SMID & Small Cap Value Updates
Cambiar SMID and Small Cap Value portfolio managers provide an update on their portfolios during the current bear market.
Dear Clients and Business Partners,
We are writing to communicate an update on the status of Cambiar’s business operations and the Small and SMID Value portfolios.
As of the close of business Friday March 13, Cambiar is moving to a work from home policy in an effort to maintain our ability to continue serving clients while also protecting the health of employees and their families. Cambiar has long maintained the necessary infrastructure to allow employees to work remotely with full access to the tools they need to perform their day-to-day jobs. Staff will be engaging in their normal business duties while continuing to be readily available to clients and partners during this time. We will remain reachable through normal channels, including email and telephone. Our front desk will be staffed from 7:30 AM mountain time until 2:30PM. A more detailed discussion of Cambiar’s action plan can be found on our website, www.cambiar.com.
With respect to the financial markets, they have clearly been under a great deal of stress over the last several weeks. We have seen the quickest descent into a bear market ever from a market high – by a wide margin – and have endured the largest daily decline in US stocks since the infamous 1987 crash. The unfolding COVID-19 pandemic is clearly the primary source of market fear, as a health crisis of unknown magnitude is spreading around the world causing sickness, death and dramatic declines in economic activity for an unknown duration. An emerging oil market share war, catalyzed by the demand destruction from COVID-19, provided an accelerant to deteriorating market confidence over the last week as well.
Amidst these market disruptions, the Small and SMID value portfolios at Cambiar continue to be managed by a highly engaged analyst and portfolio management team that is reviewing existing holdings to update outlooks in light of what we know and scouring the now much deeper opportunity set to upgrade portfolios where possible. We have taken action to pursue sought after holdings at these lower valuations, while exiting certain positions that have seen too great a fundamental deterioration or were just an unfortunate casualty in the on-going process of bettering the overall portfolio.
In the Small Cap value strategy, we added new holdings in the defense, electronic payments, and triple net REIT sectors. While we entered this period with some portfolio cash, we funded some of the purchases with the sale of holdings in the energy E&P, refinery, and bank sectors.
The SMID value strategy, also saw some activity, with new holdings in the transportation, professional staffing, leisure, medical tools, data center REIT, and software/services sectors. Though the SMID portfolio also entered this period with portfolio cash, we still funded some of the purchases with the sale of holdings in the energy E&P, software, petro-chemical, bank and airline sectors.
While we have been more active over the last few weeks than usual, the vast majority of the portfolios remain in place, as the underlying companies were actively selected for their durable business characteristics, attractive prospects for future value creation, robust financial characteristics and the unique drivers of return that we believe they bring to the portfolio. New positions, in our view, similarly, must have an advantaged market position that is converted into superior profitability, returns and free cash flow while maintaining a strong balance sheet, unreliant on the capital markets for excessive debt or equity. At the portfolio level, we are always seeking balance across drivers of return.
The stated company level preferences have resulted in a portfolio that in aggregate boasts higher profitability and lower leverage than the benchmark indices. The actions year to date have enhanced both these biases. As such, though we may lag in the initial phases of a rebound rally, we hope to deliver better downside protection than the passive index as the recovery progresses. The trading environment remains very fluid, with large day-to-day moves at both the stock and index levels. However, over the course of this market selloff so far (Feb 27th – March 13th), the Small and SMID portfolios have held up slightly better than the benchmark indices. It is disappointing to the see the value of our holdings fall over 25% in 2020 to date, ending March 13th, but we take some solace these results are better than that offered by the passive benchmark.
While pandemic would be enough to frustrate markets under any circumstances, it is worth noting we see evidence concerns expressed by us in past client communications are contributing to the magnitude of market declines. Chief among those highlighted issues are poor market structure, passification and ETF’ication of investing tools, and debt laden corporate balances sheets. With these structural issues likely to persist, we think the worth of an active manager focused on value creating businesses with conservative balance sheets is proving itself out.
This has been a violent and taxing sell-off to date, no doubt exacerbated by a sense of personal health risk we all are facing as we retreat to our homes. The death toll, economic impact and financial market levels could all very well get worse before they get better. Nevertheless, we will remain focused on executing our stated strategy on behalf of clients.
Please feel free to reach out with any questions. Otherwise, please take care and stay healthy. We look forward to being in touch soon.
Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar. Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements. The information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation.
Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts and other information presented may be based upon third-party sources that are deemed reliable; however, Cambiar does not guarantee its accuracy or completeness. As with any investments, there are risks to be considered. Past performance is no indication of future results. All material is provided for informational purposes only and there is no guarantee that any opinions expressed herein will be valid beyond the date of this communication.