Small Cap Value

The Cambiar Small Cap Value strategy is a team managed portfolio. The portfolio employs an equal-weight portfolio construction approach. Cambiar believes this approach enables the strategy to maintain a more focused portfolio relative to peers, while also mitigating stock-specific risk via uniform position sizes. 

  • The starting universe for the portfolio includes any U.S. company with a market capitalization range typically between $500 million - $3 billion.
  • The strategy attempts to hold between 45-55 stocks.
  • All new stock positions enter the portfolio at a range of 1.5%-2% (based on liquidity).  This construction is designed to reduce excessive stock-specific risk, while allowing for the freedom to participate on the upside.

Portfolio Managers

AndyB(2016) 

Andrew P. Baumbusch 

     

ColinD(2016) 

Colin M. Dunn, CFA 

Performance Charts

Inception Date: 11.30.2004. The performance information depicted above represents Cambiar’s Small Cap Value Composite (Institutional). Returns are presented gross (g) and net (n) of management fees. Gross and net returns are 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. Prior to 2014, the gross returns reflect accounts with both gross and “pure” gross performance. From 2014 to present, the composite contains accounts with only gross performance. “Pure” gross returns, applicable to SMA portfolios, are not reduced by any expenses, which includes transaction costs, and are provided as supplemental information. Brokerage firms which sponsor SMA fee programs apply bundled fees which may include transactions costs, investment management, portfolio monitoring, consulting services, and in some cases, custodial service fees. Net returns for SMA portfolios are calculated by subtracting actual SMA fees reported by the SMA sponsor. Net of fees performance reflects a blended fee schedule of all accounts within the Small Cap Value Composite (Institutional). Cambiar clients and mutual fund investors 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 Small Cap Value Composite (Institutional) are evaluated against the Russell 2000™ Value Index. The Russell 2000 Value Index is a float-adjusted, market capitalization weighted index comprised of firms in the Russell 2000 Index that experience lower price-to-book ratios and lower forecasted growth values. Indices assume no management, custody, transaction or other expenses. The Russell 2000 Value index is broadly based which reflect the overall market performance and Cambiar’s returns may not be correlated to the index. Indices are unmanaged and one cannot invest directly in an index. Cambiar’s performance and the performance of the Russell 2000 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 3.31.2018)

Top 10 Holdings % Weight
AthenaHealth 2.3
Travelport Worldwide 2.3
Conduent 2.3
Americold Realty Trust 2.3
Marcus & Millichap 2.3
Axis Capital 2.3
TCF Financial 2.2
Molina Healthcare 2.2
Telephone and Data Systems 2.2
Natus Medical 2.2
% of Total 22.6
Attributes Cambiar      Russell 2000V
Price/Earnings F1Y 15.4 14.9
Price/Book 1.9 1.4
Debt/Equity   0.9 1.3
EPS Growth  11.1 11.7
Dividend Yield 1.4 1.9
Market Cap Wtd Avg 2.8 B 2.0 B
Market Cap Median 2.5 B 0.7 B
Active Share 95.4  
Sector Weights   Cambiar      Russell 2000V
Consumer Discretionary 6.8 11.0
Consumer Staples 0.0 2.2
Energy 3.7 6.4
Financials 20.8 31.4
Health Care 12.4 6.8
Industrials 13.8 12.3
Information Tech 16.8 8.9
Materials 5.5 4.3
Real Estate 6.6 9.9
Telecom Services 2.2 0.5
Utilities 4.4 6.3
Cash 6.8  
Risk Statistics* Cambiar      Russell 2000V
Alpha -1.6 0.0
Beta 0.9 1.0
R-Squared 80.3 100.0
Sharpe Ratio 0.6 0.8
Standard Deviation     12.1 11.7
*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.  

Small Cap Value

The Cambiar Small Cap Value (SCV) strategy posted a flat return for the first quarter.  While not overly impressive on an absolute basis, the strategy’s performance was encouraging relative to the -2.6% return for the strategy’s benchmark.  After a challenging year in 2017 that was marked by extremely low volatility and a strong preference for growth, the recipe for outperformance in 2018 is likely to have an increased emphasis on quality of earnings and valuation – which are key underpinnings to the Cambiar process.  We hope to continue the strategy’s performance momentum into the coming quarters.

Small cap stocks were unable to avoid the downward pull that impacted the U.S. equity market in the back half of the quarter, as a steepening wall of worry led investors to lock in gains and move to the sidelines.  Within the small cap value market, the only sectors to finish with a gain for the quarter were healthcare and financials.  Weaker sectors in the quarter included energy as well as traditional defensive sectors such as consumer staples, real estate and telecom – which declined in conjunction with the rise in interest rates. 

The increased volatility during the quarter was a stark contrast to the rising tide environment that existed for much of 2017.  For active managers such as Cambiar, heightened price dispersion typically presents more investment opportunities.  Trade activity for the quarter included three new buys and eight liquidations.  The sales were a mix of names that reached price targets or situations where the thesis did not play out and better ideas existed elsewhere.  The net selling in the quarter resulted in a modest uptick in cash (~7%); however, we do not anticipate any challenges putting this dry powder to work in the coming months.

Cambiar’s first quarter outperformance was primarily driven by positive stock selection in the financials and consumer staples sectors. Despite the portfolio’s limited overall exposure to consumer staples, Cambiar’s two positions in the sector posted positive returns vs. a negative return for the index.  Battery maker Energizer Holdings was a notable outperformer, as the stock was bid up on an announced transaction to acquire the global battery business of Spectrum Brands.  Within financials, the highlight in the quarter was the portfolio’s position in Validus, a reinsurance company.  AIG announced that it would be purchasing Validus, resulting in an approximate 45% gain in the stock.  While Validus was the strongest performer in the sector, a number of Cambiar’s other bank and insurance positions also posted solid gains in the quarter.

Performance headwinds in the quarter included below-benchmark stock selection in the consumer discretionary and industrial sectors.  Industrials was the top contributor to the SCV portfolio in 2017, so perhaps some weakness in 1Q was to be expected – as fundamentals remain sound within the sector.  Cambiar’s industrial holdings continue to offer a great deal of end market diversification and remain reasonably valued relative to their anticipated earnings/cashflow generation.  At the individual stock level, building materials company BMC Stock Holdings was an outlier to the downside in the quarter.  This investment had been a solid performer since its initial purchase in March 2016, but pulled back on the surprise firing of their CEO.  Given the company’s strong position in a relatively fragmented industry, Cambiar remains constructive on the outlook for BMC; that said, the new CEO will be an important hurdle for the company. 

As mentioned in our 2017 year-end commentary, Cambiar believes it was somewhat inevitable that volatility would return in some magnitude after such a long hiatus.  How stock prices continue to react when the market ultimately grows more consistently stressed is both an open and powerful question.  Logically, stock selection (even if only selective avoidance) will take on more importance as we move further along the later stages of a business/market/valuation cycle.  As an active manager that attempts to capitalize on price dislocations, Cambiar views the current environment as one of increased opportunity in our goal of outperforming our benchmark.  That said, we remain cautious in deploying capital, recognizing that stretched valuations across the small cap market results in a smaller strike zone and places even greater emphasis on attachment points. 

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
Validus Holdings 0.50 0.85 Aircastle 2.03 -0.31
Energizer Holdings 1.80 0.48 Super Micro Computer 1.79 -0.36
Travelport Worldwide 1.93 0.48 Kite Realty 1.44 -0.43
Array Pharma 1.47 0.35 BMC Stock 1.79 -0.47
Conduent 2.14 0.31 RPC Inc 1.82 -0.62

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.