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.
Andrew P. Baumbusch
Jeffrey H. Susman
Inception Date: 11.30.2004. The performance information depicted above represents Cambiar’s Small Cap Value Composite (Institutional). Returns are presented gross and net 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. Net returns for SMA portfolios are calculated by subtracting actual SMA fees reported by the SMA sponsor. Results are reported in U.S. dollars. The Russell 2000 Index is a float-adjusted, market capitalization weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000™ Index, which consists of 3,000 of the largest U.S. equities. 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. These stock indexes assume no management, custody, transaction or other expenses. Both the Russell 2000 and Russell 2000 Value indices are broadly based indices which reflect the overall market performance and Cambiar’s returns may not be correlated to the indices. Cambiar’s performance, the performance of the Russell 2000 Index and the Russell 2000 Value Index include the reinvestment of all income. Performance is preliminary, please contact us for finalized figures.
|Top 10 Holdings||% Weight|
|Telephone & Data Systems||2.2|
|United Natural Foods||2.1|
|Oil States Int'l||2.1|
|Superior Energy Services||2.1|
|% of Total||22.0|
|Attributes||Cambiar||Russell 2000V||Russell 2000|
|Market Cap Wtd Avg||2.4 B||2.0 B||2.1 B|
|Market Cap Median||2.3 B||0.7 B||0.8 B|
|Sector Weights||Cambiar||Russell 2000V||Russell 2000|
|Risk Statistics*||Cambiar||Russell 2000V||Russell 2000|
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, we feel the current environment does not possess the investor euphoria that often presages the end of a stock market cycle. That said, we believe 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 surprisingly, 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 Value
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 Value (SCV) portfolio produced strong absolute returns for the quarter, essentially straddling the strategy’s assigned benchmarks. Despite the second half performance recovery, the SCV product was unable to recover from the performance deficit sustained in the first half of 2016.
A return of 18% (gross of fees) 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 Value Index. Given the magnitude of the performance shortfall, some additional comments are warranted. As discussed in prior quarterly commentaries, the SCV strategy 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 R2000V Index once again very difficult to overtake - as Financials comprise over 30% of the R2000V Index (vs. an average weight of 14% for the Cambiar portfolio).
The result was an 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 SCV portfolio 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 SCV strategy 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 Value 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 portfolio 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 SCV 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 our companies. 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.
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.