|Minimum Investment||$2,500||$5 million|
The Cambiar Small Cap Fund is a team-managed portfolio designed to capitalize on U.S. small cap investments. The Fund employs an equal-weight portfolio construction approach. We believe this approach enables the strategy to maintain a more focused portfolio relative to its peers, while also mitigating stock-specific risk via uniform position sizes.
Andrew P. Baumbusch
|Top 10 Holdings||% Weight|
|Orion Engineered Carbons||2.4|
|Telephone & Data Systems||2.3|
|% of Total||22.7|
|Holdings Subject to Change|
|Attributes||Cambiar||Russell 2000||Russell 2000V|
|Market Cap Wtd Avg||2.7 B||2.4 B||2.1 B|
|Market Cap Median||2.4 B||0.8 B||0.7 B|
|Sector Weights||Cambiar||Russell 2000||Russell 2000V|
|Risk Statistics*||Cambiar||Russell 2000||Russell 2000V|
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.
Small Cap Fund
Small Cap equities rallied into the close of 2017, fueled by above-trend economic growth, encouraging corporate profits and a Christmas present in the form of a business-friendly tax reform package. The Cambiar Small Cap Fund slightly lagged the Russell 2000 Index while outperforming the Russell 2000 Value Index in the quarter. Given Cambiar’s fundamental investment discipline and more focused portfolio construction approach, the portfolio’s relative performance is highly correlated to stock selection. After making several necessary adjustments to the Small Cap Fund during 2017, we are optimistic that we can continue the second half momentum into 2018.
Despite a fairly broad rally in stocks during 2017, there were notable divergences that persisted for much of the year. Large cap stocks outperformed small caps, and on a style basis, growth outperformed value by a wide margin. Within the small cap value market, sectors such as energy, telecom and consumer staples did not participate at all – as each of these sectors posted negative returns in 2017, as measured by the Russell 2000 Value.
Cambiar’s performance in the fourth quarter was primarily driven by positive stock selection in the financial and industrial sectors; both of these sectors were also positive contributors to relative performance on a full-year basis. Cambiar’s exposure to financials is skewed to regional banks, as these companies are operating with a number of tailwinds – lower corporate tax obligations, higher rates (particularly for banks with floating-rate portfolios), and the potential for reduced regulatory oversight. Although small cap financials did not keep pace with the market in 2017 (after a very strong 2016), Cambiar anticipates a better showing in 2018 as loan growth improves and interest margins widen.
The Fund’s outperformance in industrials has been a function of diversified holdings in the sector – some outside the more traditional machinery and equipment names. Cambiar’s industrial positions include aircraft leasing, asset-light freight/logistics operators and an auctioneer company. Air Lease, Interface and Hub Group were notable individual outperformers in 2017. While we may be in a ‘stronger for longer’ economic cycle, this optimism is largely priced in for many industrial companies. We feel our industrial positions possess unique franchises, trade at reasonable multiples on a price/book and/or free cashflow yield basis, and on the margin are less sensitive to changes in the broader economy.
In what was a recurring theme for much of 2017, Cambiar’s holdings in Technology detracted from performance in the quarter. Applying a value approach within small cap tech (particularly this late in the cycle) has been a challenging exercise, with a number of false positive outcomes. Like other areas of the small cap market, the tech sector is somewhat picked over at this point - as many quality names have appreciated beyond our targeted market cap bounds. We are certainly not deflecting blame – analytical mistakes were made, and we own these decisions. In some cases, we are continuing to stay the course with positions where we maintain conviction. One such example is Diebold Nixdorf Ltd., the ATM operator. Diebold has an approximate 35% market share in the global ATM market (a duopoly with competitor NCR) – so a clear market leader. The company has not executed well since its 2016 acquisition of Wincor Nixdorf, but with the stock now trading at 2009 levels and catalysts in the form of a new incoming CEO, anticipated replacement demand and activist involvement, we see an attractive risk/reward. Given low market expectations, even a modest amount of topline growth would be meaningful to the depressed share price.
Cambiar executed seven new purchases and six liquidations in the quarter – which is generally in line with average activity. On a year-over-year basis, it is worth highlighting sector changes within the portfolio to illustrate where the team has been finding value, vs. areas of less attractive opportunities. There was more capital allocated to financials, healthcare and materials over the course of 2017, and net selling within the industrials and consumer discretionary sectors.
Despite entering the year at fairly elevated valuations, 2017 proved to be another strong year for domestic small caps equities. As we look ahead to 2018, it is hard not to imagine more volatility, as the market has not had a correction of any magnitude since early in 2016. Cambiar remains mindful of valuation-based downside, given lofty multiples exhibited in many small cap companies, and continue our efforts to allocate capital in companies that meet our quality and valuation criteria.
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. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility. There can be no assurance that the Fund will achieve its stated objectives.
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. CAMSX was rated against 652 US-domiciled Small Blend funds over a three year time period, 558 funds over a five year period and 400 funds over a ten year period. With respect to these small blend funds, CAMSX received a Morningstar rating of 1 stars for the three year, 1 stars for the five year period, and 2 stars for the 10 year period, respectively. 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 Russell 2000™ Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Russell 2000™ Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 and Russell 2000 Value returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
Price to Earnings (P/E) – is the ratio for valuing a company that measures its current share price relative to its per-share earnings. Forward P/E - uses forecasted earnings for the P/E calculation. These are not measures of a fund’s future performance.
Beta is a measure of volatility in comparison to the market as a whole.
As of 12.31.17, the Cambiar Small Cap Fund had a % weighting in 0.0% in Air Lease, 1.6% in Diebold Nixdorf, 2.2% in Hub Group, and 2.0% in Interface.
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.