Heartland Value Plus Fund Q4 2023 Portfolio Manager Commentary

Fourth Quarter Market Dialogue

For worth buyers, there comes some extent in each cycle when it turns into exceedingly tough to be a contrarian, requiring each ounce of self-discipline to remain true to 1’s ideas. That’s the place we discovered ourselves within the fourth quarter.

As different buyers appeared to purchase into the notion that they may have their cake (moderating inflation) and eat it too (ongoing development), the wall of fear that each market should climb appeared to evaporate in a single day. After falling within the first 4 weeks of the quarter, small-, mid-, and large-cap shares surged beginning in late October, led by speculative, extremely leveraged firms that stand to learn within the early levels of a brand new cycle.

Because the finish of October, the broad market delivered greater than a 12 months’s price of positive aspects in simply 9 weeks, with the all-cap Russell 3000® Index up 15.1% and the Russell 2000® Index of small shares surging 22.4%.

By no means thoughts that Federal Reserve coverage typically acts with a lag, which implies dangerous information might but emerge within the coming months. Overlook, for the second, that there are two main floor wars being fought with the potential to impression oil costs. And let’s additionally ignore the collapse of the non-public financial savings fee and file bank card debt, which hints at additional challenges for the buyer financial system.

All of those considerations however, the consensus view appears to be that the Federal Reserve will be capable of stick a “delicate touchdown” and slash rates of interest aggressively this 12 months. With the futures market pricing in six potential fee cuts in 2024, even the fastened earnings market is embracing this narrative, with yields on 10-12 months Treasuries down from shut to five% in late October to roughly 3.9% on the finish of the quarter, additional emboldening risk-taking.

As demoralizing as this surroundings is for basically pushed, defensive-minded buyers like us, it’s dangerous—and late within the recreation—to leap on the bandwagon. As a substitute, we consider that is the time to search for alternatives that match our course of whereas sticking to our weapons and making good selections based mostly on Heartland’s time-tested ideas.

Attribution Evaluation

Within the fourth quarter, the Worth Plus Technique returned roughly 7%, trailing the Russell 2000® Index, which returned 15.3%. The underperformance was attributable to our defensive positioning, inventory choice (notably in Vitality), and underweight publicity to early cycle components of the market corresponding to Financials, which had been the benchmark’s best-performing sector.

The Worth Plus portfolio is constructed with low-volatility, low-debt shares that may thrive in good occasions and dangerous. Beginning in late October, although, high-beta, extremely leveraged, early-cycle firms got here into favor, particularly as buyers grew satisfied {that a} delicate touchdown was at hand. Traditionally, in intervals when the portfolio has been underweight to sure sectors that detracted from efficiency, sure overweights have compensated. Within the fourth quarter, nevertheless, our allocation selections weren’t of a lot help.

The very fact is that the portfolio has been too defensively positioned given the present euphoria within the markets. However we additionally consider that it is a part within the cycle the place the market is pleading with contrarians to capitulate to present views.

We now have made some modest pivots, together with aligning sector allocations extra carefully to benchmark weightings the place doable. In a market rewarding high-beta shares, the place the portfolio has little publicity, we’re additionally in search of beta—however solely when it overlaps with our 10 Ideas of Worth Investing™, which require us to search for well-managed, financially sturdy companies with sound steadiness sheets buying and selling at enticing costs to assist create a margin of security. Our course of can coincide with some higher-octane names, however we stay extraordinarily disciplined in terms of key concerns corresponding to leverage, monetary soundness, and valuations.

Along with these steps, through the quarter we trimmed some positions for tax functions, which had been overwhelmed down when self-help methods didn’t progress as hoped—and the place we now have much less conviction. As we’ve been patiently in search of methods to deploy the proceeds of these gross sales, the non permanent improve in money was additionally a drag on efficiency within the fourth quarter.

Outlook

With out query, this has been a difficult surroundings for the Worth Plus Technique. Whereas we will’t utterly ignore the present surroundings—even when we disagree with some core financial assumptions—we should keep true to ourselves and our course of. That’s why we consider in Heartland’s 10 Ideas of Worth Investing™, that are non-negotiable components that we search for in any funding into consideration. As famed fund supervisor Seth Klarman has identified, the important traits of worth investing are “endurance, self-discipline, and risk-aversion.” We consider turning our backs on these values within the quick time period is a sure-fire recipe for underperforming in the long term.

Bradford A. Evans, Senior Vice President and Portfolio Supervisor

Andrew J. Fleming, Director of Analysis, Vice President, and Portfolio Supervisor

Fund Returns

12/31/2023

Since Inception (%) 20-12 months (%) 15-12 months (%) 10-12 months (%) 5-12 months (%) 3-12 months (%) 1-12 months (%) YTD* (%) QTD* (%) Worth Plus

Investor Class

9.59 7.73 9.36 5.24 11.39 6.51 1.83 1.83 6.99 Worth Plus

Institutional Class

9.73 7.94 9.63 5.48 11.66 6.76 2.11 2.11 7.06 Russell 2000® Worth 9.34 7.68 10.27 6.76 10.00 7.94 14.65 14.65 15.26
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*Not annualized

Supply: FactSet Analysis Methods Inc., Russell®, and Heartland Advisors, Inc.

The inception date for the Worth Plus Fund is 10/26/1993 for the investor class and 5/1/2008 for the institutional class.

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Within the prospectus dated 5/1/2023, the Gross Fund Working Bills for the investor and institutional class of the Worth Plus Fund are 1.22% and 1.01%, respectively. The Advisor has voluntarily agreed to waive charges and/or reimburse bills with respect to the institutional class, to the extent obligatory to take care of the institutional class’ “Web Annual Working Bills” at a ratio to not exceed 0.99% of common day by day web belongings. This voluntary waiver/reimbursement could also be discontinued at any time. With out such waivers and/or reimbursements, whole returns might have been decrease.

Previous efficiency doesn’t assure future outcomes. Efficiency represents previous efficiency; present returns could also be decrease or greater. Efficiency for institutional class shares previous to their preliminary providing relies on the efficiency of investor class shares. The funding return and principal worth will fluctuate in order that an investor’s shares, when redeemed, could also be price kind of than the unique price. All returns replicate reinvested dividends and capital positive aspects distributions, however don’t replicate the deduction of taxes that an investor would pay on distributions or redemptions. Topic to sure exceptions, shares of a Fund redeemed or exchanged inside 10 days of buy are topic to a 2% redemption price. Efficiency doesn’t replicate this price, which if deducted would scale back a person’s return. To acquire efficiency by the latest month finish, name 800-432-7856 or go to Worth Investing Supervisor Worth Mutual Funds | Heartland Advisors.

An investor ought to contemplate the Funds’ funding targets, dangers, and costs and bills rigorously earlier than investing or sending cash. This and different vital data could also be discovered within the Funds’ prospectus. To acquire a prospectus, please name 800-432-7856 or go to Worth Investing Supervisor Worth Mutual Funds | Heartland Advisors. Please learn the prospectus rigorously earlier than investing.

Statements concerning securities aren’t suggestions to purchase or promote.

Portfolio holdings are topic to vary. Present and future holdings are topic to threat.

The Worth Plus Fund invests in small firms which can be typically much less liquid and extra risky than massive firms. The Fund additionally invests in a smaller variety of shares (typically 40 to 70) than the common mutual fund. The efficiency of those holdings typically will improve the volatility of the Fund’s returns. There is no such thing as a assurance that dividened paying shares will mitigate volatility.

Worth investments are topic to the chance that their intrinsic worth might not be acknowledged by the broad market.

The Worth Plus Fund seeks long-term capital appreciation and modest present earnings.

The above people are registered representatives of ALPS Distributors, Inc.

The Heartland Funds are distributed by ALPS Distributors, Inc.

The statements and opinions expressed on this article are these of the presenter(s). Any dialogue of investments and funding methods represents the presenters’ views as of the date created and are topic to vary with out discover. The opinions expressed are for common data solely and aren’t meant to supply particular recommendation or suggestions for any particular person. The precise securities mentioned, that are meant for instance the advisor’s funding fashion, don’t characterize the entire securities bought, bought, or advisable by the advisor for shopper accounts, and the reader mustn’t assume that an funding in these securities was or could be worthwhile sooner or later. Sure safety valuations and ahead estimates are based mostly on Heartland Advisors’ calculations. Any forecasts might not show to be true.

Financial predictions are based mostly on estimates and are topic to vary.

There is no such thing as a assure {that a} explicit funding technique will probably be profitable.

Sector and Business classifications are sourced from GICS®.The International Business Classification Customary (GICS®) is the unique mental property of MSCI Inc. (MSCI) and S&P International Market Intelligence (“S&P”). Neither MSCI, S&P, their associates, nor any of their third get together suppliers (“GICS Events”) makes any representations or warranties, categorical or implied, with respect to GICS or the outcomes to be obtained by the use thereof, and expressly disclaim all warranties, together with warranties of accuracy, completeness, merchantability and health for a selected function. The GICS Events shall not have any legal responsibility for any direct, oblique, particular, punitive, consequential or every other damages (together with misplaced income) even when notified of such damages.

Heartland Advisors defines market cap ranges by the next indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Prime 200®.

Due to ongoing market volatility, efficiency could also be topic to substantial short-term adjustments.

Dividends aren’t assured and an organization’s future potential to pay dividends could also be restricted. An organization presently paying dividends might stop paying dividends at any time.

In sure instances, dividends and earnings are reinvested.

There is no such thing as a assurance that dividend-paying shares will mitigate volatility.

CFA® is a registered trademark owned by the CFA Institute.

Russell Funding Group is the supply and proprietor of the emblems, service marks and copyrights associated to the Russell Indices. Russell® is a trademark of the Frank Russell Funding Group.

Knowledge sourced from FactSet: Copyright 2023 FactSet Analysis Methods Inc., FactSet Fundamentals. All rights reserved.

Heartland’s investing glossary offers definitions for a number of phrases used on this web page.

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Editor’s Observe: The abstract bullets for this text had been chosen by Searching for Alpha editors.