Evolution as Endemic at Cambiar
The importance of making high-quality decisions on behalf of our clients.
a conclusion or resolution reached after consideration.
Near 24 months of previously unforeseen (by most of us living at least) global pandemic circumstances have led to all kinds of dissection of all kinds of decisions. Those “reached after consideration”, those made in haste. Those from a place of science, those from a place of theory, those from a place of practicality, or sometimes those from a lack thereof seemingly anything. There has been plenty of time to think, to reflect, to hope, to despair, to triangulate.
It is a position one employed in investment management has been able to professionally relate. The responsibility to take considered care of the faith and guidance others have sought and entrusted. The evergreen demand for decisions on the back of perpetually imperfect information. All with the goal to of course do no harm, but as well shepherd equity market capital through the short and long term on a trajectory to meet both predictable and unpredictable needs. A role we at Cambiar have long taken seriously, but over more recent years evaluated with that much more introspection, to ensure we are still doing right by our clients. Transparency and accountability are tremendous concepts in principle, and what we have concluded to be the essence of a successful long-term partnership – with our clients and our employees.
We seek to maintain a culture of continuous improvement in managing the Cambiar Small Cap Value and Cambiar Small-Mid Value portfolios. This has led us overtime to tighten and more accurately memorialize our investment philosophy, while simultaneously assessing and adding to our internal resources to meet a changing asset management world further defined and measured, for better or worse, by the increasing quantitative tools and analytics at the hands of our evaluators. To ensure that as portfolios are constructed brick by brick, or stock by stock, we have near total alignment between ourselves and our clients. To continue to use our long-held Relative Value philosophy to seek to shield from permanent capital loss, while leveraging attractive absolute valuation at point of entry to achieve long-term, compounding capital appreciation. We have sought to institutionalize knowledge and practices to support consistent characteristics to our longer-term return streams. We have more recently re-branded this as QPD – Quality, Price and Discipline.
Ironically, in a world that purports to treasure companies characterized by continuous improvement and innovation, within investment management progress can be confused with change. The perceived value of “stability” is somehow at odds with the idea that an investment management company should also critically evaluate itself and upon deep consideration perhaps adjust for the betterment of its products and service delivery. Nevertheless, we continue to be unafraid to embrace that notion of progress, using reflection on our own performance to drive long-term self-improvement. Rather simply, we ultimately make decisions that we believe first and foremost will help our clients.
Further institutionalizing our investment philosophy continues to lead to favorable outcomes over longer arcs and suggests a sustainability inherent to the process. The Cambiar Small Cap Value and SMID Value strategies have performed well over the last three to five years, with more consistent aggregate portfolio metrics around profitability, ROIC, and leverage, enabling better predictability and visibility for our clients. Downside capture has been strong, enabling more clarity on how we might expect to perform in a world perhaps someday more permanently characterized by a meaningful cost of capital against the previous decade-plus of profligate government fiscal and monetary policy, basically general financial repression.
In reviewing 2021 and recent year performance, in aggregate, we are proud of what we have delivered against what we have promised – which is to provide attractive risk-adjusted returns by buying better companies at better prices. No doubt there were opportunities missed and mistakes to be further evaluated, again triggering the unending match of incorporating reflective as well as real-time learning into forward practice. We are firm believers that success can be a lousy teacher!
|4Q21||1 Year||3 Year||5 Year||10 Year||Since Inception|
|Small Cap Value (g)||4.2%||18.5%||19.6%||9.8%||10.7%||10.5%|
|Small Cap Value (n)||3.9%||17.6%||18.6%||8.8%||9.7%||9.4%|
|Russell 2000 Value||4.4%||28.3%||18.0%||9.1%||12.0%||8.0%|
Small Cap Value Composite (Institutional) Inception Date: 11.30.2004 / See Disclosure – Performance
|4Q21||1 Year||3 Year||5 Year||10 Year||Since Inception|
|SMID Value (g)||7.6%||24.3%||22.4%||15.2%||15.1%||15.5%|
|SMID Value (n)||7.4%||23.5%||21.6%||14.5%||14.3%||14.8%|
|Russell 2500 Value||6.4%||27.8%||18.3%||9.9%||12.4%||12.1%|
SMID Value Composite Inception Date: 7.31.2010 / See Disclosure – Performance
The Cambiar Small Cap Value strategy appreciated 18.5% (gross of fees) in 2021, bringing the three and five-year average annual returns to 19.6% and 9.8%, respectively. The SMID Value strategy gained 24.3% in 2021, bringing the three and five-year returns to 22.4% and 15.2% per year. (All quoted returns are for the SMA Composite, gross of fees). To be sure, 2021 returns trailed the respective benchmark Russell Value indices, but note the Cambiar strategies posted less volatility and continue to show excess return over the better-aligned investment horizon of three and five years.
Shareholder wealth closed 2021 near $50T (that is right, trillion), up nearly 100% from the end of 2018. Equity ETF flows of $700B in 2021 represented a figure greater than the sum of 2018, 2019 and 2020. These non-price sensitive assets faced little resistance in deploying the tidal wave of flows, with the ratio of insider sellers to buyers moving to 19.3x, an all-time high. S&P 500 insider buyers also reached an all-time low in 2021. Perhaps an “active” recognition that nearly one in five companies in the Russell 3000 trades for 10x sales. Or that the percentage of non-earners in the Russell 2000 reached an all-time high of 49% (Source: Strategas).
It was not terribly surprising to us that our quality and price-focused investment philosophy did not entirely keep pace with benchmarks that benefited from unprecedented liquidity driven by aggressive monetary and fiscal policies. This rising tide tends to lift all boats, offering less room for differentiation in business quality or valuation nuance. The advent of less accommodative conditions in 2022 should bring new challenges and opportunities for the Cambiar Small Cap Value and SMID Value strategies. Academic research has shown a negative correlation between US 10-year Treasury yields and the S&P 500 trailing P/E multiple, with higher rates generally leading to lower multiples. Further, historically the valuation multiple of the S&P 500 has also moved inversely with CPI. CPI at an annual tranche at or below 2% has translated to an S&P 500 multiple of roughly 18x, moving all the way down to 11x at a CPI tranche between 6% and 8%. For context, the most recent January CPI reading was 7.1%, with the S&P 500 trading at roughly 21-22x current 2022 estimates (source: Bloomberg) at the beginning of January. With available capital and consumption-oriented dollars becoming scarcer, customers at both enterprise and retail levels are likely to eventually turn more discerning with their spending, set to coincide with investors more closely examining the value received for the asset price.
As ever, the Cambiar Small Cap Value and SMID Value strategies will reflect a collection of varied value drivers, a product of the collective, reflection, learning, consideration, and decisions embedded in our 40-50 stock portfolios. We are optimistic the tables are shifting more in our favor.
As always, we thank you for your continued support, and look forward to further helping you get to know and trust what we deliver to clients.
Performance: The performance information represents the respective Cambiar strategy composite and may be preliminary. Returns are presented gross (g) and net (n) of management fees and include the reinvestment of all income. Gross and net returns have been reduced by transaction costs. Net returns are also reduced by actual investment advisory fees and other expenses that may be incurred in the management of the account. Gross returns for the Cambiar Small Cap Value (Institutional) and Cambiar SMID Value composities include accounts with both gross and “pure” gross performance. “Pure” gross returns do not reflect the deduction of any expenses, including transaction costs. “Pure” gross returns are applicable to separately managed accounts that are part of broker-affiliated or broker-sponsored programs, including wrap programs, that waive commission costs or bundle fees including commissions (SMAs). “Pure” gross returns are supplemental information. SMAs often incur bundled fees, charged by the wrap sponsor or affiliated broker, that may include transaction costs, investment management, portfolio monitoring, consulting services, and custody fees. Net returns for SMAs are calculated by deducting the investment advisory fees from the client’s account as reported by the wrap sponsor or affiliated broker, or as received by Cambiar. Cambiar negotiates advisory fees with each individual client or relationship. Please refer to our Form ADV Part 2A for additional disclosures regarding our investment management fees. Net of fees performance reflects a blended fee schedule of all accounts within the relevant composite. Cambiar clients and mutual fund investors may incur actual fee rates that are greater or less than the rate reflected in this performance summary. Returns are reported in U.S. dollars. Index returns include the reinvestment of all income, and assume no management, custody, transaction or other expenses. Each index is a broadly based index that reflects overall market performance and Cambiar’s returns may not be correlated to the index against which it is compared for a number of reasons including investment approach and number and types of holdings. Each index is unmanaged, and one cannot invest directly in an index. Cambiar’s past results do not necessarily indicate Cambiar’s future performance and, as is the case with all investment advisors who concentrate on equity investments, Cambiar’s future performance may result in a loss. The top/bottom contributors is for a representative portfolio in the strategy. A complete description of Cambiar’s performance calculation methodology, including a complete list of each security that contributed to the performance of the portfolios, is available upon request. Please contact Cambiar at 1-888-673-9950 for additional information.
Small Cap Value Benchmark: 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. 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.
SMID Value Benchmark: 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. 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.
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. All 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. Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time, 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. As with any investments, there are risks to be considered. All material is provided for informational purposes only and there is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation.
For statistics definitions, please visit www.cambiar.com/definitions.
Russell: Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Cambiar Investors, LLC. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Cambiar’s presentation thereof.