Heartland Opportunistic Value Equity Strategy 1Q21 Portfolio Manager Commentary

Executive Summary

  • Strong security selection propelled the Strategy to outpace its Russell 3000® Value Index benchmark for the period.
  • A focus on nearer-term corporate performance benefited smaller companies and those trading at attractive multiples.
  • We are beginning to see a welcomed return of investors rewarding or punishing businesses based on underlying fundamentals. 

First Quarter Market Discussion

The rollout of multiple COVID-19 vaccinations along with a fresh bout of stimulus spending from Washington fueled a surge in confidence among investors and corporate leaders alike. The growing consensus that a return to normal was on the horizon continued a trend that began to emerge late in 2020 and led investors to cast a broader net for opportunities beyond the high-flying tech stocks of the past year.

As shown below, during the first quarter, the equal-weighting of the companies in the S&P 500 Index continued to outperform the actual market-cap weighted S&P 500—in which more than 20% of the index weighting is concentrated in just five companies. This broad outperformance means it’s no longer only a few companies driving results of the closely watched index.

Improving Breadth
Total Return of S&P 500 Equal Weight Index vs. Market Cap Weighted S&P 500 Index
Heartland Advisors Value Investing Equal Weighted vs. Market Cap Weighted Chart
Source: FactSet Research Systems Inc., Monthly data 3/29/1991 to 3/31/2021
The data in the chart represents the S&P 500 Equal Weighted Index less the total return relative to the S&P 500 Index. All indices are unmanaged. It is not possible to invest directly in an index. 
Past performance does not guarantee future results.

The pull back in traditional “growth” and highly speculative stocks came partly in response to higher yields on the benchmark 10-year U.S. Treasury bond, which rose to levels not seen since the pre-pandemic days of early 2020. Behind the surging yields was investor optimism about deficit-fueled economic growth—but also concern about inflation. While yields remain low by historical standards, the sudden uptick was a headwind for shares of large technology companies, in particular, as the change led investors to favor near-term cash flows over upbeat forecasts for sales growth far into the future. 

This focus on nearer-term corporate performance benefited smaller companies and those trading at attractive multiples of underlying cash flow. The new tone was a boon for the Opportunistic Value Strategy since our risk/reward analysis and prudent focus on buying businesses below intrinsic value had already led us to increase the proportion of smaller businesses in the portfolio. 

Attribution Analysis

Strong security selection was widespread with holdings in Information Technology (IT), Health Care and Utilities contributing on the upside, and the Strategy outpaced its Russell 3000® Value Index benchmark for the period. The portfolio’s holding in Energy were up sharply, but an underweight to the space detracted on a relative basis.

Heartland Advisors Value Investing Financials IconFinancially fit. Financials in the broad market were up as banks benefited from a rise in yields. The portfolio’s holdings in the sector kept pace on a relative basis with much of the strength driven by businesses beyond traditional banks including Charles Schwab Corp. (SCHW), a top contributor from the capital markets industry. 

Shares of Schwab have shot higher over the past six months as the company closed on its acquisition of former rival T.D. Ameritrade and has begun showing progress on boosting profitability through greater efficiency gained from the merger. Rising yields have widened the gap between the rate received on low-risk bonds owned by Schwab and the interest it pays on customer deposits. As a result, investors bid up shares in anticipation of strong earnings growth going forward.

We’ve trimmed our stake in Schwab as the discount to intrinsic value narrowed; however, we continue to maintain a position in the company based on our view that over the intermediate term, earnings power will climb as a result of growth in the firm’s retail brokerage and registered investment advisor platform businesses as well as further efficiencies achieved from its acquisition of T.D. Ameritrade. 

Heartland Advisors Value Investing Energy IconA full tank. The Energy sector continued to move higher in response to the ongoing economic resurgence. We’ve been selective in the space, looking for differentiated businesses where results aren’t solely driven by the price of oil. Holly Frontier Corp. (HFC), a top contributor that we featured last period is one such example.

The small independent petroleum refiner has reaped the benefits of expectations of greater demand for petroleum products. The optimism has resulted in a 50-plus percent rise in the price of oil, gas and associated products. The return to normal should continue to boost sales for Holly Frontier, which has begun diversifying its business into renewable diesel fuels. 

With shares priced below book value, we believe Holly Frontier’s stock price continues to offer upside opportunity as the economy returns to trend growth. Additionally, the company’s relatively strong balance sheet should allow it to weather potential delays in the reopening of the economy.

Heartland Advisors Value Investing Utilities IconUtility player. The uptick in investor optimism caused some defensive areas of the market, such as Utilities, to fall out of favor. Our holdings in the sector were up during the period and outperformed the benchmark on a relative basis, and we continue to find opportunities in the sector such as Exelon Corp. (EXC), a modest contributor during the period. 

The company is a large multi-state utility with regulated as well as unregulated operations. Following a strategic review, Exelon recently announced a plan to separate the two businesses. The decision, in our view, sets the stage for a re-rating of the company. 

Based on our analysis, investors appear to be undervaluing Exelon’s two business lines under the current operating structure. We believe the regulated line has desirable transmission/distribution assets and strong opportunities for rate base growth. Meanwhile, the unregulated merchant power segment trades at less than 5x enterprise value/earnings before interest, taxes, depreciation and amortization, which represents a steep discount to the average multiple for publicly traded power companies.

In our view, Exelon remains a compelling opportunity relative to fully regulated utilities. 

Portfolio Activity

The strong showing for the broad market has stretched valuations for many stocks including those most directly tied to the reopening of the economy. As we scour the investing landscape, we remain focused on valuations and identifying what we believe are good businesses selling materially below their intrinsic value. Our consistent process has allowed us to make upgrades to the portfolio and has led us to some less economically sensitive businesses that we believe offer attractive long-term value. For example, we recently added Northwestern Corporation (NWE), a regulated natural gas and electric utility serving customers in Montana, South Dakota and Nebraska.
Northwestern is unique to the portfolio because it is a fully regulated utility, unlike the Strategy’s other investments in the space that typically included unregulated business lines. The regulated structure of the company offers the benefit of potentially lower earnings volatility while offering access to the fast-growing Montana market. 
The company has outlined a plan to increase generating capacity, which should help meet the growing power demands of the footprint it serves and translate into increased cashflows. 

Outlook and Positioning

While equities have sprinted higher to start the year, we are beginning to see a welcomed return of investors rewarding or punishing businesses based on underlying fundamentals. The rotation seems to have boosted attractively valued businesses and those positioned to benefit the most in the early stages of an economic return to normalcy.
In response to recent strength, we’ve harvested gains and redeployed capital into areas that offer what we view as a more attractive risk/reward profile. Balance sheet strength and catalysts that can result in a change in perception by investors remain a priority. We also believe businesses with pricing power will have an advantage should inflation show signs of taking root.
Thank you for your continued trust and confidence.
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Portfolio Management Team

Colin McWey

McWey, CFA, is Vice President and Portfolio Manager for the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund and it’s corresponding Mid Cap Value Strategy. He has 19 years of industry experience, 12 at Heartland.

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund, the Value Fund, and their corresponding Mid Cap Value and Small Cap Value Strategies. He also is President and Director of Heartland Funds. He has 21 years of industry experience, 17 at Heartland.

Troy McGlone

McGlone, CFA, is Vice President and Portfolio Manager for the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund and it’s corresponding Mid Cap Value Strategy. He has 13 years of industry experience, 7 at Heartland.

Composite Returns*


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Since Inception (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD (%)QTD (%)
Opportunistic Value Equity Composite (Net of Advisory Fees)**10.058.4011.559.0656.1913.3913.39
Opportunistic Value Equity Composite (Net of Bundled Fees)7.956.319.427.0053.5512.9212.92
Russell 3000® Value7.6410.9111.8710.9958.3811.8911.89

Source: FactSet Research Systems Inc., Russell Investment Group, and Heartland Advisors, Inc.
*Performance data is preliminary. Yearly and quarterly returns are not annualized. The Strategy's inception date is 9/30/1999. 
**Shown as supplemental information. 

The US Dollar is the currency used to express performance. Returns are presented net of advisory fees and net of bundled fees and include the reinvestment of all income. The returns net of bundled fees were calculated by subtracting the highest applicable sponsor portion of the separately managed wrap account fee from the net of advisor fees return.

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†Composite return is net of advisory fees.

Past performance does not guarantee future results.

The Opportunistic Value Equity Strategy seeks to capture long-term capital appreciation by investing in companies with market capitalizations greater than $500 million. The Strategy’s flexible pursuit of value positions it as a core holding for investors.

In addition to stocks of large companies, the Opportunistic Value Equity Strategy invests in stocks of small- and mid-cap companies that are generally less liquid than large companies. The performance of these holdings generally will increase the volatility of the strategy’s returns.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

Heartland Advisors, Inc. (the “Firm”) claims compliance with the Global Investment Performance Standards (GIPS®). The Firm is a wholly owned subsidiary of Heartland Holdings, Inc. and is registered with the Securities and Exchange Commission. For a complete list and description of Heartland Advisors composites and/or a presentation that adheres to the GIPS® standards, contact Institutional Sales at Heartland Advisors, Inc. at the address listed below.

GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

As of 3/31/2021, Charles Schwab Corp., Exelon Corp., Holly Frontier Corp., and Northwestern Corporation, represented 0.96%, 2.54%, 2.12%, and 1.03% of the Opportunistic Value Equity Composite, 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.

Separately managed accounts and related investment advisory services are provided by Heartland Advisors, Inc., a federally registered investment advisor. ALPS Distributors, Inc., is not affiliated with Heartland Advisors, 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 2021 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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

Book Value is the sum of all of a company’s assets, minus its liabilities. 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. Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) Ratio is a financial indicator used to determine the value of a company and is calculated by dividing the entire economic value of the company (enterprise value) by its earnings before interest, taxes, depreciation, and amortization (EBITDA). Intrinsic Value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Russell 3000® Value Index measures the performance of those Russell 3000® Index companies with lower price/book ratios and lower forecasted growth characteristics. 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. S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. Yield is the income return on an investment.