Heartland Value Plus Fund 3Q21 Portfolio Manager Commentary

Executive Summary

  • An inflating bubble in large growth companies continued to drain oxygen from value stocks. 
  • Economic headwinds exposed the fragility of a market that had been running on momentum and positive headlines.  
  • As the reality of a post-stimulus economy begins to sink in, we believe investors would be wise to recalibrate their expectations.  
  • The prudent path forward, in our view, is to focus on mitigating potential downside risk and seeking out business with opportunities to bolster cash flow generation.   

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

Economic concerns that were percolating beneath the surface of the major indices for much of the period, boiled out into the open late in the quarter as COVID-19 cases jumped, employment numbers came in weaker than expected and inflation pressures persisted. The headwinds combined with intraparty wrangling in Washington, D.C. over the fate of nearly $5 trillion in proposed Federal spending, led to a spike in volatility and exposed the fragility of a market that had been running on momentum and positive headlines for the past several months. 

The emerging concerns left the major indices flat or modestly down for the period, but valuations remained elevated as measured by the so-called Buffett Indicator. The ratio, shown below, compares the market cap of virtually all publicly traded U.S. companies to the GDP of the U.S. As illustrated, investors are paying nearly $2.40 for every dollar of GDP produced—or about a 91% more than the historical trend line and the highest level in the past 70 years.

Heartland Advisors Value Investing FARBAST to S&P 500 Index

Source: FactSet Research Systems Inc., Quarterly data 3/29/1985 to 6/30/2021. Total Market Cap is represented by the Wilshire 5000 Total Market Index. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

As fundamental investors, we are always wary of markets driven by momentum and macro events and trading at extreme valuations. If the uptick in volatility in the closing weeks of the period were a sign that investor euphoria is fading, we believe some of the marginal businesses and large growth companies that have been riding high may be pulled back to earth in the coming quarters.

Attribution Analysis

The inflating bubble in large growth companies early in the quarter continued to drain oxygen from value stocks, and the portfolio was off modestly and lagged its benchmark, the Russell 2000® Value Index. Stock selection in Utilities was strong on a relative basis as were holdings in the Financials sector. The portfolio’s holdings in Health Care were down but outperformed the benchmark average for the group.  
 

Heartland Advisors Value Investing Health Care Sector IconPower Play. As investors chased growth stocks for much of the period, less economically sensitive areas of the market and steady performers lagged. Utilities were a prime example of the dynamic. Due to rate regulations under which most utilities operate, the group can be a challenging area to find compelling opportunities for margin expansion. However, we continue to hold some attractive opportunities, such as Portland General Electric (POR), by focusing on balance sheet strength of power companies that operate in growth markets. 

Portland General, which provides electric and gas service to Oregon, stumbled last year after it racked up losses on some power trading contracts it engaged in during the height of a West Coast heat wave that sent wholesale energy prices skyrocketing. The company has taken corrective hedging actions to mitigate future issues and has regained investor interest by producing solid earnings. 

We believe Oregon is a burgeoning region for the manufacturing and data industries, which should lead to net growth in power demand versus projections of flat or negative demand nationally. Despite its financial strength and positive growth outlook, Portland Electric trades at 8x enterprise value/earnings before interest, taxes, depreciation and amortization. Going forward, we expect multiples will continue to expand.   

Heartland Advisors Value Investing Information Technology Sector IconSign of the times. Financials in the broad market continued to climb; however, strength was limited to businesses closely tied to consumer finance. The portfolio’s holdings in the sector outperformed on a relative basis, and the group included FirstCash Inc., (FCFS), a name we highlighted in the second quarter.

Shares of FirstCash, which operates pawn stores in the U.S. and Latin America, continued to move higher as the impact of COVID-19 stimulus checks began to fade and enhanced unemployment benefits expired. Absent government payments, consumers have returned to pawn stores for short-term loans. We remain constructive on the business due to its high margins and view it as uniquely positioned to thrive if the financial resiliency of consumers continues to soften. 

Heartland Advisors Value Investing Information Technology Sector IconHealth Check. The portfolio’s Health Care names were down on an absolute basis but outpaced the benchmark average for the group. We continue to find attractive opportunities in the space such as Haemonetics Corporation (HAE), a medical device company that focuses on plasma collection equipment and consumables.

We took a stake in Haemonetics earlier this year after shares slumped on news that it was losing one of its largest customers, beginning in its 2023 fiscal year. Sales of its plasma-related products also slowed during the height of the pandemic and further weighed on the stock. We viewed the sell-off as overdone and saw it as an opportunity to buy a high-quality company at a significant discount. 

Haemonetics has seen a recovery in plasma-related sales as COVID-19 concerns have moderated and federal direct payments to consumers have faded. Given its margin profile and prospects for continued sales growth, we view the business as undervalued at its current 12x enterprise value/earnings before interest, depreciation, taxes and amortization. 

Portfolio Activity 

As bottom-up stock pickers, we continue to focus on individual companies and their ability to succeed in a variety of economic scenarios. However, we’d be remiss if we failed to acknowledge that the increasingly challenging macro environment currently unfolding will impact some businesses more dramatically. For example, persistent inflationary pressures or higher interest rates could be particularly damaging to highly levered companies. 

In response, our work continues to center on balance sheet strength and prudent use of capital, and we seek to avoid companies that undertake large-scale transformative acquisitions. Instead, we prefer businesses that are involved in focusing efforts on maximizing profit margins and bolstering bottom-line results by playing to their core competencies.

Outlook and Positioning

Unprecedented fiscal stimulus and direct consumer payments initially served as an elixir in the fight against the economic damage caused by the global pandemic. However, it also had a numbing effect on investors as they glossed over the many risks lurking near the surface in the equity markets. 

As the reality of a post-stimulus economy begins to sink in, we believe investors would be wise to recalibrate their expectations. The ability of marginal businesses to ride along on the coattails of a resurging economy, we believe, are winding down. The prudent path forward, in our view, is to focus on mitigating potential downside risk and seeking out business with idiosyncratic opportunities to bolster cash flow generation. We believe this approach will produce a portfolio of companies that should have enduring strength for the long haul.

Thank you for your continued confidence.

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Portfolio Management Team

Bradford A. Evans

Evans, CFA, is Senior Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 25 years of industry experience, 22 at Heartland.

Andrew J. Fleming

Fleming, CFA, is Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 12 years of industry experience, 9 at Heartland.

Fund Returns

9/30/2021

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Since Inception (%)20-Year (%)15-Year (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD* (%)QTD* (%)
Value Plus
Investor Class
10.3910.799.0111.1713.8310.7254.8020.28-3.41
Value Plus
Institutional Class
10.5210.979.2511.4314.1010.9955.2120.49-3.34
Russell 2000® Value10.039.797.5013.2211.038.5863.9222.92-2.98
*Not annualized

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

The inception date for the Value Plus Fund is 10/26/1993 for the investor class and 5/1/2008 for the institutional class.

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©2021 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 5/1/2021, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.23% and 0.97%, 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. Without such waivers and/or reimbursements, total returns may have been lower.

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, FirstCash Inc., (FCFS), Haemonetics Corportation (HAE), and Portland General Electric (Por), represented 3.53%, 3.20%, and 3.03% of the Value Plus 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 Value Plus Fund invests in small 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 70) than the average mutual fund. The performance of these holdings generally will increase the volatility of the Fund’s returns. There is no assurance that dividened paying stocks will mitigate volatility. 

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

The Value Plus 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 2021 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) measures a company’s financial performance. It is used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. Momentum is the rate of acceleration of a security's price or trade volume. Russell 2000® Value Index measures the performance of those Russell 2000® 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. 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.

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

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