Heartland Advisors

Heartland Small Cap Value Plus Strategy 3Q23 Portfolio Manager Commentary

Executive Summary

  • The wide-spread hope of a “soft landing” for the economy is being questioned by the weakening health of the consumer and other signs of a recession ahead. 
  • While Value outperformed Growth in the third quarter, high beta value stocks got most of the attention thanks to the soft-landing narrative.
  • Rather than fixating on the economy, this is time to remain disciplined, patient and focused on things that are controllable.  

Third Quarter Market Discussion

In the late stages of a bull market, there’s normally no shortage of things to worry about. It certainly feels that way today.

For instance, the yield curve isn’t merely inverted, which is historically a sign of a looming recession. The inversion between 10-Year Treasuries and 3-Month T-Bills is the longest and most severe on record. Late in the third quarter, the Russell 2000® Small-Cap Index also dipped below its 200-day moving average, pointing to a potential downtrend ahead. Meanwhile, consumer spending, the engine that drives the economy, is starting to stall. Credit card and auto loan delinquencies are climbing, as households appear to be strapped for cash. Not only has the personal savings rate plunged, but the percentage of household spending also directed at essential items, such as food, is now rising after an extended decline, another traditional red flag.  

Yet, the market seems to be ignoring all of this. Investors have placed their faith in a narrative that says the Federal Reserve is about to do something it has only accomplished once in more than a century: Stick a “soft landing.” It’s a frustrating and familiar disconnect.

Growth led the markets in the first half of the year owing to the euphoria surrounding artificial intelligence-related stocks and the hope that the Federal Reserve might soon start cutting rates. Value managed to outperform in the third quarter, but even within Value, high beta has been working while defensive strategies and low volatility generally have not. 

Our portfolio is priced for a recession by focusing on undervalued, high-quality names. The vast majority of our holdings pay a dividend and have compelling self-help strategies, with little debt and strong balance sheets. Until the market gives up the ghost of a soft landing, we’re committed to being patient.

Attribution Analysis & Portfolio Activity

The Value Plus Strategy was down approximately 5% in the third quarter, trailing the Russell 2000® Small-Cap Value Index, which returned -2.96%.

While stock selection has been responsible for the lion’s share of our performance over the past five years, this wasn’t the case in the third quarter, when selection effect detracted in most sectors. Our Industrials holdings were a bright spot this quarter, up 4.7%, versus -3.9% for the benchmark.

We’ve  seen a fair amount of insider buying in our holdings, an encouraging sign that gives us confidence to hold tight. One such company is Carter’s Inc. (CRI), which sells apparel for babies and children under the Carter’s and OshKosh B’gosh brands. So far in 2023, CRI has returned $96.6 million to shareholders in the form of share repurchases and cash dividends. That brings the repurchase and dividend totals to roughly $3 billion over the past 15 years.

Like all retailers, Carter’s has been undertaking inventory reduction in the aftermath of the pandemic. CRI, however, was 6 to 12 months ahead of other retailers in managing its inventories, a focal point of Carter’s self-help strategy. Since there is limited fashion risk in baby and infant apparel, the company recently packed a portion of its inventory in storage to be brought back later, thereby avoiding the need for steep discounts to work down backlogs. Management has also done a good job de-risking its supply chain in China and globally. For example, Carter’s was early to recognize that low water levels in the Panama Canal threatened delays through that waterway and moved to reduce the amount of its merchandise going through that route.

Meanwhile, CRI has an enviable balance sheet, very little debt, and very strong free cash flow. Yet, the stock trades at less than 12X earnings and less than 7X enterprise value to EBITDA.


The third quarter demonstrated how challenging it can be to invest in a market driven by a narrative that does not add up. But the short-term thinking of other investors is not our concern. Our job is to keep our heads down and make sure we are positioned appropriately for the long term, by focusing on well-managed companies trading at attractive prices to their intrinsic value.

In this challenging environment, we are doing just that. Our disciplined approach allows us to become well acquainted with the stocks we own through deep research and regular engagement with the management teams of these companies. As our holdings are generally underfollowed by sell-side analysts, we are constantly checking to make sure they maintain the same level of discipline we demand of ourselves. Our intent is to avoid being reactive. But while we can’t dictate the nature of the economy or the attitudes of other investors, the one thing we can control is our understanding of—and confidence in—the strategies of the businesses we own.

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Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Andrew Fleming

Andrew J. Fleming

Director of Research, Vice President, and Portfolio Manager

Composite Returns*

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Source: FactSet Research Systems Inc., Russell Investment Group, and Heartland Advisors, Inc.
*Yearly and quarterly returns are not annualized. The Strategy's inception date is 11/30/2007. 
**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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Past performance does not guarantee future results.

The Small Cap Value Plus Strategy primarily invests in companies that have a market capitalization consistent with the capitalization range of the Russell 2000 Value Index, with a majority of its assets invested in companies that pay dividends. The Strategy intends to capture the long-term appreciation of small-caps, while minimizing the volatility of returns inherent in the small-cap market.

The Small Cap Value Plus Strategy invests in small companies selected on a value basis. Such securities generally are more volatile and less liquid than those of larger companies.

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 the Institutional Sales Team at Heartland Advisors, Inc. at the address listed below.

As of 9/30/2023, Carter’s Inc. (CRI) represented 4.70% of the Small Cap Value Plus Composite’s net assets.

The future performance of any specific investment or strategy (including the investments discussed above) should not be assumed to be profitable or equal to past results. The performance of the holdings discussed above may have been the result of unique market circumstances that are no longer relevant. The holdings identified above do not represent all of the securities purchased, sold or recommended for the Advisor’s clients.

Statements regarding securities are not recommendations to buy or sell. 

Portfolio holdings are subject to change. Current and future holdings are subject to risk.

In certain cases, dividends and earnings are reinvested.

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.

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 2024 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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

Artificial intelligence (AI) is intelligence—perceiving, synthesizing, and inferring information—demonstrated by computers, as opposed to intelligence displayed by humans or by other animals. Beta is a measure of the sensitivity of a portfolio's rates of return against those of the market. A beta less than 1 indicates volatility less than that of the market. Bull Market occurs when the price of a group of securities is rising or is expected to rise. Dividend Payout Ratio is the percentage of dividend earnings paid to shareholders. It is calculated by dividing yearly dividend per share by earnings per share. 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. 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).  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.  Insider Buying is the purchase of a company's stock by individual directors, executives or other employees. 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 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 Russell Investment Group. 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. Selection Effect of the Attribution Analysis is the portion of the portfolio excess return attributable to choosing different securities within groups from the benchmark. Sell-Side Analyst is an individual who typically works for a brokerage firm and evaluates companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). Treasury Bond is a marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. 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. Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. In a positive-sloping yield curve, short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. A negative, or inverted, yield curve occurs when short-term debt instruments have a higher yield than long-term debt instruments of the same credit quality.