the ruling emotion of the day and approach opportunities with a clear−eyed assessment of the price paid relative to company−specific factors.

Thank you for the opportunity to manage your capital.


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Portfolio Management Team

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 18 years of industry experience, 11 at Heartland.

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 President and Director of Heartland Funds. He has 20 years of industry experience, 16 at Heartland.

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® Value7.88---7.628.1027.0627.066.36
*Not annualized

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

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In the prospectus (pdf) dated 5/1/2020, 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 5/1/2022, 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 1.36% for the investor class shares and 1.07% 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 12/31/2019, Exelon Corporation, Leggett & Platt, Incorporated, Skyworks Solutions, Inc., UMB Financial Corporation represented 3.52%, 0.84%, 2.05%, and 3.05% 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.

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

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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.

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.