Large Cap Value

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.

Portfolio Manager

BrianB(2016) 

Brian M. Barish, CFA 

Performance Charts

The performance information depicted above represents the Cambiar Large Cap Value Composite (Institutional). Returns are presented gross (g) and net (n) of management fees. Gross and net returns have been reduced by transaction expenses. Net returns are also reduced by actual investment advisory fees and other expenses that may be incurred in the management of the account. Net of fees performance reflects a blended fee schedule of all accounts within the Large Cap Value Composite (Institutional). Cambiar clients may incur actual fee rates that are greater or less than the rate reflected in this performance summary. Results are reported in U.S. dollars.
Performance results for the Large Cap Value Composite (Institutional) are evaluated against the Russell 1000™ Value Index. The Russell 1000 Value Index is a float-adjusted, market capitalization weighted index of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which consists of 3,000 of the largest U.S. equities. Indices assume no management, custody, transaction or other expenses. The Russell 1000 Value Index is broadly based which reflect the overall market performance and Cambiar’s returns may not be correlated to the indices. Indices are unmanaged and one cannot invest directly in an index. Cambiar’s performance and the performance of the Russell 1000 Value Index include the reinvestment of all income. Past performance is no indication of future results. All information is provided for informational purposes only and should not be construed as an offer to buy or as a solicitation to buy or sell.  Performance is preliminary, please contact us for finalized figures. 

Portfolio Profile (as of 03.31.2018)

Top 10 Holdings % Weight
EOG Resources 3.4
Archer Daniels Midland 3.3
British American Tobacco 3.2
eBay 3.2
HP 3.2
Royal Dutch Shell 3.1
Symantec 3.1
Occidental Petroleum 3.1
Twitter 3.0
Medtronic 3.0
% of Total 31.6
Attributes Cambiar Russell 1000V
Price/Earnings F1Y 14.7 14.4
Price/Book 1.9 2.0
Debt/Equity  1.2 0.9
EPS Growth  15.8 10.2
Dividend Yield 2.1 2.4
Market Cap Wtd Avg 100.2 B 120.8 B
Market Cap Median 48.4 B 9.4 B
Active Share 83.8  
Sector Weights   Cambiar Russell 1000V
Consumer Discretionary 1.3 6.8
Consumer Staples 16.8 8.1
Energy 15.6 10.7
Financials 19.8 27.1
Health Care 12.7 13.6
Industrials 4.3 8.2
Information Tech 20.4 9.3
Materials 0.0 2.9
Real Estate 1.9 4.6
Telecom Services 0.0 2.9
Utilities 2.0 5.9
Cash 5.1  
Risk Statistics* Cambiar Russell 1000V
Alpha 1.8 0.0
Beta 0.9 1.0
R-Squared 76.4 100.0
Sharpe Ratio 1.4 1.3
Standard Deviation     7.7 7.8
*Five Year    

 

Commentary

Market Review (3.31.2018)

The relatively unabated rally in U.S. equities that has been in place for the past two years hit a shallow divot in the first quarter, with the S&P 500 Index posting a return of -0.8% for the first three months of 2018.  Stocks started the year on a strong note, with the S&P 500 gaining almost 6% in January – a record-tying 15th consecutive month of positive returns for this index.  Equities then corrected by ~10% in February before recovering, only to repeat a similar sequence (though not to the same magnitude) in March.  After a placid 2017 in which the S&P 500 registered just eight trading sessions of a 1% move (up or down) for the year, the market has already posted 23 such instances thus far in 2018.

Volatility – A New Paradigm or Return to Trend?

In considering the investment climate of 2018, a look back on market conditions in 2017 is helpful.  Last year was in many ways a near-perfect environment for equity investors: a synchronized global economic expansion, continued low-interest rates, favorable corporate earnings, and generally positive economic and political developments.  Entering 2018, change within the market was bound to occur – and as these somewhat inevitable shifts have emerged, so too has volatility.  We believe the following considerations will play a role in market behavior during 2018 (and beyond).

Positive Real Interest Rate –​  Monetary policy has been the primary tool to promote the global recovery over the past ten years.  With U.S. inflation levels running at close to 2% and with the economy having achieved full employment, the Federal Reserve is now raising rates back to a positive real number.  Assuming at least two more rate hikes in 2018, the resulting Fed Funds rate in the 2.25% range would be a positive real rate of return for the first time this decade.  As the debt and equity markets have become quite comfortable with an extremely low economic cost of capital, the withdrawal of monetary stimulus is bound to exert pressure on asset prices.  While many have anticipated this eventuality, it would be naïve to believe that this process after such a long duration will be a smooth one.  We believe the rise in interest rates as an explanatory variable for the rise in volatility exceeds most other factors.

Real Interest Rate 2018 (web)

Source: Bloomberg.  Formula: US 3 Month Bill - PCE Deflator. 

 

Quantitative Easing (QE) Programs Outside the U.S. are Reaching Their Limits – QE remains to this day a difficult concept to explain.  While it looks like money printing, it is in fact the simultaneous creation of bank reserves and the removal of risk-free instruments from the financial system.  The objective is to urge financial participants out on the risk spectrum.  In this regard, the QE programs of both Japan and Europe have gone further than the U.S. Federal Reserve.  In Japan, the vast preponderance of positive-yielding debt has been bought by the Bank of Japan (BOJ); the BOJ has subsequently expanded their purchase activity into the corporate debt equity (via ETF) markets.  In Europe, the European Central Bank (ECB) is bumping up against ownership limits for sovereign issues.  The result in both cases is a shortage of risk- free bonds of various durations, an essential source of collateral for interbank liquidity.  The resulting reduction in liquidity makes longer-term currency hedging prohibitively expensive for market participants such as major Japanese and European manufacturers – and thus blunts the benefit of QE.  We believe that Europe’s improved economic performance means that the ECB will begin exiting QE in 2018, and raising interest rates back into positive territory in 2019.  Japan’s situation is uniquely complicated and we do not expect QE to end there in 2018; however, given that the QE program is leading to illiquidity and challenges in basic capital market functions, returns appear to be diminishing. 

Tariffs and Trade Wars? – President Trump has shown a clear willingness to approach negotiations through a confrontational style, including the topic of global trade.  Tariffs on steel and aluminum, and possibly on select Chinese manufactures, likely represent negotiating tactics to force some kind of “deal” or reconciliation.  Even so, for this to be an effective tactic, there would need to be some willingness to implement stiff tariffs in certain categories, just to prove that these are serious threats.  As such, there is some risk that these tariffs “reverse” key stimulative benefits of tax reform and the general economic momentum.  Global trade linkages have become deeply integrated – broadly speaking, it would take a lot of regressive tariffs to rupture these relationships.  At the margin, protectionist policy is not a favorable development.  That said, Chinese IP theft, forced technology transfer, and domestic market protections are difficult to defend as reciprocally reasonable trade policies to tolerate in the long term.  Outside the U.S., the EU has proposed a transaction tax on internet businesses, reasoning that these are disruptive to local economies and tend to channel revenue and profits into the cloud and the most favorable tax jurisdictions.  With locally sourced “profits” difficult to quantify, the EU may tax revenue.  Taken in isolation, these may be reasonable responses to the negative externalities posed by online businesses.  As it happens, these are mostly U.S. companies and the largest ones in the global stock market, and they may earn less money than would otherwise have been the case.

Market Structure – Global equity market ownership is vastly different from the pre-GFC timeframe.  Index funds, sector ETFs, and quantitative strategies have come to predominant markets, in some cases owning an outright majority of certain stocks and their free floats.  On the other side of the markets, active managers have vastly less firepower to deploy as prices move.  The consequence is that small fluctuations in market flows can lead to outsized stock price moves.  Not unlike the unintended consequences of QE detailed earlier, true stock market and individual stock price liquidity (i.e., the amount of money needed to move a stock price) is lower today than in the past.  

Large Cap Value

After registering seven consecutive quarters of positive returns, the Cambiar Large Cap Value (LCV) strategy posted a loss in the first quarter and slightly trailed the portfolio’s primary benchmark.  The retracement in the market was broad-based, with 10 out of 11 sectors in the benchmark Russell 1000 Value Index posting a negative return in 1Q.  (technology was the lone gainer).  In contrast to the past two years, portfolio cash levels are not likely to be a performance headwind for active management in 2018.

Portfolio buy/sell activity was modest during the quarter, with two new purchases and two sales.  On the buy side, Cambiar added positions in AIG (insurance/financial services) and Halliburton (energy services company).  Liquidations included Aetna, which had been the longest-tenured holding in the LCV portfolio (first purchased in 2008), and XL Group, an insurance/reinsurance company.  XL Group had been a laggard for the portfolio in 2017, as the company was impacted by an increase in claims sustained in the Texas and Florida hurricanes.  Cambiar continued to hold the stock, as our view was that the storms were likely to drive a stronger pricing cycle for XL in the coming years.  It appears that AXA SA, a French-based global financial services company, had a similar outlook; AXA announced that it would be acquiring XL for approximately $15 billion, which equated to a 33% premium to XL’s share price at the time.  Merger and acquisition activity is less frequent in the large-cap space, but always a welcomed event when it occurs. 

Despite a relatively healthy oil deck (oil prices traded in the low $60 range for the majority of 1Q), energy stocks remain in the market’s doghouse, as the sector was a lagging performer in the quarter.  Although Cambiar’s energy holdings were unable to escape the selling pressure, the portfolio’s companies held up better than the index.  While not attempting to be contrarian in our view, Cambiar believes that the negative sentiment toward energy stocks is misplaced.  Global oil demand remains healthy, and an increased focus on improved returns/fiscal discipline at the corporate level should result in a more measured supply response from U.S. producers.  Valuations remain reasonable, and while not a requirement, each of Cambiar’s energy positions pays a dividend, which may provide an additional layer of downside protection.   

The LCV portfolio’s technology holdings posted mixed returns for the quarter – the net result a small positive contribution to performance.  While remaining sensitive to our valuation discipline when investing in tech, we also recognize that low multiples can often signal that a company is on the wrong side of a product cycle…so cheap for a reason, vs. an opportunity.  Cambiar seeks tech companies that we can define as ‘continuous compounders’; i.e., they operate in a stable/growing total addressable market and possess structurally high gross margins.  Sample of current tech holdings include Alphabet, Oracle, HP Inc. and eBay.

One setback incurred by the LCV portfolio during the quarter was Cambiar’s position in Adient, which is a global leader in automotive seating.  After a solid 2017, the stock lost ground in 1Q, as Adient reduced their income and free cash flow estimates for the year.  The culprit was a combination of margin headwinds via higher input prices, as well as increased investments as part of a joint venture with Boeing.  Although disappointing in the short-term, Cambiar believes the issues facing Adient are transitory in nature; that said, the stock will likely be range-bound until the company can demonstrate progress on these fronts.  Given current valuation and our belief that Adient management can stabilize the business, we are continuing to maintain a position in the company. 

A cause-and-effect from the uptick in bond yields during the quarter is that higher interest rates are beginning to offer investors an alternative to stocks.  While rates remain low on an absolute basis, defensive sectors such as consumer staples, telecom and utilities nonetheless came under pressure during the quarter.  Although the LCV strategy has negligible exposure to telecom and utilities, the portfolio does have an approximate 17% allocation to consumer staples.  The approach to stock selection in staples has been to identify companies with unique/underestimated demand drivers while avoiding ‘margin squeeze’ brands that are negatively impacted by higher commodity/input costs, yet unable to raise prices due to heightened competition.  Consumer staple companies have been somewhat passed over as investors have shown a clear preference for faster-growing tech stocks.  That said, the steadier cash flow and relatively inelastic demand attributes within this sector are likely to hold greater appeal once value comes back into favor.

Looking Ahead

What does the balance of 2018 hold for equity investors?  An old Wall Street axiom is ‘So goes January, so goes the year’.  Will this saying ring true in 2018?  It is worth noting that in all the years when the S&P 500 rose more than 5 percent in January, the full-year return has never been negative (the S&P 500 returned 5.7% in January).

The increase in market volatility should not be misconstrued for an imminent decline in stocks.  Equities continue to have a number of tailwinds – including solid GDP growth, strong corporate profits, and an additional boost via last year’s tax reform bill.  Yet unknowns in the form of a new Fed Chair and the pace of additional rate hikes, a possible escalation in tariff/trade barriers, and continued personnel turnover within the Trump Administration may make for a bumpier ride within the equity markets.

As discussed in our 4Q commentary, Cambiar believes that security selection will take on increased importance in 2018, in contrast to a ‘set it and forget it’ passive investment approach.  While advocating active management is an admittedly self-serving recommendation, we are encouraged that we have been able to validate this view via solid investment returns across Cambiar’s domestic strategies. 


Quarterly Top & Bottom Contributors

 

Top Contributors Avg. Weight Contribution Bottom Contributors Avg. Weight Contribution
XL Group 1.58 1.17 Adient 1.41 -0.36
Twitter 2.94 0.50 TreeHouse Foods 1.48 -0.36
Archer Daniels Midland 3.03 0.25 British American Tobacco 3.01 -0.38
eBay 3.25 0.16 Biogen 2.81 -0.42
BB&T Corp 2.93 0.12 Wells Fargo 3.12 -0.42

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.

Disclosure

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.