Heartland Value Plus Fund 1Q19 Portfolio Manager Commentary

Executive Summary

  • Financials and Energy holdings were key drivers of relative performance and the Fund outperformed its benchmark, the Russell 2000® Value Index, the Russell 2000® Value Index, returning 13.93% versus 11.93%.
  • The Federal Reserve’s decision to stop raising rates reassured investors concerned that elevated borrowing costs would derail the economy.
  • Bellwether commodities such as copper and nickel point to healthy growth going forward.
  • Companies with pricing power should be in a better position to thrive in an environment of rising costs.

First Quarter Market Discussion

Cooler heads prevailed during the period, and the major indices regained much of the ground they lost in the closing months of 2018.
The mostly optimistic tone reflected a realization that macro concerns such as trade wars and political tensions—which had stoked panic just a few months prior—were temporary distractions and unlikely to have a lasting economic impact over the long term.
While largely anticipated, the Federal Reserve’s decision to pause on its path of higher rates reassured investors concerned that elevated borrowing costs would derail the still growing economy.
On balance, a measured view of near-term challenges plus long-term potential for continued economic growth drained much of the volatility from the market, as shown, and led to strong performance among economically sensitive sectors as well as growth stocks.
A Return of Calm
Heartland Advisors Value Investing CBOE Volatility Index Chart
Source: Bloomberg L.P., 9/28/2018 to 3/29/2019
Chicago Board Options Exchange Market Volatility Index (CBOE VIX): is a popular measure of the implied volatility of the S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.
Past performance does not guarantee future results.

Attribution Analysis

Security selection was strong in several areas, and the portfolio outperformed its benchmark, the Russell 2000® Value Index. Financials and Energy holdings were key drivers of relative performance, while Health Care names lagged. Allocation decisions also boosted results. 
Heartland Advisors Value Investing Consumer Staples Sector IconStars Aligning. Finding compelling opportunities in the Consumer Staples area has been a challenge. Top-line growth prospects for many companies in the space are weak due to undifferentiated product offerings. We believe given the current environment it is better to focus on businesses able to increase margins—as opposed to those seeking to grow sales regardless of cost. Portfolio holding Hain Celestial Group, Inc. (HAIN), a packaged food company focused on organic and natural products, is one such example.
Shares of Hain Celestial were up sharply as management, led by new CEO Mark Schiller, continued to make progress on its strategy of selling non-core business lines and eliminating low-margin product offerings. The company recently began selling off its volatile protein business. In addition to boosting overall margins for the company, the proceeds should help fortify its balance sheet.
Heartland Advisors Value Investing Industrials Sector IconDelayed takeoff? The portfolio’s Industrials holdings were up on an absolute basis, but the group included a key detractor. AAR Corp. (AIR), a parts, maintenance and logistics company serving the airline industry, was down after providing fiscal-year earnings guidance below consensus estimates. 
AAR is a top three independent service provider and offers a completely integrated parts and maintenance model. The company has robust pipeline of sales that we expect should experience up to 10% in organic growth with some share gains through the aftermarket parts distribution business. In addition, management is taking costs out of the business, expanding a key contract, and divesting non-core assets.
Recent weakness in shares of AAR was overdone, in our view. With the company trading at a discount to recent private market equity valuations, we added to our position during the period. 
Heartland Advisors Value Investing Energy Sector IconEnergized. Oil prices rebounded during the period, and Energy stocks benefited. An overweight to and stock selection in the group boosted portfolio returns. Holdings in the Equipment and Services space were particularly strong including Dril-Quip, Inc. (DRQ), which specializes in serving the offshore/subsea markets.
Dril-Quip posted strong results for the quarter and provided solid guidance for the full year based on a positive inflection in bookings for future projects. Sales forecasts, coupled with cost reductions for the company, should result in meaningful growth in earnings before interest, taxes, interest, depreciation and amortization, in our view.  
The growing backlog of bookings and improving market share in a consolidating industry could point to continued strength for Dril-Quip. Additionally, new products could drive up to 15% of revenue in 2020, while the company’s strong balance sheet provides comfort should the Energy space stall in the quarters ahead.
Despite the favorable outlook for the company, shares trade at just 1.5x tangible book value vs. a long-term average of 2.5x.

Portfolio Activity  

We remain confident that underlying fundamentals remain solid and expect the economy to continue to grow at a measured pace. However, we also recognize that short-cycle data may cause temporary concerns for investors and could result in bouts of volatility and selling pressure. Our response has been to take advantage of excessive market reactions and put money to work as valuations warrant.
For example, we have increased the portfolio’s exposure to select companies in the Financials sector. As the economic outlook has become less clear, sentiment towards the group has cooled. As a result, valuations based on tangible book value (TBV) have dropped, causing bank stocks to trade at attractive discounts. We think these economic concerns are overdone and believe continued strength in credit quality and opportunities for many industry players to reduce costs could bode well for some regional institutions.

Outlook and Positioning

Heartland Advisors Value Investing Quote Image
Despite isolated weakness in some near-term economic data, bellwether commodities such as copper and nickel point to healthy growth going forward. We believe the underlying strength isn’t being fully appreciated by investors, and we could see an uptick in inflation. As such, companies with pricing power should be in a better position to thrive in an environment of rising costs or will be well-situated to withstand margin pressures should the economy soften. 
We continue to believe businesses that demonstrate financial discipline and are taking opportunities to reduce costs and improve margins through internally focused efforts should be well-positioned to capitalize on operating leverage in an expanding economy. At minimum, they should be able to modestly grow earnings should sales plateau. The importance of balance sheet strength also makes us wary of holding businesses that are aggressive acquirers of competitors.
Thank you for the opportunity to manage your capital.



Please wait while we gather your results.

Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Bradford A. Evans

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 23 years of industry experience, 20 at Heartland.

Heartland Advisors Value Investing Research Analyst Andrew Fleming

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 10 years of industry experience, 7 at Heartland.

Fund Returns

Scroll over to view complete data

*Not annualized

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

Email Sign Up

  • I am a financial professional or institutional investor
  • I am an individual investor

©2020 Heartland Advisors | 789 N. Water Street, Suite 500, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

In the prospectus (pdf) dated 5/1/2019, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.18% and 0.95%, 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 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 3/31/2019, AAR Corp., Dril-Quip, Inc., and Hain Celestial Group, Inc. represented 1.70%, 3.65%, and 3.18% of the Value Plus 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.

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.

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.

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