The Cambiar SMID Value strategy is an equal weighted portfolio with a starting universe of companies typically in the $2-$10 billion market cap range. The portfolio leverages Cambiar's tenured domestic investment team, who on average have over 21+ years of industry experience.
Andrew P. Baumbusch
Colin M. Dunn, CFA
|Top 10 Holdings||% Weight|
|Robert Half Int'l||2.8|
|% of Total||27.3|
|Attributes||Cambiar||Russell 2500V||Russell 2500|
|Market Cap Wtd Avg||7.2 B||4.8 B||5.2 B|
|Market Cap Median||6.5 B||1.1 B||1.2 B|
|Sector Weights||Cambiar||Russell 2500V||R2500|
|Risk Statistics*||Cambiar||Russell 2500V||Russell 2500|
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.
SMID Cap Value
The Cambiar Small-Mid (SMID) Cap Value strategy posted a positive quarter to close the year, but trailed the strategy’s assigned benchmarks. The SMID portfolio did outpace the value benchmark on a full-year basis, while lagging the Russell 2500 Index. Outperforming the core index for the year was somewhat outside the strategy’s expectations, given the wide performance spread between growth and value in 2017.
Sector returns within the small-mid value asset class varied in the quarter, with cyclically-geared sectors such as basic materials, industrials and energy notable outperformers. In contrast, defensive sectors such as utilities, telecom and healthcare lagged for the quarter. Although Cambiar had a modest cyclical tilt in the portfolio, this positive was offset by a mid-single digit cash position. Cash drag was also a headwind for the portfolio over the course of the year – costing the portfolio approximately 75 bps vs. the benchmark (which by definition holds no cash). Any cash balance is a negative contributor in a rising market; that said, Cambiar continues to view cash as a by-product of the buy/sell process – vs. staying fully invested at all costs.
While not representing a material percentage of portfolio capital, investments in the utilities and real estate sectors were positive contributors to performance in the quarter. Water utility Aqua America was a notable standout, as this position has returned ~33% since our purchase in the first quarter of 2017. Aqua America is not optically cheap at current levels, but the company’s valuation is reasonable in the context of very low risk-free rates – given the high correlations between utility company P/Es and bond yields. With aggregate market valuations approaching overbought levels, the highly visible (and real) return of a utility provide a prudent offset in a portfolio context. Positive stock selection in real estate was attained via positions in Starwood Homes and MGM Growth Properties. Similar to utilities, Cambiar’s historically low allocation to real estate is a function of the opportunity set relative to other sectors of the market.
Much has been said about the low volatility that existed in the equity market during 2017; this was certainly not the case in the energy markets. Energy stocks were pounded in the first half of the year, before rallying in the third and fourth quarters. Unfortunately, the power of compounding worked against the sector, and energy stocks finished in the red for the year. Cambiar’s energy holdings were a relative bright spot for the portfolio – during 4Q as well as on a full-year basis. The approach to stock selection in the energy patch is relatively straightforward: seek well-capitalized companies with conservative management teams that operate within their cashflow and prioritize margins over volume.
One sector where Cambiar struggled (in 4Q as well as on a full-year basis) was Consumer Staples. Despite limited exposure to the sector, one of the portfolio’s largest detractors, TreeHouse Foods, was a significant laggard during the quarter and for the year. As an investment, Treehouse meets many of Cambiar’s investment criteria: reasonable valuation, dominant market share within their space, and a strong balance sheet. However, lowered earnings guidance and subsequent pushout of margin targets led to a decline in the stock price (although TreeHouse has rebounded off of its low). While admittedly frustrated with our timing in this name, the company has essentially kitchen-sinked expectations – such that any improvement in execution could trigger a re-rating in the stock.
We remain encouraged in the trajectory of the Cambiar SMID portfolio – and believe this strategy can provide a compelling solution in a somewhat overlooked segment of the equity market. Small-mid companies offer many of the same mispriced opportunities that exist in the small cap asset class, yet with increased liquidity and overall higher quality characteristics.
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|
|News Corp||2.62||0.58||Premier Inc||2.10||-0.27|
|Twitter Inc||1.52||0.50||XL Group||2.56||-0.27|
|Hubbell Inc||2.67||0.43||VeriFone Systems||2.01||-0.29|
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.