The Cambiar Large Cap Value strategy is the firm's oldest strategy and utilizes a team approach to investing. Each member of the seven person investment team is then charged with finding the most compelling investment opportunities within their assigned sectors/industries.
The team conducts a rigorous internal research process to identify companies that we believe possess an attractive risk-return profile – we believe the risk of capital loss is modest while the potential for outsized return is high. Such scenarios are the result of price sensitivity at the point of purchase, as well as a non-consensus assessment of the true economic value of the company over a forward 1-2 year timeframe.
Portfolio was incepted in 1973.
The portfolio holds between 35-45 stocks.
Sector weights based on bottom-up fundamental, not index construction.
Invests in companies with a market cap larger than $5 billion.
Brian M. Barish, CFA
|Top 10 Holdings||% Weight|
|United Parcel Services||3.2|
|Royal Dutch Shell||3.0|
|% of Total||31.0|
|Attributes||Cambiar||Russell 1000V||S&P 500**|
|Market Cap Wtd Avg||89.6 B||118.2 B||178.6 B|
|Market Cap Median||41.2 B||8.8 B||21.1 B|
|Sector Weights||Cambiar||Russell 1000V||S&P 500**|
|Risk Statistics*||Cambiar||Russell 1000V||S&P 500**|
**Characteristic information representative of an exchange-traded fund (“ETF”) whose objective is to replicate the investment performance of the S&P 500 Index. Cambiar believes that the ETF portfolio characteristics are generally reflective of those of the constituent securities included in the Index.
Market Review (9.30.2017)
U.S. equities (as defined by the S&P 500 Index) notched a gain of 4.5% in the third quarter. Barring a meaningful correction in the fourth quarter, the market is poised to deliver a ninth consecutive year of positive returns, and is the second-longest bull market on record in the post-WWII period (as measured from March 2009 to present). The resiliency in equities remains high, as stocks seem unfazed by increasing geopolitical tensions abroad, normalization of monetary policy in the U.S., and an absence of tax/policy reform from Washington D.C. As has been the case throughout the current bull market, any pullback in stocks during the quarter presented a buying opportunity.
Active management has had a better showing in 2017, yet asset flows remain decidedly biased towards low cost index funds (source: Morningstar). Given the rising tide environment for stocks that has been in place for the past eight years, it is hard to refute the buy-the-market at a low cost strategy. Yet this ‘free lunch’ is bound to end at some point, and given the massive flows into passive instruments, the move to the exits (should one occur) may not be an orderly process. This should not be interpreted as Cambiar calling an end to the current bull market – there are no shortage of positive data points in the market that could translate into additional upside for stocks. But at minimum, an increased awareness of valuation and selectivity should be in order.
Energy Stocks - Poised for Improved Returns?
After meaningfully lagging the market for the first six months of 2017, energy stocks rebounded in the third quarter. Is the recent recovery the start of an improving performance trend within the sector, or a short-term bounce that is not likely to be sustained? After having maintained an underweight allocation to energy stocks in 2015, Cambiar has been slowly rotating capital back into the sector. At present, our view is that the energy sector offers an attractive risk/reward – based on our outlook for a stable-to-increasing price deck for oil over the next 12 months.
Why did energy stocks struggle in the first two quarters of the year? After posting a sharp rally in the fourth quarter of 2016 on OPEC’s announced production cuts, the energy sector reversed course in January. Climbing global oil inventories led to increased negative sentiment toward the sector – given the oversupplied market conditions. Despite rebounding in September, energy stocks remain in the red on a year-to-date basis. The decoupling in stock valuations relative to oil prices thus far in 2017 borders on capitulation by investors(see the below chart).
Source: Bloomberg. WTI (West Texas Intermediate)
Frustration with the pace of the recovery in oil market vs. past cycles is sure to be weighing on investor sentiment; that said, we believe the combination of attractive valuations (in what is increasingly becoming a fully/overvalued equity market) and improving fundamentals may result in brighter days ahead for energy stocks.
As with most assets, the oil price is primarily a function of supply and demand. Global oil demand has been strong this year, with industry publications continuing to revise their demand estimates higher. On the other hand, global oil supply growth has not kept pace with demand due to OPEC production cuts as well as underinvestment in many areas of the world outside of the United States.
While the current supply/demand picture is healthy, the spike in oil in storage during the 2014-2016 timeframe resulted in a glut of oil and oil products in storage. As the below chart illustrates, U.S. oil inventories have begun to post consistent draws - which essentially means the global oil market is not just back in balance but is actually under-supplied. While there is some work to do in working down the supply bulge and reaching more normal storage levels in the U.S. (~700K barrels), the data is moving in the right direction.
A continued overhang in the bull case for energy stocks is the role of shale production in North America (N.A.); i.e., any uptick in oil prices will result in increased shale activity, thereby capping oil price gains. Yet can N.A. shale fill the potential gap that may occur from lack of new investment in conventional oilfields? Expenditures in new oil finds have been sharply curtailed since the collapse in oil prices three years ago. The big integrated and national oil companies are instead seeking to squeeze more out of their existing assets – which will succeed in providing barrels in the short-term, but at the expense of increasing decline rates. When comparing the barrels lost via a 5% decline rate vs. the incremental shale production estimates, one can create a scenario where shale is a necessary source of supply, vs. the burden tagline that it wears today.
Uncertainties regarding the pace of the recovery remain; however, Cambiar believes these concerns are reflected in the attractive valuations that exist within the sector. Cambiar’s holdings in the sector span the energy stack, including integrated oil companies, exploration and production companies and oil services companies. Many of these companies have undergone significant restructuring – such that improving top line results have the potential for a disproportionately positive impact on earnings.
Large Cap Value
The Cambiar Large Cap Value (LCV) portfolio outperformed both assigned strategy benchmarks in the quarter, and is now ahead of the value index on a year-to-date basis. Growth stocks continue to outpace their value counterparts, although there was a broadening in sector participation during the third quarter. One bright spot in the quarter was the Energy sector, which rebounded in tandem with a recovery in oil prices. Overall positioning in the LCV portfolio was relatively unchanged during the quarter, with buy/sell activity limited to one sale (in addition to incremental adds/trims to existing positions).
According to Charles Schwab, the correlation between individual stocks within the S&P 500 and the index itself is now at the lowest levels since 2001. The result should be a more favorable backdrop for active management, which can add value via security selection as well as avoidance of sectors/stocks that appear overvalued or possess challenged fundamentals. Performance is the ultimate proof statement; on that basis, we are encouraged by recent results for the LCV strategy.
At a sector level, healthcare stocks comprised the top contributor to performance for the quarter. Cambiar was able to add value via security selection within the portfolio’s pharmaceutical and biotech positions. The relatively acyclical attributes within the sector offer a prudent offset to the portfolio’s cyclical exposures.
Although activist investors have had less impact on individual stocks than in years past, their involvement nonetheless tends to have an initial positive impact on a company’s stock price. Cambiar benefited from such an event in the quarter via disclosure of an activist investment in Adient (consumer discretionary) – a manufacturer of seats and related components for the auto industry. Cambiar initiated a position in Adient in early 2017, post the company’s spin-off from Johnson Controls. While still constructive on Adient’s fundamentals and market share (according to Adient, one in every three seats in the world is produced in their facilities), Cambiar trimmed the position in response to the ~29% gain during the quarter.
Cambiar’s energy positions were an additional value-add in the quarter, with the LCV portfolio benefiting from positive stock selection as well as a modest overweight allocation (13.5% vs. 10.5%). As discussed above, Cambiar views the year-to-date decline in energy stocks to be excessive vs. the commodity price – particularly in light of what we view to be an improving industry backdrop. The portfolio’s positions do not require heroic assumptions in the oil price to do well, and each holding has a shareholder return policy in the form of dividends that can providing a degree of downside protection.
Financials and technology continue to represent the two largest sectors in the portfolio (24% and 18.5%, respectively). Performance in both sectors for the quarter were relatively in line with the index, although Cambiar benefitted from an overweight allocation to technology. The LCV portfolio continues to have only modest exposure in those sectors that could be negatively impacted by a potential monetary tightening/reflation trade; real estate and utilities are two such sectors where we believe a degree of caution is warranted.
Performance detractors in the quarter were a function of non-participation in Basic Materials (the top-performing sector in 3Q, but represents less than 3% of the index), as well as a modest cash drag. While not attempting to be tactical with cash (was ~6% during the quarter), the Cambiar team continues to exercise patience in waiting for an appropriate entry point. Given elevated market valuations, we remain disciplined with regards to price targets – on purchase as well as sale.
Global equities have broadly rallied through the first nine months of 2017, with stock averages in the U.S., Japan, Europe and Emerging Markets all trading at 52-week highs. Given positive economic growth data, low volatility, strong corporate profits and lack of attractive investment alternatives, equities appear to represent the best house on the block for investors. Although Cambiar remains optimistic as it relates to our companies, we spend equal amounts of time thinking about what could impair the investment case. Complacency and investing are not a good mix.
As always, Cambiar continues to focus the core of our research on company-specific fundamentals. That said, we will also include macro variables into our analysis, to the extent the macro is relevant to our bottom-up work. One top-down segment of the market we are monitoring is central bank activity, in particular the U.S. Federal Reserve. The U.S. continues to slowly make progress on normalizing monetary policy; the key consideration is whether the markets will be able to digest higher rates and the Fed’s planned balance sheet reduction. The moves made by policymakers in the U.S. could have a ripple effect on the global markets – potentially jeopardizing what has been a synchronized growth environment. We are also closely monitoring the energy markets, given the high correlations between oil prices and stock movements within the sector.
Quarterly Top & Bottom Contributors
|Top Contributors||Avg. Weight||Contribution||Bottom Contributors||Avg. Weight||Contribution|
|T. Rowe Price||2.25||0.48||Universal Health Services||2.10||-0.19|
|Royal Dutch Shell||3.06||0.45||TreeHouse Foods||1.94||-0.39|
A complete description of Cambiar's performance calculation methodology, including a complete list of each security that contributed to the performance of the Cambiar portfolios mentioned above are available upon request. Please contact Cambiar at 1.888.673.9950 for additional information. Past performance is no guarantee of future results.
Certain information contained in this communication constitutes “forward-looking statements”. Due to market risk and uncertainties, actual events or results, or the actual performance of Cambiar’s client accounts may differ materially from that reflected or contemplated in such forward-looking statements. All information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the portfolio will continue to hold the same position in companies described herein, and the portfolio may change any portfolio position at any time. The specific securities identified and described do not represent all of the securities purchased, sold, or recommended by Cambiar and the reader should not assume that investments in the securities identified and discussed were or will be profitable.