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Commentary SBH Focused Small Value Fund Second Quarter 2021 Commentary

During the second quarter of 2021, the iMGP SBH Focused Small Value Fund lost 1.00%, underperforming its Russell 2000 Value Index benchmark, which gained 4.56% and the Morningstar Small Value Category (up 4.50%). Since its late 2020 inception, the fund’s 47.90% return trails the Russell 2000 Value’s gain of 69.78% and the Morningstar category’s 66.95% return.

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 Returns less than one year are not annualized.

Quarterly Portfolio Commentary

Portfolio Positioning/Opportunity Set

After a challenging first quarter of relative performance (predominantly driven by 476 bps underperformance in the month of January) when GameStop and other high short-interest, low-profit/no-profit stocks performed extremely well), the relative underperformance continued in the second quarter. Second-quarter performance continued to be driven by similar market trends observed in the first quarter; it seems investors want extreme cyclicality with low to no profits that are tied to stimulus and gross domestic product (GDP) growth only.

In the second quarter, unprofitable companies with negative or low return on invested capital (ROIC), high short-interest, and high amounts of leverage continue to drive the index higher. We do not have exposure to companies with these characteristics. The disparity of performance between what worked and what we seek was wide. For example, stocks characterized as highly shorted were up 42.2%, unprofitable stocks gained 17.5%, and highly leveraged stocks rose 16.6%. By comparison, stocks with the characteristics we seek lagged. Stocks with high profitability were down -1.5%, profitable companies fell -5.3%, and low leverage stocks declined -9.3%. “Meme” stocks (as they are called) dominated performance within the Russell 2000 Value benchmark. Meme stocks contributed almost 30% of the benchmark’s return in the second quarter, and we did not own any of these stocks, which we view as speculative businesses.

From a sector standpoint we have added to Industrials given the significant ROIC catalyst emerging in certain companies that have a new management team and new incentives to strategically transform how these businesses operate regardless of macro influences. We did trim the portfolio’s exposure in a couple of our Consumer Staples names given the risk of higher inflation causing risk to the near term. However, if this inflation is managed over the next 3 to 6 months, we plan to re‐allocate back to a couple of names in this sector assuming reward‐to‐risk is attractive.

Over an entire market cycle, proper capital allocation and improving and sustainable ROIC improvement strategies have proven to win out. We are frustrated with the magnitude and duration of the current market backdrop. But we remain disciplined. We continue to invest prudently in improving ROIC businesses and companies representing an appropriate mix of reward to risk. 

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*FundRussell 2000 Value as of 6/30/2021
Communication Services0.0%4.5%
Consumer Discretionary9.3%8.3%
Consumer Staples9.1%2.8%
Health Care & Pharmaceuticals4.4%11.4%
Information Technology10.7%5.5%
Real Estate2.1%11.1%
Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.
  • Both stock selection and sector allocation detracted from the fund’s relative performance in the quarter, though stock selection was the primary detractor.
  • The three sectors that detracted most were Industrials (driven by selection), Communication Services (driven by allocation), and Consumer Discretionary (driven by selection). Within Industrials, SP Plus, a leading provider of technology-driven mobility solutions for aviation, commercial, hospitality and institutional clients throughout North America, was among the detractors and is discussed below in more detail.
  • The three contributing sectors were Utilities (driven by allocation), Financials (driven by allocation), and Information Technology (driven by selection). Within Information Technology, NCR Corp was the top individual contributing stock, gaining 20.18% in the period. NCR, which was among the top detractors last quarter, is discussed in more detail below.
  • Among individual top detractors, REV Group was the top detractor in the quarter, as the stock fell 17.84%. Despite strong operational improvements, the stock declined on news of a large owner of shares reducing their position. However, the current management team has been 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 do not believe valuation reflects the margin and ROIC improvement that should occur as we look ahead.
  • Cash was another detractor in the period. The portfolio’s cash position averaged just over 5% in the period and was a detractor in what was a good market for small-cap value stocks.

Top 10 Contributors as of the Quarter Ended June 30, 2021

Company Name Fund Weight (%) Benchmark Weight (%) 3-Month Return (%)Contribution to Return (%) Economic Sector
NCR Corp4.330.0020.180.83Information Technology
Ferro Corp2.490.0327.940.64Materials
Element Solutions Inc2.210.0028.160.53Materials
Harley Davidson Inc.2.460.0014.260.38Consumer Discretionary
Gildan Activewear Inc1.960.0020.940.36Consumer Discretionary
SPX Corp4.390.054.820.20Industrials
Apogee Enterprises Inc0.840.0611.280.16Industrials
Coty Inc3.990.003.660.16Consumer Staples
Umpqua Holdings Corp2.350.006.280.14Financials
Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Top 10 Detractors as of the Quarter Ending June 30, 2021

Company Name Fund Weight (%) Benchmark Weight (%) 3-Month Return (%)Contribution to Return (%) Economic Sector
REV Group Inc3.240.03-17.84-0.64Industrials
Quotient Technology Inc1.430.03-33.84-0.58Consumer Discretionary
Glatfelter Corp2.640.04-17.73-0.52Materials
The Hain Celestial Group Inc3.670.00-7.98-0.30Consumer Staples
Orthofix Medical Inc3.170.05-7.47-0.24Health Care
Lakeland Financial Corp1.980.10-10.46-0.23Financials
Regal Beloit Corp3.550.00-6.43-0.23Industrials
Six Flags Entertainment Corp3.300.00-6.86-0.22Consumer Discretionary
Treehouse Foods Inc1.350.00-14.78-0.22Consumer Staples
Faro Technologies Inc2.210.01-10.17-0.21Information Technology
Portfolio contribution for a holding represents the product of the average portfolio weight and the total return earned by the holding during the period. Past performance is no guarantee of future results. Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Edited Commentary from the Respective Managers on Selected Contributors


NCR Corp. (NCR) – The thesis here has been the pivot away from a hardware‐centric model to a software suite, which carries higher margins and higher returns and less volatility. This thesis has not changed, and overall, we view the valuation of NCR as attractive at current levels given the prospects for multiple years of margin expansion and return improvement potential.

Ferro Corp. (FOE) – This holding was acquired during the second quarter. The thesis was based on the upgrading of the company’s product mix to higher margins through bolt‐on acquisitions centered around driving ROICs higher over time.

Element Solutions Inc. (ESI) – The thesis was the lack of awareness by investors post spin‐out from a larger holding company. A strong focus on returns and operational excellence aligning with significant improvements in end‐markets keep us positive on ESI. Valuation is attractive at this time and the fact that a larger competitor was recently acquired for a 50% premium over where ESI trades currently, we feel the holding is undervalued.


Hain Celestial Group Inc. (HAIN) – The thesis has been the turnaround that continues to progress under the leadership of the CEO and the team he has assembled. This has not changed during the quarter; however, Consumer Staples businesses have not been desired by investors causing relative underperformance. We have trimmed this position recently not because of stretched valuations but due to inflationary headwinds that we believe will be a challenge to offset over the next few quarters as price increases are pushed through to customers.

Treehouse Foods Inc. (THS) – Fundamentally the same challenges described above with HAIN, in terms of investors not desiring Consumer Staples stocks as well as inflationary headwinds, caused us to trim this holding as well. The thesis for Treehouse was centered around a new strategy to begin refocusing on differentiated products, however, this has taken longer than we anticipated. We believe valuation is not a concern especially once earnings normalize and inflationary trends stabilize. With JANA Partners, a large shareholder that focuses on shareholder engagement, now having a larger influence, we do expect strong execution or even potentially (though not our base case) a sale of the company at some point if the market does not give credit to the value that can be created at Treehouse.

SP Plus Corp. (SP) – The thesis for buying SP Plus was two‐fold. First was the company’s ability to deploy significant technology offerings to customers, which competitors cannot duplicate and which we believe will drive higher margins sustainably as demand recovers upon the reopening of the domestic economy. The second was valuation relative to the prospects we see over our investment horizon of 18 to 24 months. The stock, however, has underperformed for reasons we cannot accurately identify outside of management remaining conservative with earnings guidance.

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The funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the investment company, and it may be obtained by calling 1-800-960-0188, or visiting Read it carefully before investing.

Mutual fund investing involves risk. Principal loss is possible. Past performance does not guarantee future results. 

Investing in small companies subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies. Though not an international fund, the fund may invest in foreign securities. Investing in foreign securities exposes investors to economic, political and market risks and fluctuations in foreign currencies. These risks are greater for investments in emerging markets. 

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Litman Gregory Fund Advisors, LLC has ultimate responsibility for the performance of the iMGP Funds due to its responsibility to oversee the funds’ investment managers and recommend their hiring, termination, and replacement.

Effective July 31, 2020 the name of the Litman Gregory Masters Funds was changed to iMGP Funds.

The iMGP Funds are Distributed by ALPS Distributors, Inc.