The Cambiar SMID Value strategy 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
Inception Date: 7.31.2010. The performance information depicted above represents Cambiar’s SMID Value Composite. Returns are presented gross and net of management fees. Gross and net returns have been 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. The gross returns reflect accounts with both gross and “pure” 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. Composite dispersion is based on gross returns and is calculated using an asset-weighted standard deviation. Dispersion (individual account return differential within the composite) occurs for various reasons, including investment restrictions mandated by the client, which cause an account to be invested differently than a typical, fully discretionary account. The performance of the Russell 2500 Value benchmark and the Russell 2500 shown above include the reinvestment of all income and assume no management custody, transactions or other expenses. The Russell 2500 Index is a float-adjusted, market capitalization weighted index that measures the performance of the 2,500 smallest companies in the Russell 3000™ Index, which consists of 3,000 of the largest U.S. equities. The Russell 2500 Value Index is a float-adjusted, market capitalization weighted index comprised of firms in the Russell 2500 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 2500 and Russell 2500 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 2500 Index and the Russell 2500 Value Index include the reinvestment of all income. Performance is preliminary, please contact us for finalized figures.
|Top 10 Holdings||% Weight|
|Robert Half Int'l||2.7|
|East West Bancorp||2.7|
|% of Total||27.0|
|Attributes||Cambiar||Russell 2500V||Russell 2500|
|Market Cap Wtd Avg||6.4 B||4.1 B||4.2 B|
|Market Cap Median||6.2 B||1.0 B||1.1 B|
|Sector Weights||Cambiar||Russell 2500V||R2500|
|Risk Statistics*||Cambiar||Russell 2500V||Russell 2500|
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.
The Cambiar SMID Value strategy participated in the fourth quarter surge in stocks, outperforming both the Russell 2500 Value Index and the Russell 2500 Index. After falling behind the benchmarks in the first half of 2016, the SMID strategy executed a strong rebound in the third and fourth quarters – benefitting from a combination of positive stock selection as well as the portfolio’s cyclical tilt.
On a sector level, the primary beneficiaries of investors’ increased sentiment towards stocks were more economically sensitive in nature – namely, Financials, Energy, Industrials and Technology. On a full-year basis, all eleven economic sectors produced positive results, illustrating the broad-based nature of the equity rally in 2016. This across-the-board melt-up in stocks also speaks to the challenges of active management in such an environment; with all sectors positive, and for the most part clustered in their returns, active managers were hard-pressed to achieve any positive separation vs. their benchmark. With that said, intra-sector volatility did increase in the fourth quarter, thus allowing for active managers such as Cambiar to add value. We are cautiously optimistic that this trend will continue into 2017 – which would potentially set up the SMID portfolio for a strong year of excess returns.
Financial Services constitute a significant portion of the SMID strategy’s benchmarks – approximately 24% in the R2500V Index and 17% in the R2500 Index. Cambiar’s approximate 20% allocation to Financials over the course of 2016 provided the portfolio with meaningful exposure to this top-performing sector, and was a notable positive contributor for both the fourth quarter as well as on a full-year basis. While being in the right sector helped, the companies held by Cambiar were also a key driver – as the SMID portfolio’s aggregate financial holdings outperformed the benchmark (Ru2500V Index) by approximately 1000 basis in the quarter (as well as by 740 basis points for the year). Company-specific fundamentals will always be the primary input to the buy/sell decision of an individual position; that said, an improving economic growth outlook, steepening yield curve and potential deregulation from the new administration could provide a healthy backdrop to this sector in 2017.
The SMID portfolio was also the beneficiary of merger and acquisition activity in the quarter. Although takeout potential is not a consideration in Cambiar’s initial investment thesis, potential acquirers are often attracted to many of the same underlying attributes – strong balance sheets, market-leading positions, and reasonable valuations. Long-time holding Harman International was acquired by Samsung Electronics during the quarter, which will enable Samsung to enter the automotive infotainment market. Shares of Harman moved higher in response to the offer and Cambiar liquidated the position shortly thereafter.
Another relative bright spot for the portfolio came from what the portfolio didn’t own – i.e., Cambiar’s non-participation in Utilities and limited exposure to Real Estate. Our third quarter commentary noted the bubble-like conditions that had begun in the STUB trade (staples/telecom/utilities/bonds); there has been some validation to this view, as these sectors have subsequently weakened in favor of more cyclical areas of the market. Although valuations in Utilities are becoming more reasonable, the sector remains more of a wait-and-see in terms of investment appeal.
While Cambiar’s residual cash position typically results in only a modest performance impact in most time periods, the portfolio’s ~6% cash allocation detracted approximately 75 bps from return in the fourth quarter’s melt-up. Cash was also a drag on a full-year basis. Another source of relative underperformance in the quarter was Technology, where Cambiar’s holdings were unable to keep pace with the index. Technology was also an Achilles Heel for the portfolio on a full-year basis. Two of the notable underperformers (Verifone and Synaptics) remain in the portfolio. After a frustrating year with these two holdings, we are confident that 2017 should bring improved operating performance – and with it a higher stock price.
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.