Heartland Advisors

Heartland Mid Cap Value Fund 4Q22 Portfolio Manager Commentary

Executive Summary

  • The shifting mood of investors proved to be a constructive backdrop for active, selective, and opportunistic investors.
  • We took advantage of fourth quarter uncertainty to build positions in both high-quality (value) and deep value buckets.
  • We expect volatility to continue, as the yield curve is more inverted than it’s been in 40 years. This implies additional economic headwinds — and opportunities — ahead.

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.

Fourth Quarter Market Discussion

Far too often, investing is thought of in “either/or” terms, when nothing is certain. Large doses of both hope and fear were on display in the fourth quarter. Investors couldn’t decide whether to be optimistic that moderating inflation could provide air cover needed for the Federal Reserve to begin easing monetary policy or to be pessimistic about the state of the economy as the full effect of monetary tightening is realized.  

The fallacy of discussing the market in these “risk on/risk off” terms is the implication that money can only be made when the mood of investors is optimistic. As contrarians know, gains can often be found against any backdrop. In fact, “you make most of your money in a bear market,” the famed investor Shelby Davis once noted. “You just don’t realize it at the time.”

We agree with this notion. The erratic shifts in sentiment throughout the quarter and year proved unsettling, and the inverted yield curve (see chart below) suggests more volatility to come as investors come to grips with the economic headwinds ahead. While this speaks poorly for economic growth, this should be a constructive backdrop for active, selective, and opportunistic investors.

Heartland Advisors Value Investing Personal Income vs. Retail Sales Chart

Source: Bloomberg L.P., Standard & Poor’s, quarterly data from 3/31/1977 to 12/30/2022. This chart represents the U.S. Treasury bond yield curve.  A yield curve reflects the difference between interest rates of bonds having equal credit quality but differing maturity dates. The slope of the yield curve reflects the bond market’s view of future inflation and economic growth prospects. Past performance does not guarantee future results.

In the fourth quarter, we added to both our ‘value’ bucket holdings of high-quality companies and our ‘deep value’ bucket consisting of companies that may be lower in quality but where promising self-help catalysts exist, providing meaningful tailwinds for business fundamentals.  

Which brings us to another false choice. Within the value universe, there are those who adhere to a philosophy of only owning high-quality companies trading at decent bargains. Meanwhile, others focus on deeply discounted companies that have generated poor economic returns over time. Just as growth and value generally take turns outperforming, these two styles of value investing also tend to alternate market leadership. Within the mid-cap space, we don’t think it’s prudent to choose one while ignoring the other because, in doing so, a top-down bet is introduced into the portfolio. We want to be in a position to have stock selection drive our results, which we believe can only be achieved if the uncontrollable is somewhat mitigated. 

This two-bucket approach combined with the 10 Principles of Value Investing™ stock-selection process emphasizing balance sheet strength and a range of possible outcomes helps in quarters like the past two, which began with across-the-board gains but transitioned to a more circumspect mindset. As markets rise, both quality buckets contribute to returns while downside is mitigated by less financial leverage and by purchasing shares at a meaningful discount to their intrinsic value.

Attribution Analysis

The outperformance during the fourth quarter was driven largely by stock selection, particularly in the Real Estate, Healthcare, and Energy sectors. At a time when positive Wall Street estimate revisions are becoming scarce, our fundamental forecasting and ability to identify catalysts aided performance. In some cases, our winners began to overcome headwinds that they faced in prior quarters. In other cases, company-specific catalysts are beginning to play out. This combination helped us outperform the Russell Midcap® Value Index by approximately 9 percentage points this year.

Value Bucket

Healthcare. One of our best performing stocks in the fourth quarter was Encompass Health (EHC), a leader in inpatient rehabilitation for strokes, neurological issues, and post-op surgical services. Earlier in the year, EHC spun off Enhabit, its home health and hospice business. The move allowed investors to begin properly valuing EHC’s rehabilitation business, which enjoys sizeable scale and operational advantages within the industry. 

Other tailwinds include progress in getting past labor supply and cost issues that created a profit squeeze in the post-COVID-19 environment. Revenues are also recovering, as COVID-19-related dynamics, such as fewer elective surgeries and lower general health system utilization, are beginning to clear. Yet the stock, which has historically traded at a premium to the broader midcap universe, remains at a discount, though the gap is closing.

Communications. Volatility in the fourth quarter allowed us to add what we consider a best-in-class holding in communications: Cable One (CABO). Cable One is a broadband and cable provider with a focus on rural markets in the Midwest, Northwest, and Southeast. Graham Holdings Company (GHC) spun CABO out in 2015, and investors became attracted to management’s strategy to exit pay TV, which has been in secular decline amid the streaming boom, in favor of more-profitable broadband. As a result of this early strategic pivot, CABO operates with one of the highest margins in the cable industry.

The stock, a perceived “work from home” winner during the pandemic, became overvalued in 2021. So far this year, though, the stock has fallen about 60%, and it now trades at just 8.3 times Enterprise Value to EBITDA (EV/EBITDA) over the next 12 months. By comparison, CABO’s median valuation post spin-off is 11.5 times EV/EBITDA.

Deep Value Bucket

Industrials. U-Haul Holding Company (UHAL; UHAL/B) owns DIY moving and storage assets under the “U-Haul” brand name. The company is a collection of company-owned and independent dealership, moving truck, self-storage real estate, and insurance assets. Through decades of expansion and focus, UHAL has built a dominant distribution network that is more than three times larger than its next two largest competitors combined. This scale has created a significant moat around the franchise as independent dealers are unlikely to switch to a competing brand because doing so would immediately have a negative impact on their revenue. 

Yet the stock trades at less than 15 times earnings and more than a 40% discount to our sum-of-the-parts estimate. We believe the market glosses over UHAL’s high-quality moving equipment rental business because of management’s focus on ground-up self-storage development, a strategic decision that reduces short-term profit and creates the illusion of a company with poor returns on capital. In fact, UHAL’s management team has created tremendous value through their real estate investments. There are no major Wall Street analysts covering the stock while peers of similar size have 10 to 20 analysts under coverage. This creates an opportunity to own a high-quality company disguised as a deep-value stock.

Financials. RenaissanceRE (RNR) is a reinsurance underwriter focused on global property catastrophe and casualty & specialty (C&S) lines of risk. Reinsurance involves selling coverage to primary insurers for protection against excess losses. It is largely a commodity with industry economics heavily dependent upon the supply of and demand for capital. Prior to 2017, property catastrophe industry losses were abnormally low, resulting in excess returns and capital entering the industry. More recently, though, property cat losses have been unusually high. Combined with weak pricing, this has resulted in significant industry losses.  

In response to the irrationally competitive market, RNR’s management team made the decision to pull back capital for underwriting and reallocated it to repurchase shares. This pivot piqued our interest last year. We began purchasing the stock in the third quarter, prior to Hurricane Ian. We added to our position when shares fell on fears that Ian could result in massive losses for property insurers. Our thinking was that RNR had sufficient capital to sustain cat losses from Ian, and if the storm proved to be bad, it would further catalyze a hard market. Hurricane Ian turned out to be the costliest hurricane in U.S. history, resulting in industry losses forecast to be well in excess of $50 billion. After RNR reported its Q3 cat losses, we were quickly rewarded as pricing for the important January renewal period shot up in excess of 25%, and the stock rallied more than 40% from the Ian lows. RNR still trades at a price/earnings ratio of 8.3, based on the next 12 months’ profit forecasts, which is below the company’s long-term median valuation of 9 times earnings.


As the markets inched closer to the point where economic risks are starting to get priced into securities, we’ve grown more comfortable adding cyclical exposure to the portfolio. We believe an economic recession over the next year is consensus, profit expectations are falling quickly in certain pockets of the market, and management teams are increasingly capitulating on the demand environment.  

While we expect further economic deterioration in the coming quarters, our focus remains on quantifying both the risk and the reward under multiple good and bad scenarios. It doesn’t always feel good buying cyclical businesses when fundamentals are clearly deteriorating. There is a point, however, where less-defensive businesses become highly attractive even though visibility is poor and economic prospects are deteriorating. As always, we will allow our 10 Principles of Value Investing™ to drive our bottoms-up decision making.

Thank you for your trust and Happy New Year!

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Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

Vice President and Portfolio Manager

Heartland Advisors Value Investing Portfolio Manager Will Nasgovitz

Will Nasgovitz

CEO and Portfolio Manager

Heartland Advisors Value Investing Portfolio Manager Troy McGlone

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* (%)
*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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©2023 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 5/1/2023, 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 4/5/2025, 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 1.16% for the investor class shares and 1.04% 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 12/30/2022, Cable One, Inc. (CABO), Encompass Health Corp. (EHC), RenaissanceRe Holdings Ltd (RNR), U-Haul Holding Co. (UHAL), and U-Haul Holding Co. (Series N) (UHAL/B) represented 0.85%, 3.16%, 1.87% , 0.43%, and 2.25% of the Mid Cap Value Fund’s net assets, respectively. Graham Holdings Co. (GHC) is unowned by Heartland Advisors, Inc.

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 2023 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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

Active Investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions. Bear Market occurs when the price of a group of securities is falling or is expected to fall. Bottom-up is an investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks and the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. Cyclical Stocks cover Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Technology, and Transportation which tend to react to a variety of market conditions that can send them up or down and often relate to business cycles. Defensive Stocks include Health Care, Utilities, and Consumer Staples. These companies usually don’t suffer as much in a market downturn as they relate to basic needs. 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). Intrinsic Value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Leverage is the amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged. Price/Earnings Ratio of a stock is calculated by dividing the current price of the stock by its trailing or its forward 12 months’ earnings per share. Risk on/Risk off Theory is an investment setting in which price behavior responds to, and is driven by, changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns. During periods when risk is perceived as low, risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived as high, investors have the tendency to gravitate toward lower-risk investments. Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index. All indices are unmanaged. It is not possible to invest directly in an index. Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. In a positive-sloping yield curve, short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. A negative, or inverted, yield curve occurs when short-term debt instruments have a higher yield than long-term debt instruments of the same credit quality. 10 Principles of Value Investing™ consist of the following criteria for selecting securities: (1) catalyst for recognition; (2) low price in relation to earnings; (3) low price in relation to cash flow; (4) low price in relation to book value; (5) financial soundness; (6) positive earnings dynamics; (7) sound business strategy; (8) capable management and insider ownership; (9) value of company; and (10) positive technical analysis