For the fourth quarter of 2022, the iMGP SBH Focused Small Value portfolio gained 14.20%, widely outperforming the 8.42% return for the Russell 2000 Value benchmark. The fund finished the calendar year ahead of the benchmark, losing 13.39% compared to a 14.48% decline for the Russell 2000 Value index. Since the fund’s inception, it has generated a 12.07% annualized return compared to a 17.27% gain for the Russell 2000 Value.
Performance quoted represents 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. Current performance of the funds may be lower or higher than the performance quoted. Short term performance is not a good indication of the fund’s future performance and should not be the sole basis for investing in the fund.To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit www.imgpfunds.com. Returns less than one year are not annualized. The Advisor has contractually agreed to limit the expenses of the fund through April 30, 2023. Without this limit the fund’s net expenses would be higher the return would be lower.
Market Overview and Strategy Performance
The market was relatively strong in the quarter even as the overall economy faced a more aggressive Federal Reserve (Fed) interest-rate policy. The loosening of supply chains in many areas and cooling inflation across almost all categories (except wages) have been a benefit to many of the portfolio’s holdings particularly those in Industrials and Consumer Discretionary. China remains a wildcard heading into 2023; however, the portfolio’s holdings with exposure to China handled the shutdowns from COVID outbreaks fairly well. Nevertheless, we are watching developments here closely. The European energy crisis has abated for the time being and we have lowered the portfolio’s exposure to this region given how unpredictable the cost structures of companies with larger operations in the European Union have become.
The three sectors that contributed most to the portfolio’s performance relative to its benchmark in the quarter were Industrials (driven by selection and allocation), Consumer Discretionary (driven by selection) and Health Care (driven by selection and allocation). Consumer Discretionary holding Modine Manufacturing Company was a top contributor on an individual stock basis. Modine, under a new CEO, has rapidly turned over management across the organization as it executes upon an 80/20 simplification strategy. When this strategy is successfully adopted by an organization, it leads to less complexity, stronger customer relationships, and a greater focus on pricing and improvements. Although Modine is still early in this process, we have already started to see positive signs of its focus on profitability. Within Industrials, Sterling Infrastructure was the top performer. STRL’s management team has positioned the business to take advantage of emerging secular trends. Reshoring back to the United States for greater supply chain certainty has driven increased spending by customers, allowing the company to further build out its infrastructure. Sterling also has exposure to traditional infrastructure spending including roads, bridges, and airports, which should see solid demand for the next several years.
The three sectors that detracted most from the portfolio’s performance relative to its benchmark in the quarter were Materials (driven by selection), Financials (driven by selection), and Energy (driven by allocation and selection). Within Materials, Glatfelter Corporation was the top detractor. Glatfelter has continued to be under substantial pressure due to its manufacturing footprint having sizeable exposure to the European Union region including many facilities in Germany. Given the natural gas and overall energy crisis that has unfolded in GLT’s core manufacturing markets along with higher-than-desired leverage during this uncertain backdrop, we exited the position during the quarter. Within Financials, SouthState Corporation was the largest detractor. In our opinion, SouthState’s underperformance was unfounded relative to the pressure their overall regional bank peers are facing. We believe the company has a significant advantage given its lower cost of deposits and strong history of solid credit underwriting. Geographically, it has exposure to the Southeast region, which is seeing the most capital investment from the reshoring theme and therefore we continue to like this exposure.
Portfolio Breakdown as of 12/31/2022
| By Sector | Fund | Russell 2000 Value |
| Finance | 16.8% | 28.9% |
| Consumer Discretionary | 13.2% | 10.0% |
| Information Technology | 6.9% | 5.6% |
| Communication Services | 0.0% | 2.9% |
| Health Care & Pharmaceuticals | 4.3% | 10.5% |
| Industrials | 32.9% | 13.3% |
| Consumer Staples | 3.6% | 2.7% |
| Real Estate | 8.1% | 10.7% |
| Utilities | 0.0% | 5.3% |
| Energy | 5.7% | 6.1% |
| Materials | 6.4% | 4.0% |
| Cash | 2.2% | 0.0% |
| Top 10 Holdings | |
| MODINE MANUFACTURING CO | 4.2% |
| SP PLUS CORP | 3.9% |
| KBR INC | 3.8% |
| BELDEN INC | 3.7% |
| STERLING INFRASTRUCTURE INC | 3.6% |
| PROGRESS SOFTWARE CORP | 3.2% |
| APOGEE ENTERPRISES INC | 3.2% |
| SEACOST BANKING CORP/ FL | 2.9% |
| EQUITY COMMONWEALTH | 2.9% |
| GLACIER BANCORP INC | 2.8% |
| Total | 34.22% |
Market Outlook
In our opinion, 2023 will not be much easier than 2022 from a market volatility perspective. We would describe 2022 as chaotic with many unexpected macro circumstances including rising interest rates. We believe that the market has only adjusted to some of the cost of capital increases and 2023 will show us how the market will react to contracting margins, which we expect to happen later this year. We also believe a recession is highly probable and a Fed pivot may or may not occur. It is our view that the key to the market ending the year on a strong note is increased liquidity. While there is currently more downside than upside risk in the market, we believe 2023 will be full of opportunities to buy quality companies with strong management teams particularly during volatile episodes, of which there will likely be more than just one or two. We think companies with strong balance sheets and stable free cash flow will remain important for the majority of 2023. As shareholders know, we have an ROIC philosophy and seek to find like-minded management teams focused on improving ROIC. We learned a lot in 2022, not simply about the market, but about resilience in the face of many volatile times. This business is not for the faint of heart given its many challenges and aspects that are out of one’s control Experience is the best teacher and we are stronger investors entering 2023 and, I would like to think, better humans navigating these complicated times on many levels. Thank you for your interest and support.