A (Re)learning Opportunity

“Those who do not remember the past are condemned to repeat it.”
— George Santayana, Philosopher
Volatility ruled the day, as shown below, as investors struggled to quantify the impact of an unforeseen global health challenge. The rapid erosion of the markets was a stark contrast to the generally upbeat mood on Wall Street to start the year.
CBOE Volatility Index
Small-Cap to Large-Cap Historical P/E RatioSource: FactSet Research Systems Inc., 1/2/2004 to 3/31/2020
Chicago Board Options Exchange Market Volatility Index (CBOE VIX) is a mathematical measure of how much the market thinks the S&P 500 Index option will fluctuate over the next 12 months, based upon an analysis of the difference between current S&P 500 put and call option prices. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

While fallout from the coronavirus (COVID-19 ) drove most of the selling pressure, other factors made a bad situation worse. A carryover of investor euphoria from the strong showing in 2019 left valuations at the start of the year rich even by robust growth expectations. As the number of COVID-19 cases spiked and businesses and governments were forced to take more aggressive efforts to mitigate the spread of the illness, what had been considered reasonable economic projections were slashed, and the consensus became that a recession was underway.
The late March stimulus package—the largest in the nation’s history—provided some reassurance to a weary Wall Street. While the package offered needed relief, the story remains fluid both in terms of battling the COVID-19 virus and the ongoing fallout for the economy and investors.

Despite the temporary uncertainty, we are confident that efforts around the globe will stem the tide of the pandemic green shoots of normalcy will begin to emerge in the months ahead. The hard work of recovery will lead to some valuable questions and a study as to what worked, and what could have been done better.

As investors who have endured recessions and so-called black swan events in the past, we believe analysis after the crisis has calmed will highlight a familiar flaw for businesses and investors alike—the embrace of corporate debt in the constant pursuit of unrealistic growth projections. 

We believe companies that recklessly leverage their balance sheets often do so at the peril of shareholders. As such, all our Funds have lower debt levels on average compared to their benchmarks.

The toll from COVID-19 has been significant on both a personal and economic scale. Yet the current environment, while painful, has created a pool of opportunity well-stocked with high-quality companies trading at attractive valuations relative to their peers.
As we sort through the companies that hit our radar, we will not change our philosophy or process. Our team continues to focus on valuations, balance sheet strength, and catalysts that can result in a change in perception by investors. We believe this disciplined application of our process will be essential to navigating the quarters ahead. 


Your Heartland Team


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Black Swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.

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