Heartland Advisors

Heartland Value Plus Fund 1Q23 Portfolio Manager Commentary

Executive Summary

  • To the growing list of economic challenges that included rising rates and inflation, you can now throw in a banking crisis, which emerged in the first quarter. 
  • On a positive note, troubles in the banking sector have refocused the markets attention on balance sheet strength, which bodes well for long-term investors.
  • In a world where there don’t seem to be any economic catalysts to rely on, we believe it makes sense to focus on companies with compelling self-help strategies. 

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.

First Quarter Market Discussion

For months, as the Federal Reserve has been raising rates in an effort to slow inflation, we’ve been waiting for something to break. That’s because we have learned that whenever the Federal Reserve pushes short-term rates above 2-Year Treasury yields—as is the case today—something bad generally happens in the economy.

Well, in the first quarter, that turned out to be the banking crisis. After the sudden collapse of Silicon Valley Bank, Signature Bank, and Silvergate Capital in March, along with worrisome headlines swirling around Credit Suisse and First Republic, investors were left scrambling to figure out which institutions needed to raise capital quickly to shore up their balance sheets.

As disciplined value investors, we view this as a positive development. Heading into the quarter, there had been indications that fundamental factors such as valuations and earnings were finally being taken seriously again. However, investors hadn’t completely bought in, as they continued to overlook balance sheets in general and leverage specifically. That’s likely to change now, thanks to troubles in the banking sector which in turn have driven up credit spreads. 

To be sure, in past crises, the Federal Reserve has raced to the market’s rescue by printing money, which in turn has resuscitated speculation. Complicating matters for the Federal Reserve this time, however, is that inflation remains a front-burner concern, as is the growing federal budget deficit, sovereign debt, and corporate and consumer leverage.

In this environment, balance sheet strength is paramount, especially in the small-cap space as the screws are tightening from a funding perspective. Credit stress typically shows up as the Federal Reserve raises rates, as can be seen by the performance of leveraged loans relative to the Federal Funds rate in the chart below.   

Heartland Advisors Value Investing Trailing Earnings vs Forward Earnings

Source: Bloomberg L.P., Standard & Poor’s, monthly data from 1/31/2010 to 3/31/2023. The chart represents Federal Funds Rate Index compared to Leveraged Loan Pricing. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

At the start of the year, it was challenging enough for smaller companies to raise capital in the fixed income and equity markets. Now the banking market is starting to close. This shines a spotlight on financially sound, well-run businesses with sound strategies, which are traits embedded in our 10 Principles of Value Investing™.

Indeed, in this environment, the types of companies we have always focused on — well-managed companies with little or no leverage, strong balance sheets and consistent free cash flow generation to self-finance their organic growth and raise their dividends over time  — stand to benefit going forward.

Attribution Analysis & Portfolio Activity

While we believe the market is moving in our direction, we haven’t seen a big benefit from it just yet. In the quarter, the portfolio outperformed the Russell 2000® Value Index, thanks to relative outperformance in Industrials and Health Care.

In general, we are very comfortable with how the portfolio has been positioned, but we did make some tweaks around the edges later in the quarter to take advantage of what the market was giving. We were particularly focused on opportunities in companies that have compelling self-help strategies. This is because at a time when there aren’t many economic or market catalysts you can rely on, self-help advantages stand out.

A good example is Avanos Medical (AVNS), a medical device company focused on products related to pain management, chronic care, and digestive and respiratory health. 

This is a story of addition by subtraction. Avanos, which we added to in the quarter, announced plans to wind down around $35 million of its slowest-growing and least profitable parts of the business and take a restructuring charge. This portfolio optimization could amount to roughly $55 million in gross cost savings. The company’s self-help moves are also likely to boost its EBITDA margin to 22%, up from 16-17% in 2022. 

Meanwhile, AVNS has a very strong balance sheet, sporting a Net Debt/EBITDA ratio of less than 1. And the stock is quite cheap, trading at approximately 9 times EV/EBITDA based on ’24 estimates.


The first quarter proved to be a Tale of Two Markets. Up until the start of March, investors were caught up in a speculative junk rally that all but ignored quality stocks and dividend payers. Then with the banking crisis, the script was flipped very quickly, and financially healthy businesses with strong balance sheets and are back in vogue.

At Heartland, we think those traits, which are found in our 10 Principles of Value Investing™, are always in fashion. Make no mistake: Our portfolio won’t be immune to the effects of a banking crisis and other economic headwinds. But we believe our companies will be less affected than the broader market on the downside. 

As Warren Buffett famously said: “Only when the tide goes out do you discover who’s been swimming naked." We intend to be the ones with swimming suits on ready to uncover real bargains. 

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Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Andrew Fleming

Andrew J. Fleming

Director of Research, Vice President, and Portfolio Manager

Fund Returns

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*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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In the prospectus dated 5/1/2023, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.22% and 1.01%, 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 3/31/2023, Avanos Medical, Inc. (AVNS) represented 3.10% 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 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.

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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. 

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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.

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Data sourced from FactSet: Copyright 2024 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

Book Value is the sum of all of a company’s assets, minus its liabilities. Corporate Credit Spread is the difference in yield between two bonds of similar maturity but different credit quality. Widening credit spreads indicate growing concern about the ability of corporate (and other private) borrowers to service their debt. Narrowing credit spreads indicate improving private creditworthiness. Dividend Yield is a ratio that shows how much a company pays out in dividends each year relative to its share price.  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. Federal Funds Rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. Free Cash Flow is the amount of cash a company has after expenses, debt service, capital expenditures, and dividends. The higher the free cash flow, the stronger the company’s balance sheet. Inflation Risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. 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. Net Debt/EBITDA Ratio is calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA, and is a leverage measurement that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative. 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. Treasury Yield is the effective rate of interest paid on a debt obligation issued by the U.S. Treasury for a specified term. 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.

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