During the first quarter of 2021, the iMGP SBH Focused Small Value gained 17.55%, underperforming its Russell 2000 Value Index benchmark, which gained 21.17% and the Morningstar Small Value Category (up 21.55%). Since its late 2020 inception, the fund’s 49.40% return trails the Russell 2000 Value’s gain of 62.37% and the Morningstar category’s 59.71% return.
Past performance does not guarantee future results. Index performance is not illustrative of fund performance. An investment cannot be made directly in an index. Short-term performance in particular is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns.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 fund may be lower or higher than the performance quoted. To obtain the performance of the funds as of the most recently completed calendar month, please visit www.partnerselectfunds.com. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced.
Quarterly Portfolio Commentary
Portfolio Positioning/Opportunity Set
The fourth quarter of 2020 presented market dynamics that created challenges to the portfolio’s relative performance and those same dynamics continued into the first quarter of 2021. The predominant headwinds we faced were the significant outperformance of unprofitable companies as well as high-beta and high short-interest stocks. Short-selling occurs when investors borrow a security and then sell it on the open market, planning to buy it back later for less money. We adhere to a risk policy within our portfolio where we do not invest in heavily shorted stocks and overall, we have very few companies in the portfolio that do not generate profits, nor do we have meaningful exposure to high-beta stocks. The enthusiasm for these type of names is somewhat understood given the massive stimulus that is happening concurrent with the reopening of the economy as more vaccine distribution occurs. What is surprising to us, though, is the length that this has occurred and the speed at which it is occurring. We remain disciplined in our process and philosophy, as always. We are not trying to maximize risk taking over cycles, rather we are trying to maximize returns by balancing risk and will not take excessive risk just to “keep up” within certain market environments.
Discussion of Performance Drivers
It is important to understand that the portfolio is built stock by stock with sector and cash weightings being residuals of the bottom-up, fundamental stock picking. That said, we do report on the relative performance contributions of both sector weights and stock selection to help shareholders understand drivers of recent performance. It is also important to remember that the performance of a stock over a single quarter tells us nothing about whether it will be a successful position for the fund; that is only known at the point when the stock is sold.
iMGP SBH Focused Small Value Fund Attribution
| Sector Weights* | Fund | Russell 2000 Value as of 3/31/2021 |
|---|---|---|
| Communication Services | 0.0% | 2.6% |
| Consumer Discretionary | 10.8% | 14.2% |
| Consumer Staples | 9.9% | 3.5% |
| Energy | 1.3% | 4.9% |
| Finance | 13.5% | 27.1% |
| Health Care & Pharmaceuticals | 6.5% | 6.4% |
| Industrials | 31.3% | 17.2% |
| Information Technology | 10.5% | 5.6% |
| Materials | 10.2% | 6.3% |
| Real Estate | 2.2% | 8.3% |
| Utilities | 0.0% | 3.9% |
| Cash | 4.0% | 0.0% |
| 100.00% | 100.00% |
- All 11 sectors comprising the Russell 2000 Value Index saw gains in the quarter, ranging from 4.84% for the utilities sector to a high of 41.89% for the energy sector.
- Both stock selection and sector allocation detracted from the fund’s relative performance in the quarter, though stock selection was the primary detractor. While stock picking detracted from performance, all sectors in the portfolio had positive returns in the three-month period.
- The three sectors with the largest contribution to performance were utilities (driven by allocation), financials (driven by selection), and industrials (driven by selection). Within industrials, REV Group was a top contributor in the quarter, as its stock gained 117%. The stock is discussed in more detail below.
- Another top contributor was Six Flags. This consumer discretionary name gained 36% in the quarter on optimism around the reopening of theme parks; it is also discussed below.
- The three sectors that detracted most from the portfolio’s performance relative to its benchmark were materials (driven by selection), health care (drive by selection), and energy (driven by allocation). Below we discuss Circor, a valve manufacturer, and Mednax, a provider of pediatric care services, in more detail.
- On an individual basis, technology holding NCR was a top detractor as the stock gained 1% in the period and failed to keep pace with the sector’s 19% gain in the benchmark. One reason for the stock’s underperformance was management’s decision to pursue a larger-than-expected acquisition. The management team at NCR has proven disciplined in capital allocation and return on invested capital, giving the fund’s co-managers confidence that management can continue to drive value creation looking forward.
- Cash was another detractor in the period. The portfolio’s cash position averaged over 7% in the period and was a detractor in what was a strong market for small-cap value stocks.
Top 10 Contributors as of the Quarter Ended March 31, 2021
| Company Name | Fund Weight (%) | Benchmark Weight (%) | 3-Month Return (%) | Contribution to Return (%) | Economic Sector |
|---|---|---|---|---|---|
| REV Group Inc | 2.74 | 0.02 | 117.48 | 2.70 | Industrials |
| Six Flags Entertainment Corp | 3.17 | 0.00 | 36.28 | 1.10 | Consumer Discretionary |
| Faro Technologies Inc | 2.84 | 0.01 | 22.57 | 0.79 | Information Technology |
| Regal Beloit Corp | 3.94 | 0.00 | 16.42 | 0.74 | Industrials |
| Glacier Bancorp Inc | 2.58 | 0.34 | 24.44 | 0.69 | Financials |
| Beacon Roofing Supply Inc | 2.03 | 0.19 | 30.18 | 0.66 | Industrials |
| Lakeland Financial Corp | 2.21 | 0.11 | 29.87 | 0.63 | Financials |
| Tapestry Inc | 1.25 | 0.00 | 39.51 | 0.62 | Consumer Discretionary |
| Seacoast Banking Corp | 2.56 | 0.13 | 23.06 | 0.61 | Financials |
| Coty Inc Class A | 1.14 | 0.00 | 26.19 | 0.57 | Consumer Staples |
Top 10 Detractors as of the Quarter Ending March 31, 2021
| Company Name | Fund Weight (%) | Benchmark Weight (%) | 3-Month Return (%) | Contribution to Return (%) | Economic Sector |
|---|---|---|---|---|---|
| Core-Mark Holding Co Inc | 0.05 | 0.01 | 12.29 | 0.05 | Consumer Discretionary |
| Gildan Activewear Inc | 0.23 | 0.00 | -2.39 | -0.04 | Consumer Discretionary |
| Quotient Technology Inc | 0.02 | 0.03 | 5.08 | 0.03 | Consumer Discretionary |
| Mednax Inc | 0.86 | 0.14 | -8.72 | -0.07 | Health Care |
| Orthofix Medical Inc | 3.51 | 0.06 | 0.86 | 0.06 | Health Care |
| Circor International Inc | 1.69 | 0.05 | -9.42 | -0.14 | Industrials |
| Box Inc | 0.02 | 0.00 | -4.13 | -0.04 | Information Technology |
| NCR Corp | 4.55 | 0.00 | 1.01 | 0.01 | Information Technology |
| Progress Software Corp | 2.27 | 0.00 | -2.10 | 0.00 | Information Technology |
| Equity Commonwealth REIT | 2.34 | 0.00 | 1.91 | 0.04 | Real Estate |
Edited Commentary from the Respective Managers on Selected Contributors
Contributors
REV Group Inc. (REVG), an American manufacturer of specialty vehicles, was a name we identified in 2020 as one with significant opportunity to have an inflection in their Return on Invested Capital (ROIC) due to the new management team aggressively focusing on operations by bringing in a “Lean” culture. Our thesis surrounding this ROIC improvement has only grown stronger over the last several quarters and we don’t believe valuation is fully reflecting the margin and ROIC improvement that should be occurring there over the next several years in our judgment. The stock performed well in the quarter as management beat expectations and provided a strong outlook for 2021.
Six Flags Entertainment Corp. (SIX) was purchased in the portfolio due to our belief investors would react positively to optimism around the reopening of theme parks as progress against COVID-19 was becoming a reality but more importantly, this is a new management team that is now return-driven around capital allocation. The change in culture around capital allocation that has been occurring over the last number of quarters should drive a step change in the ROIC profile over time in our judgment. Our thesis has not changed over the last couple of quarters as we continue to feel management is beginning to accelerate this cultural transformation. We believe the valuation remains attractive when factoring in the overall earnings power of the company upon full reopening of theme parks. The stock did well in the quarter predominantly on the expectation of improved results from the reopening of the economy.
Detractors
Circor International Inc. (CIR), an industrial valve manufacturing company, has been a holding for over a year. Our investment thesis is based on their portfolio transformation through selling more commoditized businesses and using the proceeds to pay down debt as well as organically drive growth in much higher return parts of the business. This thesis remains fully intact and we believe valuation is not fully reflective of the new operating portfolio of businesses. The stock underperformed in the first quarter simply because it performed extremely well in the fourth quarter of 2020 rather than due to changes within the business or its overall fundamentals.
Medical group Mednax Inc. (MD) was not a large detractor in the quarter overall, however the stock has struggled under the view that birth rates will be structurally lower going forward post-COVID. We believe the management team has done a great job of divesting non-core assets and putting the balance sheet in great shape. We did, however, make the decision to sell this name out of the portfolio as the reward to risk, along with unknown visibility into birth trends, made it difficult for us to allocate our capital into the stock.