Heartland Value Plus Fund 3Q19 Portfolio Manager Commentary

Executive Summary

  • The portfolio outperformed its benchmark during the period and continues to outpace its Russell 2000® Value benchmark year−to−date. 
  • Modest performance of the major indices during the period masked a tumultuous ride for investors.
  • Equity investors continued to favor low volatility and sought safe havens with predictable revenue.
  • While the economy has cooled, we continue to find compelling opportunities.

Third Quarter Market Discussion

The modest performance of the major indices during the period masked a tumultuous ride for investors. The unresolved trade war with China, geo−political tensions in the Middle East, and heightened acrimony in Washington, D.C. cast a shadow of uncertainty over the markets. 
With little clarity of how any of the major issues would be resolved, equity investors continued to favor low volatility over high volatility and sought safe havens with predictable revenue. The ongoing rush to perceived defensive and momentum names has created a crowded trade in those areas and drove significant swings in performance for the indices throughout the period.
Investors appeared to overlook debt loads when bidding up names on macro news; however, shares of leveraged companies paid a significant price when earnings or outlooks fell short of Street expectations.

Attribution Analysis

Security selection was strong in several areas, and the portfolio outperformed its benchmark, the Russell 2000® Value Index, for the period and remains ahead through the first three quarters of the year. Information Technology (IT) holdings were key drivers of performance during the period, while Financials names lagged on a relative basis. The portfolio’s Consumer Staples names were mostly flat, and we continue to find compelling value in the space.
Heartland Advisors Value Investing Industrials Sector IconOther worldly? Top−line growth prospects for many companies in the Consumer Staples are weak due to undifferentiated product offerings. We continue to believe it is better in the current environment 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, fits with this approach.
We added to the portfolio’s position in Hain when shares came under pressure after a Street analyst issued a negative outlook for the business based on concerns that Brexit could take a toll on the company’s sales and margins. We believed the report was inadequate and didn’t accurately reflect the strides management was taking to reduce debt and focus on higher margin offerings in the product lineup.
Our thesis was validated when Hain announced the divestiture of an underperforming rice brand sold in the UK market. Proceeds from the transaction are slated to pay down debt, and we expect Hain’s leverage will be cut in half once the deal is completed. 

With a reasonable debt load and improving margins, we view Hain as a compelling opportunity with meaningful upside remaining.
Heartland Advisors Value Investing Consumer Discretionary Sector IconWinning strategy? Strong stock selection in IT more than offset negative performance effects from an underweight to the group. We continue to evaluate businesses in the space and have been willing to add names when we believe idiosyncratic drivers of performance are underappreciated by the market. For example, we recently took a position in MicroStrategy Incorporated (MSTR), an independent developer of business intelligence software that can be used on multiple cloud platforms.

MicroStrategy recently released a new product suite that fits with management’s goal of transforming the business into a subscription−based company that generates higher revenues, operating income, and more stable earnings than in the past.

The rollout of the suite follows a year in which MicroStrategy made heavy investments in marketing and sales. With those costs now behind the company, we expect margins should inflect higher.

As one of the only remaining independent business intelligence software providers, the company in our view has a unique advantage in that it offers flexibility not provided by integrated competitors whose products are tied to a single cloud platform. Additionally, MicroStrategy has a portfolio of attractive domain names that it plans to sell in the quarters ahead.

Despite its unique niche in the market, shares of MicroStrategy trade at a 50% discount to our price target.

Portfolio Activity 

We continue to focus on individual companies and their ability to succeed in a variety of economic scenarios. However, we also recognize that any slowdown could have disproportionate effects on highly levered companies, as well as financial institutions that have significant exposure to commercial and industrial loans. As such, it has been challenging to find compelling risk-reward profiles in the Financials sector and we continue to scour balance sheets of our holdings and watchlist names.
In keeping with our focus on balance sheets and prudent use of capital, we continue to avoid companies that undertake large−scale transformative acquisitions. Instead, we prefer businesses that are involved in selling off noncore, underperforming business lines or those that have the balance sheet strength to opportunistically make small−scale, bolt−on purchases that further strengthen core competencies.

Outlook and Positioning

Recession fears have been weighing on investor sentiment for much of this year. While the economy has cooled, employment remains strong, the Federal Reserve is on an easing path and we view the gloomy consensus as premature.

Given this backdrop, we believe inflation may be a more serious threat for businesses with high production costs and limited pricing power.

An Overlooked Risk?

Citigroup Inflation Surprise Index − Global

Source: Bloomberg L.P., 9/30/2000 to 9/30/2019
Citigroup Inflation Surprise Indices measure price surprises relative to market expectations. A positive reading means inflation has been higher than expected and a negative reading means inflation has been lower than expected.
All indices are unmanaged. It is not possible to invest directly in an index.
Past performance does not guarantee future results.

Although the team’s economic outlook is more optimistic than the consensus narrative, we acknowledge that we are in the late stages of an expansion and that businesses will no longer be able to rely on a rising tide to lift all boats. Uncertainty related to many macro challenges is likely to elevate volatility in the near term.

While volatility can be challenging to navigate, it can also provide opportunity to find attractive bargains on businesses that are positioned to improve margins through internal efforts. This dynamic should benefit active investors who focus on fundamentals and identifying catalysts for positive change.

Thank you for the opportunity to manage your capital.


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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 24 years of industry experience, 21 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 11 years of industry experience, 8 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® Value9.449.057.2310.067.176.54-8.2412.82-0.57
*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 9/30/2019, Hain Celestial Group, Inc. and MicroStrategy Incorporated represented 2.92% and 1.79% of the Value Plus Fund’s net assets, respectively.

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Portfolio holdings are subject to change without notice. Current and future portfolio holdings are subject to risk.

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Because of ongoing market volatility, performance may be subject to substantial short-term changes.

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

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

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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.