Heartland Select Value Fund 4Q19 Portfolio Manager Commentary

Executive Summary

  • Stocks with positive price momentum were bid up while many attractively valued companies with improving prospects were overlooked, and the Fund lagged its benchmark, the Russell 3000® Value Index, returning 5.97% versus 7.48%. 
  • Mixed economic data and extreme corporate debt levels have reduced the margin for error in today’s markets.
  • The prudent course, in our view, is to get past the ruling emotion of the day and stay focused on company-specific factors.

Fourth Quarter Market Discussion

The rate cut by the Federal Reserve in late October was a shot in the arm for investors concerned about recent lackluster industrial economic data. The move was viewed as a needed backstop to prevent a temporary lull from turning into a prolonged downturn.

As investors grew more confident that current weakness might be short-lived, they bid the major indices to a string of new highs in late November and December. While the mood on Wall Street was bullish, a closer look at market drivers suggests the optimism was guarded.

For example, a relatively small number of names were responsible for much of the performance gains and investors, as the chart below illustrates, gravitated toward the perceived safety of larger names, resulting in the 10 largest names in the S&P 500 having a combined market cap of more than 3x the entire Russell 2000® index. Similarly, stocks with positive price momentum were bid up while many attractively valued companies with improving prospects lagged.

Flocking to Large

Source: Furey Research Partners, LLC,  Standard & Poor’s, and Russell®, 12/1/1985 to 12/31/2019
This chart shows the aggregate market cap for the ten largest companies in the S&P 500 Index divided by the total market cap of the Russell 2000® Index.
Past performance does not guarantee future results.

Attribution Analysis

Security selection was strong on an absolute basis in Financials and Health Care but could not overcome weakness in Information Technology (IT) and Communication Services, and the portfolio lagged its benchmark, the Russell 3000® Value Index. Allocation decisions boosted performance.
 Beyond the banks. 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 with much of the strength driven by a position, Charles Schwab Corporation (SCHW), in the capital markets space.
We took a stake in Schwab, the largest publicly held brokerage business in the country, after it came under significant pressure in late 2018 and early 2019 as customers began shifting their cash balances into higher-yielding products. This trend put pressure on the company’s asset growth and revenue. In early October, the pressure accelerated when Schwab announced it would cut online stock trading commission to zero, creating a clear short-term headwind to revenue and profits.

However, shares rallied on news that Schwab was acquiring competitor TD Ameritrade Holding Corporation (AMTD) in an all-stock deal. The transaction is expected to boost earnings by 15% to 20% over three years, as Schwab should be able to reduce Ameritrade’s cost structure by 60% to 65%.

Going forward, we except earnings growth to resume, driven by continued market share gains in Schwab’s brokerage and advisor-services businesses as well as accretion from the Ameritrade transaction.
Heartland Advisors Value Investing Consumer Staples Sector IconHealthy objectivity. The portfolio’s Health Care names were among the top performers on an absolute basis and the group contained a key contributor, Triple-S Management Corporation (GTS).

Triple-S is a managed care company in Puerto Rico that operates under the Blue Cross name. The company also has a property and casualty insurance unit that is not core to its overall business strategy. During the summer, a negative research report was released that suggested the company lacked adequate reserves to meet a potential surge in property and casualty claims stemming from 2017’s Hurricane Maria.

When the report was published, we once again revisited our investment thesis, delving into the potential impact a significant increase in new claims filed would have on earnings and balance sheet strength. Additionally, we dug into the assumptions used in the bear case to determine whether the scenario suggested by the authors was likely to play out. At the conclusion of our review, we remained confident that Triple-S offered an attractive risk-reward profile.

In the months following the report, the flood of claims predicted by the authors has yet to materialize, and shares have recovered. Longer term, we view Triple-S as a compelling opportunity due to its potential to increase market share, recently approved rate increases and continued progress on cost cutting.

Heartland Advisors Value Investing Financials Sector IconNo deal. Following a string of strong gains during the past several quarters, the Real Estate sector lagged the broader market to close out the year, and the portfolio’s holdings in the space contained a key detractor. CyrusOne Inc. (CONE), one of five publicly traded datacenter real estate investment trusts (REITs) in the U.S., sold off after management announced that the business was not pursuing a sale to a competitor or private equity, as had previously been rumored.

We originally took a position in CyrusOne in early 2019 after shares had fallen out of favor with investors who were concerned about recent softness in margins and cash flow. The weakness stemmed from company efforts to expand in Europe. At the time, we believed management had set the stage for strong growth relative to peers once the overseas initiatives began to produce results.

Soon after we initiated a position in CyrusOne, the company began showing progress in boosting earnings per share. However, as merger rumors began to heat up, CyrusOne shares approached our estimates of fair value and we began trimming the strategy’s exposure to the name.

As shares sold off once it became clear there were no efforts to find an acquirer, we began increasing our stake at what we believe are compelling valuations. 

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.

Despite its improving margin profile and long runway for sales growth, Skyworks trades at a more than 10% discount to the S&P 500 based on forwards earnings.

Outlook and Positioning

Mixed economic data and extreme corporate debt levels have reduced the margin for error in today’s markets. While equities have marched higher through much of 2019, we are beginning to see investors rewarding or punishing businesses based on underlying fundamentals 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 stay focused on company-specific factors.

Thank you for your continued confidence.


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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.

Troy McGlone

McGlone, CFA, is Vice President and Portfolio Manager of the Select Value Fund and its corresponding separately managed account strategy. He has 12 years of industry experience, 6 at Heartland.

Fund Returns


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Since Inception (%)20-Year (%)15-Year (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD* (%)QTD* (%)
Select Value
Investor Class
Select Value
Institutional Class
Russell 3000® Value8.877.207.5811.718.209.3226.2626.267.48
*Not annualized

The inception date for the Select Value Fund is 10/11/1996 for the investor class and 5/1/2008 for the institutional class.

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In the prospectus (pdf) dated 5/1/2020, the Gross Fund Operating Expenses for the investor and institutional classes of the Select Value Fund are 1.25% and 1.02%, respectively. The Advisor has voluntarily agreed to waive fees and/or reimburse expenses with respect to the institutional class, to the extent necessary to maintain the institutional class’ “Net Annual Operating Expenses” at a ratio not to exceed 0.99% of average daily net assets. This voluntary waiver/reimbursement may be discontinued at any time. 

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.

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

As of 12/31/2019, Charles Schwab Corporation, CyrusOne Inc., Skyworks Solutions, Inc., TD Ameritrade Holding Corporation, and Triple-S Management Corporation represented 3.20%, 0.98%, 2.11%, 0.00%, and 1.64% of the Select 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®.

Small-cap and large-cap investment strategies each have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap investment strategies emphasize the significant growth potential of small companies, however, small-cap securities, are generally more volatile and less liquid than those of larger companies. Large-cap investment strategies emphasize the stability of large companies, however, large-cap securities are more susceptible to momentum investments and may quickly become overpriced or suffer losses.

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.

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.

In addition to stocks of large companies, the Select Value Fund invests in small- and mid-sized companies that are generally less liquid and more volatile than large companies. The Fund also 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.