Heartland Value Plus Fund 4Q21 Portfolio Manager Commentary

Executive Summary

  • Despite an ongoing migration into large-cap companies, shares of attractively valued smaller businesses still posted solid returns for the period. 
  • A clouded economic outlook caused investors to turn away from unprofitable or low-margin economically sensitive companies. 
  • The migration into large-cap companies that started midyear continued during the quarter.  
  • Our focus on quality businesses and robust balance sheets has resulted in a portfolio that is more defensive.

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.

Fourth Quarter Market Discussion

Equities continued to move higher during the period with major indices ending the year at or near all-time highs. Beneath the bullish headline gains, however, individual stock performance suggested investor optimism was beginning to fade. The rapid spread of the Omicron COVID-19 variant, sticky inflation, and a growing concern that the Federal Reserve could start to tighten monetary policy in hopes of cooling red hot inflation numbers prompted investors to be more selective in the types of companies they bought.

With the outlook for future growth clouded, investors turned away from unprofitable or low-margin economically sensitive companies as well as those with significant debt. A push for lower volatility also led to a strong showing for large caps. The upshot was a resurgence for defensive areas of the market through most of December, as illustrated below.

Going on Defense?  

Heartland Advisors Value Investing Total Market Cap to GDP Chart

Source: Bloomberg L.P., Standard & Poor’s, daily data from 12/31/2020 to 12/31/2021. The chart represents the performance of defensive stocks in the S&P 500 Index versus the performance of cyclical stocks. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

Attribution Analysis

The migration into large-cap companies that started midyear continued during the quarter but shares of smaller businesses still posted solid returns for the period. Stock selection for the portfolio was mixed, and the strategy was up on an absolute basis but modestly lagged its benchmark, the Russell 2000® Value Index. Holdings in Information Technology (IT) and Materials were up on both an absolute and relative but couldn’t overcome weakness in Financials. Holdings in Health Care were down but outperformed the benchmark average for the group.

Heartland Advisors Value Investing Financial Sector IconRe-engineered. While investors fixated on inflation and supply chain disruptions throughout the economy, our team remained focused on those companies that were executing at a high level or were positioning themselves to grow margins through internally focused efforts. TriMas Corp. (TRS) is an example of this approach.

TriMas, a manufacturer and distributor of engineered packaging, aerospace, and industrial products, has been focused on improving margins by adjusting its business mix through a combination of strategic acquisitions and divestitures. The efforts have resulted in growth in its packaging and aerospace units and deemphasis on its lower-margin lines.

TriMas has enjoyed strong sales growth during the COVID-19 pandemic, but profit margins have been stunted due to supply chain disruptions and rising input costs. With prices for resin, a key ingredient in the company’s products, beginning to ease, we expect margins and earnings to rise going forward.

Heartland Advisors Value Investing Health Care IconFinancial fallout. The once red-hot Financials sector finished the year on a quiet note as the outlook for future economic growth is clouded and the expiration of stimulus payments to consumers could result in an uptick in loan defaults. For much of the past year, we’ve found value in the sector outside of the traditional banking industry. The approach has boosted performance for much of 2021; however, a stock-specific issue in one of the portfolio’s holdings in the Consumer Finance industry caused the Strategy to lag for the period.

This company operates pawn stores in the U.S. and Latin America. We’ve highlighted the business in previous quarters citing its high margins and our view that it was uniquely positioned to thrive should the financial resiliency of consumers soften. Shares of the company were down sharply after management announced it was acquiring a lease-to-own and retail finance company.

The move caught Wall Street by surprise, and shares sold off. Company leadership has previously been silent on plans to expand into other business lines. We viewed the move as a misstep that could bring greater operational risk and regulatory scrutiny to what has been a successful pawn store franchise. As a result, we liquidated the portfolio’s position in the company.

Heartland Advisors Value Investing Consumer Discretionary Sector IconGood to hear. The Fund’s Information Technology (IT) holdings posted a strong quarter and outperformed the benchmark average. Knowles Corp. (KN) is an example of the type of compelling opportunity we hold in the space. The company is a leading maker of microphones and speakers for cell phones and other electronics as well as hearing aids. Earnings have recently come in higher than expected, and management upped their guidance led by growth in the company’s high-margin precision device segment. Additionally, the company announced it was redeeming convertible debt using cash it had on its balance sheet—clearing up an issue that had hung over the stock.

We view the recent strong quarter as a sign of positive things to come for Knowles. Despite the strong performance, shares of the business trade at just 8x estimated 2022 earnings before interest, taxes, depreciation and amortization.

Portfolio Activity

Valuations in many areas of the market strike us as extreme. Most jarring are the price multiples commanded by weak businesses with weak balance sheets operating in stagnant industries. Many of these businesses exist wholly thanks to a favorable capital raising environment driven by easy credit and low interest rates. We seek to avoid these types of companies in the belief that their bloated valuations fail to compensate investors for the outsized risk of permanent impairment of capital.

As fundamental investors, we continue to focus on individual companies and their ability to improve margins and earnings in a variety of economic scenarios. Our focus on quality businesses and robust balance sheets has resulted in a portfolio that is more defensive than it has been in favor for portions of 2021. However, we view this approach as prudent given that the increasingly challenging macro environment should impact some businesses more dramatically than others. For example, persistent inflationary pressures or higher interest rates could be particularly damaging to highly levered companies.

Outlook and Positioning

Growing economic headwinds ranging from another wave of COVID infections to surging inflation and tightening monetary policy by the Federal Reserve are becoming too hard for investors to ignore. 

As the reality of a post-stimulus economy begins to sink in, investors should begin to reconsider previous expectations. We believe marginal businesses’ ability to ride along on the back of a resurging economy is coming to an end. The prudent path forward, in our view, is to focus on mitigating potential downside risk and seeking out businesses with idiosyncratic opportunities to bolster cash flow generation. We believe this approach will produce a portfolio of companies that should endure and thrive over the long term.

Thank you for the opportunity to manage your capital.

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Portfolio Management Team

Bradford A. Evans

Senior Vice President and Portfolio Manager

Andrew J. Fleming

Vice President and Portfolio Manager

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® Value10.119.187.1912.039.0717.9928.2728.274.36
*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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©2022 Heartland Advisors | 790 N. Water Street, Suite 1200, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

In the prospectus dated 5/1/2022, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.15% and 0.92%, 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 12/31/2021, Knowles Corp. and TriMas Corp. represented 2.81% and 1.97% 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 portfolio 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.

Data sourced from FactSet: Copyright 2022 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

Absolute Value is a business valuation method that uses discounted cash flow analysis to determine a company's financial worth. Absolute value models try to determine a company's intrinsic worth based on its projected cash flows. Bull Market occurs when the price of a group of securities is rising or is expected to rise. 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. 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. Inflation Risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. S&P 500 Index is an index of 500 U.S. stocks chosen for market size, liquidity and industry group representation and is a widely used U.S. equity benchmark. All indices are unmanaged. It is not possible to invest directly in an index. Relative Value is a method of determining an asset's value that takes into account the value of similar assets. Calculations that are used to measure the relative value of stocks include the enterprise ratio and price-to-earnings ratio. 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.

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