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|
|British American Tobacco||3.1|
|Royal Dutch Shell||3.1|
|Johnson & Johnson||3.0|
|% of Total||31.7|
|Attributes||Cambiar||Russell 1000V||S&P 500**|
|Market Cap Wtd Avg||106.0 B||126.4 B||197.0 B|
|Market Cap Median||54.8 B||9.6 B||22.1 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 (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 will 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 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 provides 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%|
There is no shortage of academic studies that show value outperforms growth over the long term (with 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.
Large Cap Value
The Cambiar Large Cap Value (LCV) strategy posted a positive return for the fourth quarter, while lagging the Russell 1000 Value Index by a modest differential. The portfolio did outgain the index on a full-year basis, and remains ahead of the benchmark over longer-term rolling timeframes. 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 strategy’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 would be well received by the market.
Representing approximately 20% of the portfolio, technology stocks comprise the second largest sector allocation in the LCV 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 portfolio’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 will 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 portfolio.
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 will 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.
Quarterly Top & Bottom Contributors
|Top Contributors||Avg. Weight||Contribution||Bottom Contributors||Avg. Weight||Contribution|
|Tyson Foods||3.25||0.49||CVS Health||0.23||-0.19|
|Occidental Petroleum||3.06||0.46||XL Group||2.02||-0.21|
|Capital One||2.06||0.35||TreeHouse Foods||1.61||-0.40|
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.