The iMGP Small Company Fund declined 5.24% in the second quarter, lagging the Russell 2000 Index’s 3.28% loss. Year to date, the fund is up 2.01%, putting it ahead of the 1.73% gain for the small-cap benchmark. We should note that Polen Capital’s small-cap growth team was added to the fund at the end of April, splitting the assets with the fund’s small-cap value manager, Segall Bryant & Hamill (SBH). With the addition of Polen, the fund’s mandate changed from small-cap value to small-cap blend.
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, 2025. Without this limit the fund’s net expenses would be higher the return would be lower.
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Market Overview and Strategy Performance
Manager Commentaries
Polen Capital
Marking a shift from the first quarter’s lower-quality and high-price momentum style factors driving performance, the second quarter reflected more of a flight to quality. Concerns around stubbornly high inflation dampened views on interest-rate cuts, following the exuberance in the small-cap asset class that started in October. Against this backdrop, the performance gap between small-caps and large-caps continued to widen, and small-cap investors retreated to lower-volatility sectors and industries. Amid all this, there remains considerable hype around companies perceived to be beneficiaries of artificial intelligence and a crowding into companies where growth is perceived as more certain.
Our quality growth-oriented portfolio was not immune to this seemingly exaggerated volatility; while some holdings benefited, most were adversely affected. In instances where stock prices rose beyond what we felt fundamentals justified, we right-sized positions and sourced funds to add to new and existing ideas with what we believe are better risk-return profiles, reinforcing our opportunity cost mindset.
Segall Bryant & Hamill
Durin the quarter, the market started to fully price out any near-term interest-rate cuts from the Federal Reserve Board, which created more volatility at times. What also emerged, particularly in June, was that the ‘higher for longer’ interest rate policy would be at risk of slowing the economy down faster than expected. This was confirmed by economic leading indicators weakening as the second quarter ended. As a result of a weaker economic backdrop, we saw underperformance mainly centered in our Industrials and Consumer Discretionary holdings during the quarter. We continue to see demand from megatrends such as data centers, infrastructure spending, onshoring/reshoring, and the Inflation Reduction Act, albeit nothing is linear and we are watching for a broader weakening. As we move into the second half of the year, focus will remain on the Federal Reserve Board’s interest-rate decisions, economic data trends, and the Presidential election. It is difficult to handicap the result of the election, but it will have ramifications across many areas of the economy both domestically and globally.
There are always uncertainties. However, some periods contain a far greater number of uncertainties, which is where we are today. Elections across the globe have gotten more interesting to say the least. The implications of policy, currency, and other key macroeconomic factors on consumer, industrial, and broad market sentiment will likely be volatile for several months, making navigating the remainder of the year anything but linear.
As always, our focus is on management teams that have significant opportunity to drive an inflection in return on invested capital (ROIC), regardless of the operating environment, by employing self-help strategies such as 80/20, LEAN, continuous improvement, and simplification. This focus helps us find positive rates of change on returns over time that are within the management teams’ control as opposed to almost entirely requiring good times and constant access to low costs of capital. While this approach clearly does not always outperform the market, it has done reasonably well over longer time periods (2008 inception with many environments of experience).
While the next six to 12 months may have more volatility, that means more opportunity to find and add value to our strategy. Such time periods do not last forever and guided by good management teams, we have confidence that most of our teams can be stronger over time regardless of environment. To think assets, capital allocation, cost of capital, and management no longer matters (as some people think given a small period of time post pandemic) is short sighted and prone to a confidence that needs another several years to prove out. It also defies the entirety of market history in the sense that these factors have always mattered over time. We are thankful to be navigating these uncertainties with a heavy management and asset allocation focus for so many years. This allows us to constantly unearth new ideas, new investments, and new potential sources of returns for our clients.
Edited Commentary from the Respective Managers on Selected Contributors
It is worth remembering the fund’s overall positioning is driven by the managers’ stock picking. As a result, stock selection is always the main driver behind the fund’s absolute and relative performance. Attribution analysis over a given time period may however show other factors also explain relative performance.
Stock selection and sector allocation detracted value during the first quarter. The former was the main detractor. Positions within the technology sector detracted the most from relative gains during the quarter. Stock selection in the health care sector was also a meaningful drag on returns.
Ollie’s Bargain Outlet (Rayna Lesser Hannaway and Whitney Young Crawford, Polen Capital)
Ollie’s Bargain Outlet is an American retail chain known for offering discounted, closeout merchandise and excess inventory across a wide range of product categories. Their emphasis on selling high-quality, name-brand products at significantly discounted prices has been a cornerstone of the business since its inception. Their approach to leveraging closeouts and bargains, cultivated through deep vendor relationships, agile distribution networks, and a dedicated buyer team, has positioned Ollie’s as a leader in the closeout market. This position allows Ollie’s to meet the demands of both consumers looking for value and manufacturers seeking efficient inventory management, both of which we believe play well in the current environment marked by pressures on the consumer. During the quarter, the stock responded positively to first quarter adjusted earnings per share and comparable sales that were better than consensus estimates, and the company also raised its full-year guidance.
Warby Parker (Rayna Lesser Hannaway and Whitney Young Crawford, Polen Capital)
A US-based eyewear retailer that emphasizes a customer centric omnichannel business model that is strongly positioned in the value-for-money segment of the eyewear market. Their business model centers on customer transparency and ease of shopping which is embedded in their channel agnostic business model. The stock was up on better-than-expected earnings, in part also a reflection of the weaker sentiment around the stock in recent quarters. What went well this quarter has been stronger glasses growth and continued growth in contacts/optometry. The investment in optometrists has been substantial and we are now starting to see gross margin improve as that investment begins to contribute to utilization.
Valmont Industrials (Shuan Nicholson and Mark Dickherber, SBH)
Within the Industrials sector, Valmont Industries Inc. was a top performer. Valmont is undertaking a more rigorous ROIC approach across the organization under a new CEO. This allows for stronger margins across its infrastructure and agriculture businesses. The most exciting part of the story is the ever-increasing need for power supply to the utility grid to service data center demand, which fits into the core product offering of Valmont. Agriculture remains in a downturn for the second year in a row in North and South America. However, solid demand in the Middle East is allowing for growth opportunities.
Element Solutions (Shuan Nicholson and Mark Dickherber, SBH)
Element Solutions Inc. in the materials sector was the top performer in part to raising guidance for the second quarter. ESI is currently seeing strong demand across their specialty chemicals portfolio that sells into the electronics industry, which includes semiconductors as well as circuitry and assembly. This demand is driven by next generation chips that require stringent heat management chemicals of which the company maintains a leadership position.
Edited Commentary from the Respective Managers on Selected Detractors
Progyny, (Rayna Lesser Hannaway and Whitney Young Crawford, Polen Capital)
The company is the leading managed care provider specialized in fertility. The company provides a clear and differentiated value proposition that has led many employers to carve out fertility as a separate medical benefit. The company reported weaker 1Q24 results in May due to lower-than-expected benefit utilization. This was largely due to patients reassessing treatment after the Alabama Supreme Court ruling in February declaring embryos created through In vitro fertilization (“IVF”) should be considered children. While Alabama accounts for very little of Progyny’s revenue, the headlines—particularly in conservative Christian groups—caused some patients with authorized procedures to delay the start of those cycles. While this is aheadwind, we believe the long-term opportunity and the competitive position of Progyny is unchanged. Fertility benefits still have an extremely long runway for potential growth, particularly as Progyny shows success penetrating new sectors and industries beyond the fertility benefits early adopters.
Blackline (Rayna Lesser Hannaway and Whitney Young Crawford, Polen Capital)
In our view, a high-quality company that is in the early stages of penetrating the large nascent cloud financial close software industry that they pioneered. Although this is a fairly new industry, management has already seen their moat tested by several capable competitors and have maintained their relative leadership position due to what we believe is a strong management team. Like many other software peers, budgets for their customers have tightened considerably compared to 2 years ago. Much of the weakness in the quarter stems from this, as well as a sell-off related refinancing of $600M convertible bonds in late May (which was a surprising reaction to us).
PVH (Shuan Nicholson and Mark Dickherber, SBH)
PVH was a top detractor within the consumer discretionary sector. The underperformance was due primarily to disappointment upon introducing their 2024 guidance, which fell below expectations primarily due to a softer outlook in Europe. PVH’s management also decided to accelerate their quality of sale initiatives by reducing low quality and brand dilutive distribution. We see the decision as a “short-term pain, long-term gain” situation and is an appropriate risk management decision, which will have longer-term positives for brand health and improved ROIC.
Summit Materials (Shuan Nicholson and Mark Dickherber, SBH)
Summit Materials was a top detractor in the materials sector. The underperformance was not related to any execution issues. However, wet weather in some core aggregate and cement markets in the month of May caused a temporarily negative sentiment shift around their fiscal year guidance being achievable. We met with management during the quarter and came away with no change to our view of significant value creation ahead for SUM due to their significant synergy realization and cost reductions efforts that will inflect higher ROIC and margins over the next several years.
Portfolio Breakdown as of 6/30/2024
| By Sector | |
| Finance | 15.6% |
| Consumer Discretionary | 14.0% |
| Information Technology | 20.5% |
| Communication Services | 0.0% |
| Health Care & Pharmaceuticals | 9.9% |
| Industrials | 25.4% |
| Consumer Staples | 0.0% |
| Real Estate | 2.4% |
| Utilities | 0.0% |
| Energy | 2.3% |
| Materials | 7.8% |
| Cash | 2.2% |
| 100.0% |
| By Market Cap | |
| Small Cap | 94.5% |
| Mid Cap | 5.5% |
| Large Cap | 0.0% |
| 100.0% |
| By Region | |
| US Equities | 97.2% |
| Developed International Equities | 2.8% |
| Emerging Market Equities | 0.0% |
| 100.0% |