|Minimum Investment||$2,500||$5 million|
The Cambiar Opportunity Fund is a team-managed portfolio designed to capitalize on large cap investments. The Fund is a natural extension of the Cambiar Large Cap Value portfolio, the firm's oldest strategy.
The seven person domestic investment team conducts a rigorous internal research process to identify companies that we believe possess an attractive risk-return profile – where we are confident that the risk of capital loss is modest while the potential for outsized return is high.
The outcome is a concentrated portfolio of established businesses that meet Cambiar’s four investment criteria: quality, valuations, value creation/catalyst and upside potential.
Brian M. Barish, CFA
|Top 10 Holdings||% Weight|
|British American Tobacco||3.1|
|Royal Dutch Shell||3.1|
|% of Total||31.2|
|Holdings Subject to Change|
|Attributes||Cambiar||S&P 500||Russell 1000V|
|Market Cap Wtd Avg||106.1 B||197.0 B||126.4 B|
|Market Cap Median||54.8 B||22.1 B||9.6 B|
|Sector Weights||Cambiar||S&P 500||Russell 1000V|
|Risk Statistics*||Cambiar||S&P 500||Russell 1000V|
Market Review (12.31.2017)
U.S. equities extended their year-long upward trajectory into the fourth quarter, closing out 2017 at or near all-time highs for most stock averages. The S&P 500 Index returned 6.6% in the quarter, and notched a 2017 gain of 21.8%. Smaller cap stocks (as measured by the Russell 2000 Index) gained 3.3% and 14.7%, respectively. While the details of the recently passed tax reform are still being scrutinized, small cap companies should be disproportionate beneficiaries of the reduced corporate tax rates.
2017 marked the ninth consecutive calendar year of positive returns for the S&P 500 Index, and a cumulative return of 372% from the bottom of the financial crisis in March 2009. There is little debate that we are in the later innings of the current bull market (perhaps the ninth year is a telling sign for this baseball analogy), and valuations are at elevated levels for an increasing number of market participants. That is not to say that the rally cannot continue, as corporate profitability remains robust. However, adherence to process, sensitivity to attachment points and remembering to sell should all take on increased importance in 2018.
Value vs. Growth - Cambiar's Take
The value vs. growth debate is often an either/or discussion, yet we believe the reality is that both styles of investing have a place in the average client portfolio. By definition, growth stocks have different attributes than their value counterparts – the resulting combination thus can provide broad exposure to a diverse set of equities. Given the stock market’s underlying mean reversion tendencies, the key is to have a rebalance program in place during time periods when there is material divergence in returns. After a strong run for growth stocks in 2017, now is one such time where a rebalance out of growth and into value may be appropriate.
Although 2017 produced higher equity returns across the board, growth stocks handily outperformed value for the year. As the performance tables illustrate, growth leadership extends beyond the last twelve months – this trend has been in place for much of the past ten years. While value stocks have posted periodic runs of their own (e.g., 4th quarter 2016), growth stocks have clearly had the upper hand in the current market cycle.
|2017||3 Year||5 Year||10 Year|
|Large Cap Growth - Russell 1000 Growth||30.2%||13.8%||17.3%||10.0%|
|Large Cap Value - Russell 1000 Value||13.7%||8.7%||14.0%||7.1%|
|Small Cap Growth - Russell 2000 Growth||22.2%||10.3%||15.2%||9.2%|
|Small Cap Value - Russell 2000 Value||7.8%||9.6%||13.0%||8.2%|
Source: FTSE Russell
There is no shortage of academic studies that show value outperforms growth over the long term (with typically less risk). Yet why have growth stocks bested their value peers as of late, and when will value investing regain its luster? Index construction/constituents is one obvious distinction; value benchmarks have higher allocations to sectors such as energy and financials, while growth benchmarks own more technology – which has been an outperforming sector in recent years. Another reasonable explanation for the outperformance of growth stocks is the ultra-low interest rate environment that has been in place since the financial crisis. While low rates have provided a rising tide for equities regardless of style, growth stocks have been disproportionate beneficiaries of this low cost of capital environment. Low rates have also led investors to pay up via higher multiples for what they perceive to be higher growth companies. This has been especially true for the so-called FANG (Facebook, Amazon, Netflix, Google/Alphabet) stocks, whose strong momentum has contributed to widening the gap between value and growth.
What could swing the performance pendulum back to value stocks? Perceived risk/reward is a possible catalyst, given widening valuation spreads between growth and value sectors. A change in market conditions such as interest rates and inflation could also provide a lift to value stocks. Monetary policy will likely continue to normalize in 2018, and while there is no clear advantage on a style basis in a rising rate environment, the impact of rising capital costs may be a headwind to more highly leveraged companies. In contrast, traditional value companies with strong balance sheets have less reliance on capital markets to sustain their business and should therefore be less impacted by higher borrowing costs.
Cambiar’s investment approach is fairly agnostic to the underlying style tilts in the market – other than to take advantage of price dislocations that may often result from swings in market sentiment. Growth stocks have had the upper hand throughout the current cycle, and may continue to outperform value should the status quo in the markets remain. Yet should there be a flattening in earnings trends or a peak in the business cycle, the high multiples assigned to many growth stocks will likely be unsustainable – setting up an environment that is more advantageous for value stocks.
The Cambiar Opportunity Fund posted a positive return for the fourth quarter, while lagging the S&P 500 Index by a modest differential. The aforementioned divergence between value and growth stocks during the year made the S&P 500 Index a very challenging performance bogey, given the constituent composition of that index.
Buy/sell activity was higher relative to past quarters, with eight new purchases and seven liquidations. There was nothing thematic regarding the trade activity; new purchases included Medtronic, Archer Daniels Midland and British American Tobacco. A somewhat atypical buy during the quarter was Delta Airlines. Cambiar’s historical reluctance to invest in airlines was primarily due to a lack of pricing discipline within the industry. Subsequent consolidation amongst airlines and a more conscious focus on attractive returns and free cashflow have resulted in Cambiar’s more constructive investment posture. We view Delta to be one of the more well-managed airlines, and our investment thesis is predicated on a combination of pricing improvement, cost discipline and strong free cashflow production that can be used for deleveraging purposes, dividends and ongoing share buybacks.
The Fund’s performance shortfall in the quarter can be primarily attributed to setbacks by TreeHouse Foods in the consumer staples sector. Cambiar initiated a position in TreeHouse during the second quarter of 2017; the investment thesis was predicated on private label taking market share from branded products. This thesis still holds, but TreeHouse has been impacted by a combination of company-specific execution issues, higher input costs and an increased price competition. The stock has recovered a bit since selling off in October, and we believe the headwinds facing TreeHouse are fixable. Given their scale within the private label business, TreeHouse should ultimately be part of the solution as more retailers (from traditional brick and mortar to Amazon) increase their product mix to private label. Current valuations reflect an abundance of negative assumptions; any progress the company can make on increasing margins should be well received by the market.
Representing approximately 20% of the portfolio, technology stocks comprise the second largest sector allocation in the portfolio (after financials). Although Cambiar’s tech holdings were a small detractor from performance vs. the index in the quarter, the portfolio’s overweight position to this top-performing sector was a strong contributor to returns in 2017. Individual highlights included HP Inc. (the printer business of the former Hewlett Packard), eBay and Oracle. While these companies do not fall into the ‘disruptive technology’ category that was in vogue during the year, there were nonetheless opportunities for value-oriented investors to participate in the sector during 2017. Oracle and eBay should benefit from the repatriation tax holiday, as both companies have significant overseas cash balances.
Energy - If an underpinning of value investing is allocating capital to sectors where investor sentiment is low, energy stocks certainly fit this billing for much of 2017. The energy sector was in reverse for the first seven months of 2017, before recovering in the back half of the year as oil prices moved higher. Cambiar’s energy positions outperformed in the quarter, and were a positive contributor in the aggregate on a full year basis. This is not to suggest that the Fund’s energy positions moved in lockstep; solid gains from Royal Dutch Shell and Occidental were neutralized by declines in Noble Energy and Schlumberger. Despite a challenging 2017, we believe these latter positions are poised to deliver improved operating performance in 2018.
Cambiar garnered positive gains from many of the portfolio’s financial positions during the quarter, although a pullback by reinsurance position XL Group hampered relative performance vs. the benchmark. XL Group declined by approximately 10% in response to the claims sustained in the Texas and Florida hurricanes. A silver lining for the company should be the potential for a stronger pricing cycle in the coming years. In general, insurance companies lagged the more credit-sensitive banks in 2017, which are perceived to be bigger beneficiaries of tax reform. Cambiar’s financial holdings include money center and regional banks, pure-play credit card companies and insurance/reinsurance. Looking ahead to 2018, Cambiar believes that financials continue to offer an attractive investment opportunity for the Opportunity Fund.
Given where we are in the economic cycle, selective avoidance of overvalued areas of the market should begin to add value relative to passively-managed benchmarks. Large cap industrials is one sector where Cambiar has been hard-pressed to allocate capital over the past 18 months. With many industrials trading at peak earnings on peak margins and expected to post only modest top-line growth, the risk/reward appears skewed to the downside for many operators in this sector.
U.S. equities delivered a dream year for investors in 2017 – strong returns with very low volatility. Can stocks continue their upward trajectory? While not outright practitioners of behavioral finance, we do attempt to safeguard against biases that can lead to potentially flawed decisions. For example, recency bias extrapolates recent events into the future indefinitely. As it stands today, the path of least resistance certainly appears to be higher stock prices; however, Cambiar believes an impartial assessment of risk and reward will take on heightened importance in 2018.
The acceleration in economic growth across most geographies is unlikely to sharply decelerate in the coming year, which should provide a tailwind to corporate profits and stock prices. That said, it is unlikely that 2018 will be without some degree of increased volatility along the way. Volatility is not necessarily a bad thing – the corresponding increase in dispersion across sectors is beneficial to active managers such as Cambiar.
What unforeseen shocks could derail the upward trajectory for equities? Geopolitical risk is always front of mind; changes in central bank monetary policy will be another variable worth watching. Although the three rate increases by the U.S. Federal Reserve did little to impede stocks from advancing in 2017, the ongoing normalization in policy should eventually be felt by market participants (particularly those with higher leverage ratios). In general, the mood at Cambiar is best described as constructive paranoia; while optimistic in the outlook for our companies, we spend equal time thinking about what could go wrong.
Mutual fund investing involves risk, including the possible loss of principal. The Cambiar Opportunity Funds may invest in derivatives, which are often more volatile than other investments and may magnify the Fund's gains or losses. There can be no assurance that the Fund will achieve its stated objectives. Diversification does not protect against market loss. A company may reduce or eliminate its dividend, causing loses to the fund.
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund’s prospectus which can be obtained by clicking here or calling 1-866-777-8227. Please read it carefully before investing. There is no guarantee that the Funds will meet their stated objectives.
Performance data quotes are past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month-end, please call 1-866-777-8227.
The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. CAMOX was rated against 1090 US-domiciled Large Value funds over a three year period, 965 over a five year period and 695 over a ten year period. With respect to these large value funds, CAMOX received a rating of 3 stars, 3 stars and 2 stars, respectively. Past performance is no guarantee of future results.
Price/Earnings F1Y is a calculation that divides the current share price by the estimates of earnings in the next four quarters. Debt/Equity - Long Term is a calculation that takes interest bearing, long-term debt divided by shareholder equity. EPS Growth - Long Term is a calculation that takes the company’s estimated profits for five years divided by the outstanding shares. Active share is a holdings-based measure of active management representing the percentage of securities in a portfolio that differ from those in the benchmark index. Alpha is a measure of risk-adjusted performance. Beta is a measure of risk in relation to the market or benchmark. The Sharpe Ratio is a direct measure of reward-to-risk and is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation. Standard Deviation is a statistical measure of historical volatility; a measure of the extent to which numbers are spread around their average. R-Squared measures how closely a portfolio’s performance correlates with the performance of a benchmark index.These calculations are not a forecast of the Fund’s future performance.
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index, with each stock's weight in the Index proportionate to its market value. The S&P 500 returns do not reflect any management fees, transaction costs or expenses. The S&P 500 Growth index is market-capitalization-weighted index consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics. The S&P 500 Value index is market-capitalization-weighted index consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics.
The Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and one cannot invest directly in an index.
Beta is a measure of volatility in comparison to the market as a whole.
As of 12.31.17, the Cambiar Opportunity Fund had a 3.0% weighting in Alphabet, 2.9% in Archer Daniels Midland, 3.1% in British American Tobacco, 2.2% in Delta Airlines, 3.1% in eBay, 3.0% in HP Inc., 3.0% in Medtronics, 1.8% in Noble Energy, 3.1% in Occidental Petroleum, 2.9% in Oracle, 3.1% in Royal Dutch Shell, 3.0% in Schlumberger, 1.7% in TreeHouse Foods, and 2.0% in XL Group.
This material represents the portfolio manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities. There is no guarantee that any forecasts made will come to pass.
Cambiar Funds are distributed by SEI Investments Distribution Co., 1 Freedom Valley Dr Oaks, PA 19456, which is not affiliated with the Advisor. Cambiar Funds are available to US investors only. Strategies included within the Institutional Investor offer are not mutual funds and are not affiliated with SEI Investments Distribution Co.