Heartland Value Plus Fund 1Q20 Portfolio Manager Commentary

Executive Summary

  • The widespread selloff in equities was a drag on performance, but the portfolio held up meaningfully better than its benchmark. 
  • Many of the conservatively run holdings in the portfolio weathered the worst of the downturn. 
  • We remain focused on businesses that are poised to be disrupters in their fields and that have strong cash flows.  
  • Heightened regulatory oversight tied to stimulus funds will have a lasting impact on businesses. 

First Quarter Market Discussion

Extreme volatility, as shown in the VIX chart below, became the new norm as investors struggled to fathom the impact caused by the COVID-19 virus. The rapid erosion of the markets was a stark contrast to the generally upbeat mood on Wall Street to start the year.

CBOE Volatility Index

Source: FactSet Research Systems Inc., 1/2/2004 to 3/31/2020
Chicago Board Options Exchange Market Volatility Index (CBOE VIX) is a mathematical measure of how much the market thinks the S&P 500 Index option will fluctuate over the next 12 months, based upon an analysis of the difference between current S&P 500 put and call option prices. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

While the coronavirus was the driving force for one of the worst quarters in history, other factors added to the decline. A carryover of investor euphoria from the strong showing in 2019 left valuations to start the year rich even against robust growth expectations. As the number of COVID-19 cases spiked, and businesses and governments took drastic measures to contain the spread of the illness, what had been considered reasonable economic projections were slashed and the consensus became that a significant recession was underway.  

Oil prices hit multi-decade lows in reaction to the prospect for lower crude demand in the months ahead and due to a price war, that broke out after OPEC failed to reach an agreement on production cuts. Weakness in the Energy space had a carryover effect on many cyclically oriented businesses.

Attribution Analysis

The widespread selloff in equities was a drag on performance, but the portfolio held up meaningfully better than its benchmark, the Russell 2000® Value index. Relative outperformance was widespread with holdings in 10 out of 11 sectors faring better than the benchmark average. 

We have historically sought to mitigate risks posed by excessive debt by focusing on financially sound businesses. Coming into the year, this approach took on heightened importance as we anticipated the economy may cool as the coronavirus became better understood. Those efforts appeared to pay off as many of the conservatively run holdings in the portfolio weathered the worst of the downturn. 
Heartland Advisors Value Investing Industrials Sector IconLicense for success. Information Technology (IT) holding InterDigital, Inc. (IDCC) epitomizes our focus on sound balance sheets and steady cashflows. The company pays a dividend and is financially strong with $500 million net cash on the balance sheet. The business holds and licenses numerous IP patents related to consumer electronics, video and the Internet of Things.  

Shares of the company came under pressure along with the IT area in general; however, we believe investors aren’t fully appreciating InterDigital’s durable cash flow. Unlike many IT players, IDCC generates 90% of its revenues from fixed fee agreements that are not reliant upon customer sales volumes.

Additionally, we believe IDCC should see a surge in revenue tied to the continued rollout of 5G technology in cellular service, an area where the company holds a strong portfolio of patents.
Heartland Advisors Value Investing Consumer Discretionary Sector IconFor the long haul. While the immediate focus on Wall Street has been whether individual businesses can survive COVID-19, the tide will turn eventually, in our view, and companies that are well suited to thrive in the aftermath of the pandemic will then take center stage. In that context, we view Heartland Express, Inc. (HTLD), a best-in-breed truckload carrier, as a unique opportunity that has the balance sheet to endure the current slowdown and a competitive advantage to help it excel during an eventual rebound.

Due to the vital role trucking plays in delivering food and supplies, the industry has been able to mitigate some of the softness caused by the recent dramatic economic slowdown. The ability to continue to generate revenue during the current crisis should allow Heartland to maintain its strong balance sheet, without tapping into its net cash position. 

We believe when the economic recovery comes, Heartland, which has one of the youngest fleets of rigs in the industry, will be better positioned to gain market share while weaker competitors are forced either to make do with older, less reliable trucks or take on additional debt to replace them.

Despite Heartland’s position as an industry leader, enviable balance sheet and long-term growth prospects, the company’s shares trade at just 6x earnings before interest, taxes, depreciation and amortization.

Portfolio Activity 

The economic disruption caused by COVID-19 as well as the size and scope of the response by global governments is unprecedented. While stimulus packages out of Washington D.C. will provide life support for some of the weakest corporate players, we believe it won’t be enough to stave off the inevitable fate for poorly run companies with excess debt and undifferentiated business models.  

As such, we remain focused on businesses that are poised to be disrupters in their fields and that have strong cash flows and a history of prudent capital allocation. 

Outlook and Positioning

As stimulus funds begin to hit the domestic economy, we expect a sugar rush of spending that should boost gross domestic product for a quarter or two. However, the heightened regulatory oversight that will be attached to money earmarked for the commercial economy is likely to have a lasting impact on businesses forced to accept Federal dollars. 

As such, we believe investors who show a willingness to overlook idiosyncratic challenges do so at their own peril. 

Thank you for the opportunity to manage your capital.

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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 24 years of industry experience, 21 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


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Since Inception (%)20-Year (%)15-Year (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD* (%)QTD* (%)
Value Plus
Investor Class
Value Plus
Institutional Class
Russell 2000® Value7.786.834.114.79-2.42-9.51-29.64-35.66-35.66
*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.

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In the prospectus (pdf) dated 5/1/2020, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.19% and 0.98%, 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.

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As of 3/31/2020, Heartland Advisors on behalf of its clients held approximately 2.82% and 2.55% of the total shares outstanding of Heartland Express, Inc. and InterDigital, Inc., 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.

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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.

The Value Plus Fund seeks long-term capital appreciation and modest current income.