|Minimum Investment||$2,500||$5 million|
The Cambiar Small Cap Fund is a team-managed portfolio designed to capitalize on U.S. small cap investments. The Fund employs an equal-weight portfolio construction approach. We believe this approach enables the strategy to maintain a more focused portfolio relative to its peers, while also mitigating stock-specific risk via uniform position sizes.
Andrew P. Baumbusch
Jeffrey H. Susman
The performance data quoted represents past performance. Past performance 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. Returns assume reinvestment of all dividend and capital gains distributions. Investor Share Class: Expense ratio is 1.35% (gross); 1.30% (net). Institutional Share Class: Expense ratio is 1.10% (gross); 1.05% (net). Cambiar Investors, LLC has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses from exceeding 1.05% of the average daily net assets of each of the Fund’s share classes until September 1, 2017. Absent these waivers, total return would be reduced. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The Russell 2000® Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell Indices returns do not reflect any management fees, transaction costs or expenses. Individuals cannot invest directly in an Index. For performance current to the most recent month-end, please call 1-866-777-8227.
The Fund charges a 2.00% redemption fee on redemptions of shares held for less than 90 days.
|Top 10 Holdings||% Weight|
|Oil States Int'l||2.3|
|Group 1 Automotive||2.2|
|% of Total||22.9|
|Holdings Subject to Change|
|Attributes||Cambiar||Russell 2000||Russell 2000V|
|Market Cap Wtd Avg||2.4 B||2.1 B||2.0 B|
|Market Cap Median||2.2 B||0.8 B||0.7 B|
|Sector Weights||Cambiar||Russell 2000||Russell 2000V|
|Risk Statistics*||Cambiar||Russell 2000||Russell 2000V|
Market Review (12.31.2016)
U.S. equities posted strong gains in the fourth quarter, capping an 8th consecutive year of positive returns for stocks (as measured by the S&P 500 Index). The fourth quarter brought with it new record highs for most market averages, as the outcome of the Presidential Election catalyzed investors into believing that a pro-business Trump administration will reverse the stagnant growth in the economy. Small cap stocks outpaced their larger cap counterparts, given these companies’ home country revenue concentration and therefore less impact from a stronger dollar. While in the aggregate stocks are beginning to approach more extended valuation levels, the current environment does not possess the investor euphoria that often presages the end of a stock market cycle. That said, the next leg higher will likely be an earnings growth story, as multiple expansion has largely run its course.
Active vs. Passive - Darkest Before Dawn?
2016 marked another year of asset rotation from active managers to passive investment vehicles. The urge to index has become overwhelming, and it is hard to argue with its effectiveness in the current cycle.
Not surprising, Cambiar is a proponent of active investing. On an intuitive basis, the idea that qualified individuals making decisions about what companies may be good investments vs. companies to avoid because they are overpriced or engage in bad business practices just makes sense to us. Part of the intrigue in active management is the price-discovery process. Stocks can theoretically trade at any price that buyers or sellers choose to transact. But in practice, if XYZ stock falls below a certain level, buyers tend to emerge and sellers tend to disappear. That’s how price floors or ceilings emerge. This process still holds true today, but the market ecology is much different. Passive vehicles have no reactivity to the price-discovery process – they won’t buy more shares of XYZ however low the price might go.
An underappreciated element to the current active/passive discussion is the cyclical nature of investing. Think growth vs. value, domestic vs. international or small cap vs. large cap. The same can be applied to active vs. passive. The current run of passive has been longer than past cycles – that said, we believe the ultra-low interest rate environment that has been in place may be more than just coincidental on this front.
One metric that may begin to provide a tailwind to active management is a decrease in equity correlations. According to Strategas, correlation among stocks in the S&P 500 Index fell to a 10-year low in December. This environment should therefore place greater emphasis on security selection. The walk back towards normal monetary policy is an additional consideration that is likely to produce a profound shift in relative winners and losers. Companies that benefited from a low cost of capital may be challenged, while steepening yields would be unambiguously positive for financials yet a headwind for bond proxy sectors of the market.
All of the above may be interesting sound bites; however, performance is the key proof statement. It will take sustained excess returns from active management to reverse (or perhaps slow) the flow to passive strategies. Cambiar is encouraged by the improved returns we have achieved in recent quarters, but recognize that more follow-through is required on this front. The table is set for active management – it is now time to deliver.
Small Cap Fund
Small Cap equities culminated a very strong year for the asset class with a sharp fourth quarter rally. While virtually all U.S. stocks went green after the election, small cap companies were the primary beneficiaries of investors’ buying activity. The Cambiar Small Cap Fund produced strong absolute returns for the quarter, essentially straddling the strategy’s assigned benchmarks. Despite the second half performance recovery, the Fund was unable to recover from the performance deficit sustained in the first half of 2016.
A return of 17.08% would generally be regarded as a very strong year in most markets; however, Cambiar’s return was a fairly large miss vs. the Russell 2000 and Russell 2000 Value Index. Given the magnitude of the performance shortfall, some additional comments are warranted. As discussed in prior quarterly commentaries, the Fund was negatively impacted by the portfolio’s lower allocation to bond proxy sectors (and subsequently higher exposure to cyclicals) during the risk-off second quarter. While Cambiar’s other domestic strategies were able to make up ground as this trend reversed in the second half of the year, the outsized move in Financials during 4Q made the indices once again very difficult to overtake - as Financials comprise over 20% and 30% of the R2000 and R2000V Index, respectively (vs. an average weight of 14% for the Cambiar portfolio).
The result was almost a perfect storm of sorts for active managers, illustrated by the statistic that only 10% of active SCV managers outperformed in 2016 (source: Merrill Lynch). We are confident that the above market conditions are highly unlikely to repeat in 2017, and the Cambiar Small Cap Fund should be in good position as we enter 2017.
Given investors’ increasing optimism toward equities after the election, more economically sensitive sectors such as Materials, Industrials, Energy, and Financials outperformed their more defensive counterparts during the fourth quarter. For the year, all 11 economic sectors produced positive results, although the Health Care sector was a notable laggard on a relative basis.
As discussed, the sharp snap back in Financials proved to be a significant factor in the overall performance of small cap equities during the quarter. Small cap financials lagged early in 2016 on deflation concerns, exposure to energy companies and declining yields. Investor sentiment towards the sector increased dramatically post-election – where optimism about possible deregulation by the new administration and an increase in interest rates were catalysts behind an exceptional rally. The Cambiar Small Cap Fund did participate in the sector’s 4Q rebound…but not to the same extent as the index, given Cambiar’s lower allocation. Cambiar selectively increased the portfolio’s Financial weight during the quarter – and continue to maintain a pipeline of potential ideas should they trade down to our desired attachment point. It should be noted that portfolio risk controls (25% sector maximum) will also result in a consistent underweight position vs. the benchmark.
Another source of relative underperformance for the quarter was stock selection within the Energy sector. Although the sector rallied in response to an announcement by OPEC of a production cut, Cambiar’s holdings lagged the broader energy market. One of the underperforming holdings was Callon Petroleum, an exploration/production company with exposure in the West Texas Permian Basin. Callon made an equity offering late in 4Q in conjunction with an acquisition that we believe fits well with the company’s existing acreage. The equity deal results in a modest degree of share dilution, but should set the company up for a solid ramp in production growth for the next couple of years.
Cambiar’s non-participation in Utilities and limited exposure to Real Estate were positive contributors to relative performance, as these more defensive sectors lagged as investors rotated to more cyclical areas of the market. The Fund was also helped by strong stock selection and an underweight position in the lagging Health Care sector, which was the only sector to produce a negative return in the fourth quarter.
Given the strong absolute returns in 2016, any cash balance was a drag on return – as even the worst- performing sector in the index (Healthcare) rose 5%, and every other sector was up double digits. While cash balance within Fund was not significant (~4%), it proved to have a negative impact on strategy performance for the quarter as well as on a full-year basis. Cambiar does not attempt to be in any way tactical in the management of cash; rather, it is a by-product of the investment discipline.
The fourth quarter concluded an impressive year of gains for U.S. equities: the S&P 500, Nasdaq Composite and Russell 2000 Index each notched all-time highs, and the Dow Jones Industrial Average closed in on the 20,000 milestone. Consumer confidence is at the highest level since 2001, based on upbeat prospects for the economy, labor market and income growth. At a high level, the market’s optimism appears warranted – lower corporate taxes, job growth and a less onerous regulatory environment are all positives. Yet the road from here is likely to get a bit bumpier, as the timing and pace of implementation may fall short of expectations. In aggregate, Cambiar is cautiously optimistic on the outlook for stocks; however, we do not expect 2017 to be smooth sailing.
With valuation metrics for the broader market nearing prior peak levels, the risk/reward is becoming more asymmetric to the downside for an increasing number of stocks. This does not mean that the market cannot move higher; rather, the point here is that a naive passive portfolio may be less desirable vs. an actively managed portfolio that can identify attractive valuations while avoiding the more expensive segments of the market. While investors appear to be taking a glass half-full view on the outlook for 2017, Cambiar is taking a more balanced approach in assessing the upside for the stocks we’ve invested in. While company-specific fundamentals remain the driving force behind our buy/sell decision, market risks include the potential for a strong dollar, the market’s digestion of additional rate hikes by the Federal Reserve, and an unexpected uptick in inflation. As multiple expansion has likely run its course, upside from here will be more heavily dependent on earnings. Time will tell…but on this basis, we like our chances as we head into the new year.
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.
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 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. CAMSX was rated against 626 US-domiciled Small Blend funds over a three year time period, 534 funds over a five year period and 360 funds over a ten year period. With respect to these small blend funds, CAMSX received a Morningstar rating of 1 stars for the three year, 1 stars for the five year period, and 3 stars for the 10 year period, respectively. 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.
Russell 2000™ Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Russell 2000™ Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. 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.
As of 12.31.16, the Cambiar Small Cap Fund had a 1.8% weighting in Callon Petroleum.
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.
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.