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Commentary SBH Focused Small Value Fourth Quarter 2021 Attribution

During the fourth quarter of 2021, the iMGP SBH Focused Small Value Fund gained 3.12%, trailing the Russell 2000 Value Index benchmark’s 4.36% gain and the Morningstar Small Value category (up 5.90%). Since its July 2020 inception, the fund’s 32.22% annualized gain trails the Russell 2000 Value’s gain of 46.51%, and the Morningstar category’s 47.29% 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

During the fourth quarter, the portfolio was relatively stable in terms of repositioning. We trimmed a few of the larger weighted positions as they appreciated and built smaller positions in names where our conviction has grown. We have remained underweight Energy; a sector that continues to perform exceptionally well, but difficultly in anticipating commodity price swings keep our exposure limited. We are underweight Health Care mostly due to Bio‐pharma becoming a significant weight in the benchmark. We have no exposure here as we haven’t found any company in this industry in which we have sufficient confidence to take a sizeable position. However, given the risk of having no exposure in the portfolio, we continue to research companies in the industry. With interest rates starting to rise, we have kept our bank sector weight approximately in‐line with the benchmark. If banks continue to appreciate at the same rate as they have recently, we are likely to trim that exposure. Our overweight to Industrials and Materials remained constant in the quarter. While owning companies that produce real products has been a headwind this year (given supply chain issues, labor availability, and inflation), we are quite pleased with how our companies have fundamentally and operationally handled these challenges.    

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

  • Stock selection was the driver of relative underperformance in the quarter, while sector allocation was a contributor.
  • The three sectors that contributed most to the portfolio’s performance relative to its Russell 2000 Value benchmark in the quarter were Consumer Staples (driven by allocation and selection, equally), Communication Services (driven by allocation), and Energy (driven by allocation).
  • Within Consumer Staples, Coty Inc. was the top contributor on an individual stock basis. The stock was the single largest detractor in the previous quarter due to one of the largest shareholders, KKR, selling a very large portion of its stake. Nicholson and Dickherber believed last quarter’s decline was technical in nature, and they remained confident in new management’s execution and focus on higher returns on invested capital, with the potential to create a global beauty and fragrance powerhouse. More details on the stock can be found below in the Commentary on Selected Contributors.
  • Another top contributor in the period was Glatfelter Corp., a leading global manufacturer of engineered materials. In the period, management continued to allocate capital to fortify their market leadership via an acquisition. This acquisition increases Glatfelter’s scale and diversification into attractive and complementary product categories with high-performing and innovative technologies and advanced plant-based sustainable solutions across some of its product lines.
  • The three sectors that detracted most from the portfolio’s performance relative to its benchmark in the quarter were Real Estate (driven by allocation), Information Technology (driven by selection) and Utilities (driven by allocation).
  • One of the largest individual detractors was REV Group, Inc. This stock was a top contributor in the prior quarter (gaining nearly 10%), but in this three-month period the stock was down 17.25%. The longer-term investment thesis remains unchanged, but recent supply chain pressures have put pressure on the stock. Additional details on the investment thesis can be found below.
  • A lack of exposure to Utilities (compared to the nearly 4.72% in the benchmark) detracted from performance as the benchmark sector gained 12.48%. Utilities is a sector that does not fit the team’s best-ideas criteria given industry regulations and typically a lack of catalyst to significantly improve returns on investment capital.
Sector Weights*FundRussell 2000 Value as of 12/31/2021
Communication Services0.0%3.6%
Consumer Discretionary9.4%8.0%
Consumer Staples9.0%3.0%
Health Care & Pharmaceuticals4.0%10.1%
Information Technology13.6%5.7%
Real Estate2.1%11.7%
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 Contributors as of the Quarter Ended December 31, 2021

Company Name Fund Weight (%) Benchmark Weight (%) 3-Month Return (%)Contribution to Return (%) Economic Sector
Coty Inc4.770.0033.591.43 Consumer Staples
Apogee Enterprises Inc2.600.0728.140.67 Industrials
Glatfelter Corp3.230.0522.980.66 Materials
KBR Inc2.880.0521.160.57 Industrials
Regal Rexnord Corp3.610.0013.420.48 Industrials
Belden Inc3.440.1912.820.45 Information Technology
Beacon Roofing Supply Inc2.070.0520.080.43 Industrials
SPX Corp3.500.311.660.42 Industrials
Sterling Construction Co Inc2.3500.416.010.39 Industrials
Gildan Activewear Inc2.340.0016.530.38Consumer Discretionary
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.

Commentary on Selected Contributors

Coty Inc. The investment thesis for Coty Inc. was based on an entire new management team that was looking to bring focus, efficiency, and innovation into the core product markets of beauty and fragrance. The progress management has made has been quicker than expected; however, the improvements are still in the very early stages of this transformation. The fund’s co-managers remain confident in management’s ability to execute and believe the stock has additional upside as valuation remains significantly below its peers. Given the strong appreciation in the stock and to manage the position size, the position was slightly trimmed in the quarter.

Apogee Enterprises. The investment thesis for Apogee Enterprises was based on a new CEO who joined the company in the past year. His expertise in driving operational improvements and measuring all aspects of a business to ROIC hurdle rates was very attractive. New management has moved swiftly to create a leaner organization which should allow them to have better visibility into driving further ROIC improvements over the next several years. The stock reacted favorably in the quarter as the company raised guidance even in the face of supply chain and inflationary headwinds. The valuation is still not fully reflecting the potential ROIC opportunity. However, the company has a cyclical bent to its business and because of potential stock-price volatility position size is being managed accordingly.

KBR, Inc. The investment in KBR centered on the competitive moat the company have developed across their businesses. They have positioned the business to play into emerging trends such as incremental funding around environmental regulations as well as other areas within government spending, such as space exploration The stock performed well due to consistent execution in the face of a challenging backdrop of inflation and supply chain headwinds. The position size has been held steady as some of the trends to which the company is exposed are in the very early innings and, given the company’s outlook for significant earnings power and return improvement over the next several years, it may take some time for the market to fully recognize the opportunity.

Top 10 Detractors as of the Quarter Ending December 31, 2021

Company Name Fund Weight (%) Benchmark Weight (%) 3-Month Return (%)Contribution to Return (%) Economic Sector
Compass Minerals International Inc3.570.00-20.45-0.80Materials
REV Group Inc3.070.03-17.25-0.59 Industrials
Orthofix Medical Inc2.630.00-18.44-0.58Health Care
Circor International Inc2.35 0.00-17.66-0.46Industrials
SP Plus Corp2.67 0.00-7.99-0.22 Industrials
Conduent Inc1.00 0.00-18.97-0.22 Information Technology
Modine Manufacturing Co0.730.03-10.15-0.18Consumer Discretionary
Umpqua Holdings Corp2.27 0.00-4.00-0.09 Financial
Pacific Premier Bancorp Inc1.340.22-2.64-0.04Financial
Progress Software Corp2.33 0.00-1.52-0.03Information 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.

Commentary on Selected Detractors

Compass Minerals. Compass Minerals International, Inc. produces and sells essential minerals primarily in the United States, Canada, Brazil, the United Kingdom, and internationally. The investment centers on a management team that is driving a renewed focus towards operational discipline and portfolio management. Compass divested its non‐core Brazilian assets, while disclosing a strategy to develop a very large lithium asset within their Salt Lake City, UT property, as new technology has emerged recently to make this a feasible value creator for the company. The underperformance in the quarter was due primarily to reallocation of internal capital that surprised the Street. Specifically, the company cut its dividend to allocate more to the development of this lithium asset. If successful, this asset is a true game changer both in profits and returns for a company that had become more of a pure play dividend darling. Nicholson and Dickherber believe the stock is significantly undervalued if Compass can develop their lithium asset on budget and on time. Even if unsuccessful, the co-managers believe the stock is still attractive. With the stock’s weakness during the quarter, Nicholson and Dickherber added to the position.

REV Group, Inc. REV Group is an American manufacturer of specialty vehicles. The investment thesis rests on an entirely new management team leading the business and significantly enhancing the operational discipline. This has resulted in significantly better margins, while demand has remained exceptionally strong. The underperformance in the quarter came from supply chain issues (beyond the company’s control) limiting management’s ability to drive further margin expansion. The stock’s valuation remains very attractive, and in Nicholson and Dickherber’s opinion, investors are overly discounting the company’s risk of supply chain headwinds which, once resolved, should allow for a powerful upswing in ROIC.

Orthofix Medical, Inc. Orthofix Medical, a medical device and biologics company, was down 18.44% in the quarter. The company has a revamped management team, and the salesforce is gaining traction to drive a strong margin story as efficiently as possible; a story which Nicholson and Dickherber believe the market is overlooking. In their opinion, the underperformance is entirely related to the pandemic headwinds on the number of elective surgeries, even though many surgeries can’t be deferred. The sentiment around the recovery of hospitals to service elective surgeries given staffing challenges currently still poses a near‐term headwind; however, once we move past the pandemic phase, the co-managers believe there will be a strong positive rate of change in both growth and margins from current levels.

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Return on Invested Capital (ROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns.

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