Heartland Advisors

Heartland Value Plus Fund 2Q23 Portfolio Manager Commentary

Executive Summary

  • Our style of investing fell out of favor in the quarter, as investors’ appetite for risk-taking came back in a big way.
  • While the markets appear convinced the Federal Reserve has threaded the needle by engineering a ‘soft landing,’ we think there is a far greater likelihood of some form of stagflation weighing on the economy. 
  • With more credit stress on the way, balance sheet strength and compelling self-help strategies are as important as ever. 

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.

​Second Quarter Market Discussion

Put simply, this was a frustrating quarter, as our style of value investing fell out of favor. On paper, we looked as daft in recent months as we seemed smart last year. Investors turned their backs on the types of companies we embrace — well-managed businesses with strong balance sheets and consistent free cash flow to self-finance their growth and raise dividends over time.

As recently as March, investors coveted such businesses when the banking crisis left investors scrambling for financially strong companies earlier in the year. Yet investors’ appetite for risk taking returned in a big way over the past three months, thanks to a new narrative taking hold. According to this new line of thinking, the Federal Reserve may not only be done tightening, they may actually be close to cutting rates shortly. It isn’t surprising, then, that speculative, low-quality stocks outperformed in recent weeks, since those types of equities led in the previous easing cycles. 

Underlying this narrative is the hope that the Federal Reserve has threaded the proverbial needle and is about to engineer a quick takeoff for the economy after achieving a ‘soft landing.’ Never mind the fact that if this is true, the yield curve would likely begin to ‘uninvert’, and stocks have struggled historically in those moments.

Russell 2000 Value Index vs. The 2-10 Year US Treasury Yield Curve

Source: Bloomberg, daily data from 1/3/2000 to 6/28/2023. This chart represents the Russell 2000® versus the 2 to 10 Year US Treasury Yield Curve and how the market generally falls significantly as the 2 to 10 Year Curve ‘uninverts.’ All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

Right now, the markets are embracing this narrative hook, line, and sinker. While we don’t view this as an impossibility, the chances of this occurring seem slim. By contrast, we think there is a high likelihood of some form of stagflation weighing on the economy going forward, and we continue to position our Fund for that scenario.

We believe it’s risky to bank on a rising tide keeping ships afloat. Balance sheet strength and the ability to self-finance organic growth remain important attributes, especially in the small-cap space as banks are tightening their lending standards in this challenging economy. As we’ve noted before, credit stress typically shows up as the Federal Reserve raises rates, and we’re already seeing that with an uptick in leveraged loan pricing and defaults.  

No matter what narrative the market is buying at the moment, economic realities continue to shine a spotlight on financially sound, well-run businesses with sound strategies, which are traits rooted in our 10 Principles of Value Investing™.

Attribution Analysis & Portfolio Activity

The second quarter was a challenging period for value investors in general. With the yield curve as inverted as it is — 2-year Treasuries are yielding 4.87% versus 3.81% for 10-year notes — the bond market is bracing for a recession. Historically, when earnings growth is hard to come by, investors tend to gravitate to the few parts of the market that are growing, even if they have to pay a premium, putting value at a disadvantage. 

Our brand of value investing was hit even harder. Our Fund was slightly down for the quarter, -0.05%, versus 3.18% for the Russell 2000® Value Index, as factors we gravitate toward — such as low volatility, low leverage, and dividends — didn’t work. And while our stock selection has been a leading driver of our performance over the long run, our selection effect was negative in the quarter as the market moved away from high-quality names with strong balance sheets.

We underperformed in several sectors including Health Care, Materials, and Information Technology. But we outperformed the benchmark in Consumer Staples, Real Estate, and Industrials, where our stock selection added positive value. 

An example in industrials is Healthcare Services Group (HCSG), the leading provider of housekeeping and culinary services to skilled nursing facilities. As those healthcare providers scale, it makes sense for them to outsource ancillary services, yet currently only around 30% of skilled nursing facilities do so.

The stock has come under pressure in recent years, as occupancy levels at their clients’ facilities plummeted during the global pandemic. Meanwhile, inflation in the aftermath of the pandemic disadvantaged HCSG’s contract pricing, meaning they were taking a hit on both revenues and costs. We believe those headwinds have abated. Not only is occupancy improving, the company’s two-year self-help strategy of renegotiating all contracts with all customers to include more dynamic pricing is finally starting to pay off. The company’s EBITDA margins fell to 4-4.5%, but our projections show that improving to +6% this year and +7% in 2024 on their way to a target of 10%.

Today, the stock trades at 0.6 times enterprise value to sales. Yet when it was at this level of profitability in the past, the stock has traditionally traded at 1.5 times EV/Sales.


With more credit stress to come in this slow-growing economy, now is the time to be patient and not be distracted by all the bright and shiny objects that received the lion’s share of attention in the second quarter. It’s also more important than ever to have conviction on the companies we own. This means doing the work to confirm the financial strength of every company under consideration, while making sure that each company’s self-help strategies remain intact and compelling. 

Whether other investors choose to ignore it is not our concern. Our job is to keep our eyes on the long-term prize by identifying well-managed companies trading at attractive prices to their intrinsic value. We hold many such names that are currently flying under the market’s radar. We see them as small kernels ready to pop. That may not happen in the coming weeks or months. But our goal isn’t to win the quarter; it’s ensuring that our portfolio is going to outperform in the long run.

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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

Fund Returns

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*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 5/1/2024, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.18% 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 6/30/2023, Healthcare Services Group Inc (HCSG) represented 2.35% 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 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.

In certain cases, dividends and earnings are reinvested.

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Data sourced from FactSet: Copyright 2024 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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. Dividend Yield is a ratio that shows how much a company pays out in dividends each year relative to its share price. Enterprise Value/Sales Ratio is a financial indicator used to determine the value of a company including debt. It is equal to a company’s Enterprise Value divided by its annual sales. Federal Funds Rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. 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. 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. 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. Risk on/Risk off Theory is an investment setting in which price behavior responds to, and is driven by, changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns. During periods when risk is perceived as low, risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived as high, investors have the tendency to gravitate toward lower-risk investments. 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. Treasury Yield is the effective rate of interest paid on a debt obligation issued by the U.S. Treasury for a specified term. 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. 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.