Heartland Value Plus Fund 2Q18 Portfolio Manager Commentary

Executive Summary

  • Security selection in a number of areas including Industrials and Consumer Discretionary boosted results and helped the Fund to outperform its benchmark, the Russell 2000® Value Index, returning 10.62% versus 8.30%.
  • Concerns about rising inflation and geopolitical challenges has led some investors to question whether the bull market is nearing its end.
  • The vitality of the business climate, in our view, is underappreciated.
  • We believe the market backdrop requires a greater understanding of individual companies.

Second Quarter Market Discussion

Faced with a barrage of tough trade rhetoric, a flattening yield curve and inflation heating up, as shown below, investors struggled to embrace the economic strength hiding in plain sight. The result was an uptick in volatility and swings in risk appetite as investors tried to anticipate whether the economy would continue to blossom or if it had already peaked.
Costs Climbing
Heartland Advisors Value Investing Producer Price Index versus Consumer Price Index Chart
Source: Bloomberg L.P., 6/30/2013 to 5/31/2018
Past performance does not guarantee future results.
Some of the early winners of the debate included cyclical areas and businesses poised to benefit from rising commodity pricing. Conversely, some slow-growth, high-yielding industries continued to face challenges as interest rates continued to climb. 

Attribution Analysis

Security selection in several areas including Industrials and Consumer Discretionary boosted results and helped the Strategy beat its benchmark, the Russell 2000® Value Index. The portfolio’s Energy names were up for the period but lagged on a relative basis. 
Consumer sentiment improved during the period on already high levels as the effect of tax cuts continued to show up in paychecks and unemployment reached a near two-decade low. The bullish sentiment helped propel Consumer Discretionary names higher. The portfolio’s holdings in the space were up sharply and the group contained a key contributor.
Heartland Advisors Value Investing Consumer Discretionary Sector IconClimbing boots. Wolverine World Wide, Inc. (WWW), a maker of premium casual footwear is an example of the kind of company we favor in the space. The manufacturer and marketer of Sperry, Merrell and Saucony shoes delivered a strong earnings report with top- and bottom-line growth. Management also upped its full-year guidance.
Wolverine’s strong brands, high margins, and cost-cutting initiatives make the company compelling, in our view. We’ve been impressed with company leadership’s prudent capital management as it funds organic growth, pays down debt and buys back shares.  
With just 1.1x net debt/earnings before taxes, interest, depreciation, and amortization (EBITDA), the company’s balance sheet provides flexibility as Wolverine reconfigures its business. Trading at 10.6x estimated 2018 EBITDA versus the 11x to 12x range for its low-growth peers, this shoe maker also offers the potential for mitigating risk should the retail industry languish.
Heartland Advisors Value Investing Information Technology Sector IconGreat acoustics. The Fund’s Information technology (IT) names were up sharply and the group outperformed on a relative basis. The sector contained a meaningful contributor, Knowles Corp. (KN). Knowles is a leading maker of microphones and speakers for cell phones and other electronics as well as hearing aids. Its shares rose after management reported better than expected earnings. 
We view the recent solid quarter as a sign of positive things to come. Knowles’ core business—microphones and speakers used in cell phones—has begun to stabilize after a period of volume pressure. Sales are being boosted by the fact that cell phone makers are using more speakers and microphones per phone, a trend we expect to continue. 
Additionally, the company’s high-margin intelligent audio offerings should generate sales growth as products such as Amazon’s Dot continue to gain traction in the market. 
Heartland Advisors Value Investing Industrials Sector IconCold wire. Widespread strength in the portfolio’s Industrials holdings helped the strategy beat its benchmark, but the group also contained a key detractor. Shares of Encore Wire Corporation (WIRE), a producer of copper and aluminum wire used in construction, were down as sales softened due to the impact of cold weather on the construction industry during the first quarter. 
However, the same earnings report that addressed cold-weather impacts also noted improved margins, which rose 10% during the period. We expect Encore to see increased sales in the near-term and to benefit from passing along higher copper prices to its end customers. Because much of Encore’s operating expenses are fixed costs, the effect of increased sales should be higher margins—and an exponential effect on bottom-line results.

Portfolio Activity  

Economic data continues to reflect a buoyant economy. A focus on hard data as opposed to the latest speculation about ongoing trade negotiations reveals a backdrop where corporate earnings are up, unemployment is at lows not seen in more than a decade, and manufacturing activity remains strong. The vitality of the business climate appears underappreciated. We acknowledge the pace of growth will ebb and flow, and so we are focused on owning businesses that: 
  1. Have strong or improving balance sheets
  2. Are well positioned to expand operating margins through self-help initiatives and idiosyncratic catalysts, and
  3. Are undervalued. 
We continue to believe businesses with opportunities to reduce costs and improve margins through internally focused efforts should be well-positioned to capitalize on operating leverage in an expanding economy or modestly grow earnings should sales plateau.

Outlook and Positioning

Heartland Advisors Value Investing Quote Image
Concerns about rising inflation and geopolitical challenges has led some investors to question whether the bull market is nearing its end. While we don’t call market tops or bottoms, we believe the current dynamic requires a greater understanding of individual companies and how the headwinds of the day may impact their fortunes. 
In our bottom-up process, we are focused on companies with low debt levels, trading at attractive valuations and with strong business prospects as opposed to the price/earnings of a broad index. As such, we have been finding compelling opportunities among those that could benefit from rising raw material prices. 
With economic activity accelerating, raw materials and businesses that produce commodities should move higher. Conversely, companies that lack pricing power or that rely on commodities in production of goods could face margin pressure in the quarters ahead.
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 9 years of industry experience, 6 at Heartland.

Fund Returns


Scroll over to view complete data

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® Value10.258.679.939.8811.1811.2213.105.448.30
*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

©2019 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 6/30/2018, Amazon.com, Encore Wire Corporation, Knowles Corp., and Wolverine World Wide, Inc. represented 0.00%, 2.94%, 2.10%, and 3.11% 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.

CFA® is a registered trademark owned by the CFA Institute.

The Heartland Funds are distributed by ALPS Distributors, Inc.

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.