Heartland Value Plus Fund 3Q22 Portfolio Manager Commentary

Executive Summary

The economic backdrop continues to deteriorate, with credit spreads widening, liquidity weakening, and the Federal Reserve raising rates aggressively.
Rather than seeking shelter in defensive areas of the market, we believe in identifying companies with defensive traits across all sectors.
A focus on quality is key to our process, as investors may soon begin focusing on balance sheet strength.

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.

Third Quarter Market Discussion

The backdrop we’ve been expecting — and fearing — started to take shape in the third quarter. The economy continued to slow, credit spreads widened, and liquidity began to weaken. The Federal Reserve also kept raising interest rates aggressively at a time of worrisome levels of sovereign, corporate, and consumer debt. The Federal Reserve may not think it has a choice but to keep lifting rates to tamp down inflation, even if it drives the economy straight into a painful recession.

Yet one thing we haven’t seen so far — but are anticipating — is the point at which balance sheet strength becomes a primary focus of investors again. That’s the type of environment where we should shine, with profitable, high-quality, low-volatility, low-leverage, free-cash-flow-generating companies being valued for their ability to weather any economic condition.

With the amount of monetary stimulus that has been poured into the economy in recent years, a good deal of aggregate demand has been pulled forward. And with the Federal Reserve’s foot off the accelerator and firmly on the brakes, we could be in store for a long period of slower-than-average growth. In that scenario, future returns may be challenging.

While this may seem like a frustrating situation for investors, it is precisely the type of environment where active value-minded managers can demonstrate their worth.

Downside Protection

Our focus is on high-quality companies with good management teams that we think will be winners on a longer-term basis, not just in the current environment. In other words, we are looking for secular winners, not just cyclical survivors.

Within this framework, the themes running through our portfolio include companies with compelling self-help strategies, the ability to raise their dividends over time, and the strength to self-finance organic growth. We are also looking for companies with durable competitive advantages throughout not just this cycle but beyond.

More than a year ago, we began looking for ways to reduce our portfolio’s supply chain risks stemming from exposure to China, which is still enforcing its “zero-Covid” policy that continues to include lockdowns and economic restrictions. And about nine months ago, we took a long, hard look at reducing our exposure to Europe. In our view, Europe is likely to be severely impaired on a long-term basis as a result of energy issues stemming from the Russia-Ukraine war. At the moment, we are trying to stay as U.S.-centric as possible.

Attribution Analysis

Make no mistake: We are not simply hiding in defensive areas of the market. We are, for example, overweight in economically sensitive Industrials and Materials relative to the Russell 2000 Value® Index. And our second-largest weighting, after Industrials, is in Financials, another classic cyclical part of the market.

Instead, we have focused on companies throughout our portfolio, across all sectors, that tend to have defensive characteristics and margins of safety. In the quarter, this posture contributed to underperforming the small-cap value benchmark, which witnessed a rebound in speculative securities in July and early August. But it also contributed to outperforming the Russell 2000 Value® Index year to date, during which time the broader market seems to have fallen into a bear market.

Heartland Advisors Value Investing Consumer Discretionary Sector Icon Industrials. An example of a high-quality company in an economically sensitive area is Douglas Dynamics (PLOW). Douglas, an Industrial company, manufactures commercial vehicle attachments such as snowplows, salt spreaders, and lawn-care equipment. If you live in the Northeast and see a snowplow, there’s a good chance that it is either a “Western” device made by Douglas, or a BOSS snowplow made by the Toro Company. Douglas and Toro are leaders in what is effectively an oligopoly.

PLOW is a vivid example of a good business with low leverage and the potential to buy back its stock and grow its dividend. In fact, the company has consistently raised its payout every year for more than a decade.

But the stock has been weighed down because roughly two-thirds of its revenues are tied to snow- and ice-removal equipment, and there has been lower-than-average snowfall over the past several years. The stock is currently priced as if a traditional winter will never occur again. If we see a winter with simply average snowfall, it could be a catalyst for the stock. Meanwhile, the stock is currently yielding more than 4%, so investors are being paid for their patience.

Outlook and Positioning

Against this economic backdrop, one of our primary responsibilities is to protect investors from the downside. We feel we are well-positioned in companies that can help us fulfill this goal, such as Douglas.

The markets are likely entering a period of negative earnings revisions, as we began to see in mid- to late-September. While our portfolio won’t be immune to those effects, we think our companies will be less affected than the broader market. Meanwhile, our companies seem to be positioned to weather an economic slowdown.

We believe our current portfolio construction and a disciplined application of our Ten Principles of Value Investing™, will serve our clients well and help us navigate the quarters ahead.

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Portfolio Management Team

Bradford A. Evans

Senior Vice President and Portfolio Manager

Heartland Advisors Value Investing Portfolio Manager Andrew Fleming

Andrew J. Fleming

Director of Research, Vice President, and Portfolio Manager

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Fund Returns

9/30/2022

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	Since Inception (%)	20-Year (%)	15-Year (%)	10-Year (%)	5-Year (%)	3-Year (%)	1-Year (%)	YTD* (%)	QTD* (%)

*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 9/30/2022, Douglas Dynamics Inc. represented 1.83% of the Value Plus Fund’s net assets.

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.

The above individuals are registered representatives of ALPS Distributors, Inc.

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.

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.

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.

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

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indices. Russell® is a trademark of the Frank Russell Investment Group.

Bear Market occurs when the price of a group of securities is falling or is expected to fall. Cyclical Stocks cover Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Technology, and Transportation which tend to react to a variety of market conditions that can send them up or down and often relate to business cycles. Defensive Stocks include Health Care, Utilities, and Consumer Staples. These companies usually don’t suffer as much in a market downturn as they relate to basic needs. Dividend Yield is a ratio that shows how much a company pays out in dividends each year relative to its share price. 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. Liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset's price. It is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. Margin of Safety is a principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. 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. Volatility is a statistical measure of the dispersion of returns for a given security or market index which can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. 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.

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