|Minimum Investment||$2,500||$5 million|
The Cambiar SMID Fund is a team-managed portfolio designed to capitalize on mid-cap investments previously limited in scope within existing Funds. The Fund is an equal weighted portfolio with a starting universe of companies in the $2-$10 billion market cap range.
The portfolio leverages Cambiar's tenured domestic investment team, who on average have over 20+ years of industry experience.
Andrew P. Baumbusch
Colin M. Dunn, CFA
|Top 10 Holdings||% Weight|
|Air Lease Corp||3.1|
|Dun & Bradstreet||2.7|
|% of Total||28.3|
|Holdings Subject to Change|
|Attributes||Cambiar||Russell 2500||Russell 2500V|
|Market Cap Wtd Avg||6.6 B||4.7 B||4.5 B|
|Market Cap Median||6.0 B||1.2 B||1.0 B|
|Sector Weights||Cambiar||Russell 2500||Russell 2500V|
|Risk Statistics*||Cambiar||Russell 2500||Russell 2500V|
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 by the S&P 500 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 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 should 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.
The Cambiar SMID Fund posted a positive return for the third quarter, while trailing the strategy’s benchmarks. The SMID Fund remains ahead of the Russell 2500 Value index on a year-to-date basis. Returns within the small-mid asset class were generally positive across the board; telecom was the one exception. On a style basis, growth stocks continue to outpace value; the spread in the small-mid asset class is 1100 basis points as of quarter-end.
The performance shortfall for the SMID portfolio was primarily due to stock selection within the consumer sectors (i.e. consumer staples and consumer discretionary). Cambiar did not make any material changes to the portfolio’s consumer positions in light of the moves in the quarter. Our view is that company fundamentals remain constructive, and the pullback in the stocks is more a function of the quarter-to-quarter moves that are somewhat self-cancelling in nature. For example, shares of tax preparer H&R Block returned -13% in 3Q, after gaining almost 26% in the second quarter. The company continues to maintain a healthy balance sheet and can generate strong free cash flow, and we maintain a multi-year view that the stock represents an attractive investment opportunity.
Although the SMID portfolio maintained only one position in consumer staples, that one holding (Treehouse Foods) was the strategy’s largest detractor in the quarter. Treehouse is a branded and private label food and beverage purveyor; the company has a broad line of offerings, and is in the midst of integrating an acquisition made in 2016. The company announced in-line earnings, but lowered full year earnings in response to pricing and volume pressures. The staples sector has incurred a degree of price deflation; however, we view Treehouse’s private labels business to be a share-taker in such an environment. Given the company’s scale advantages and margin discipline, Cambiar remains constructive on the risk/reward opportunity for this position.
Notable bright spots in the quarter include positive stock selection within the energy and real estate sectors. With respect to Energy, it was notable to see some positive momentum in a sector that has been a consistent laggard for much of the past few years. As discussed above, Cambiar has a favorable opinion of the sector at current valuations, and believe we hold high quality companies that can endure continued price pressure as well as outperform as oil prices recover. RPC Inc. was the top performer in the sector, after investors bid up the oilfield services company in response to strong quarterly results. Cambiar is attracted to management’s conservative approach, strong market position and healthy financials.
Trade activity in the quarter included two new buys and three liquidations. The net result at a sector level was minimal, with a sale and subsequent buy in both Healthcare and Technology, and a small decrease in Energy with one sale in the sector. The portfolio ended the quarter with a cyclical bias – given overweight positions in Technology, Consumer Discretionary, and Industrials.
Global equities, as measured by the MSCI All Country World Index, 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; we believe 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.
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.
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. CAMMX was rated against 354 Mid-Cap Blend funds over a three year period and 321 funds over a five-year period. With respect to these Mid-Cap Blend funds, CAMMX received a rating of 2 stars for the three year and 3 stars for the five year period, respectively. Past 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.
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 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. The Russell 2500 Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. The Russell 2500 is a subset of the Russell 3000® Index. It includes approximately 2500 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2500 Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 Index companies with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and one cannot invest directly in an index.
As of 9.30.17, the Cambiar SMID Fund had a 2.3% weighting H&R Block, 2.9% in RPC Inc, and 2.2% in Treehouse Foods.
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.