SMID Cap 4Q 2018 MARKET COMMENTARY

Transcription

1 SMID Cap 4Q 08 MARKET COMMENTARY Segall Bryant & Hamill s SMID Cap Core strategy returned -8.% for the fourth quarter of 08, compared to a -8.5% return for the Russell 500 TM Index. Stock selection within three sectors Consumer Discretionary (+.5%), Consumer Staples (+0.8%), and Industrials (+0.4%) primarily drove the outperformance versus the benchmark. Sector allocation was slightly negative (-0.%) during the quarter as strong performance in the Utilities and REIT sectors, which we consistently underweight, overcame the positive contribution of our cash balance. No buyout activity occurred during the fourth quarter of 08. Like in the prior quarter, companies with higher on Invested Capital (ROIC) outperformed during the fourth quarter, as did those with higher market caps and stronger balance sheets, all of which were a tailwind to the strategy. For the full year, the SMID Cap Core strategy returned -5.6% versus a return of -0.0% for the Russell 500 TM Index. Stock selection (+4.6%) was very strong during 08, with Consumer Discretionary (+.4%), Consumer Staples (+.%) and Technology (+0.9%) leading the way. The allocation effect was slightly negative (-0.4%) for the year as the negative effect of portfolio s overweight and Industrials and underweight in Utilities more than offset the positive benefit of our cash position and Energy sector underweight. Overall, 08 was a strong relative performance year and we were pleased to see the portfolio provide solid downside protection and generate strong relative returns in a more volatile market. The market s renewed focus on higher ROIC companies was a key factor in the strategy s outperformance. With respect to individual names in the portfolio for the fourth quarter, Dorman Products Inc. (DORM), a designer of replacement parts for the automotive aftermarket and repair market, was the largest contributor to performance. DORM s business began to reaccelerate in the second half of 08, driven by more favorable weather conditions and the acceleration of new product introductions after two years of below-trend performance in both. Further, the market gravitated to DORM because its exposure to the automotive aftermarket is considered defensive and fairly insulted from macroeconomic conditions. Church & Dwight Co. Inc. (CHD), a defensive consumer household goods company, was the second-largest contributor to performance. CHD continued its string of impressive quarterly results which, combined with a market shifting to defensive names, resulted in strong performance for the stock. We trimmed our position into the strength. In terms of detractors, Innophos Holdings, Inc. (IPHS), a provider of phosphate and Health & Nutrition products, was the largest detractor. IPHS experienced short-term setbacks over the past two quarters, such as a slight delay on approvals for production equipment, which pressured quarterly results and the stock. We purchased shares on the decline and think the stock is severely discounted at present. Parsley Energy Inc. (PE), an oil/gas exploration and production (E&P) company, was our second-largest detractor during the quarter. In our view, PE is a highquality E&P company that sold off due to the broader decline in oil prices. We used that opportunity to purchase additional shares. Looking back, the fourth quarter of 08 was the worst fourth quarter since 940 and the most volatile quarter since 0. While initial concerns with respect to a potential trade war with China began to impact the market during the third quarter, the addition of U.S. Federal Reserve (Fed) Chairman Powell s comments in early October was the catalyst for the market turmoil during the fourth quarter. Based on his commentary, it appeared that the Fed would continue hiking rates in 09, sparking major fears of a potential policy error, which proved a major factor in driving the markets lower. Subsequently, in early January 09, Powell and the Fed came out with dovish commentary indicating any further rate hikes would be data dependent, which began to soothe those fears. Based on the magnitude and swiftness of the selloff during the fourth quarter, we would not be surprised to see a modest bounce higher in the market during the first part of 09. History suggests that it is not uncommon for markets to rebound after such sharp selloffs, so this would not be abnormal. At the same time, based on the strong relative performance of companies with higher market caps, higher ROIC and better balance sheets during 08, we can envision a scenario where these names lag the market for a brief period during a short-term reversion trade higher. We will not sacrifice our positioning to broadly chase smaller, lower-roic names at this time should a short-term bounce occur. However, we will continue to be opportunistic, just as we were during 08, if we find attractive risk-adjusted investment opportunities that fit our criteria. (Continued on next page )

2 SMID Cap 4Q 08 MARKET COMMENTARY (continued ) Staying focused on the bigger picture, the performance of the strategy over the past couple years highlights the importance of combining ROIC with niche market-focused companies, especially during periods of higher uncertainty such as 08 (and 4Q5/Q6, 0, 008, 007, etc.). During 07, the market increased substantially with limited volatility as it perceived minimal risks, and the strategy was able to outperform. In 08, the market moved dramatically higher through the first nine months of the year, led by growth, with periods of heightened volatility. Again, the strategy outperformed. Further, as volatility rose substantially during the fourth quarter and the market declined nearly 0%, the portfolio was again able to post positive relative performance for both the quarter and the full year. While market backdrops will continue to change over time, we remain steadfast in our belief that focusing on companies targeting niche markets with improving or consistent, high-roic levels are key factors that help position the portfolio to generate outperformance over market cycles. Thank you for your continued interest and support. Jeffrey C. Paulis, CFA Principal, Senior Portfolio Manager

3 PERFORMANCE ATTRIBUTION SMID Cap vs. Russell 500 TM Index GROSS RETURNS* (as of /3/8) 0% 0% 0% -0% -0% -30% Quarter YTD Year 3 Years 5 Years 0 Years Since Inception (7//0) SBH -8.06% -5.60% -5.60% 8.53% 5.78% 3.43% 9.49% Russell 500 TM Index -8.49% -0.00% -0.00% 7.3% 5.4% 3.5% 8.98% Russell 000 Index -0.0% -.0% -.0% 7.37% 4.4%.97% 8.3% 9/30/8 to /3/8 SMID Cap Russell 500 TM Index Attribution Analysis To To Consumer Discretionary Dorman Products, Inc Core-Mark Holding Company, Inc Advance Auto Parts, Inc Gildan Activewear Inc Steven Madden, Ltd Stoneridge, Inc Wolverine World Wide, Inc Hasbro, Inc LKQ Corporation Aramark Universal Electronics Inc Financials Seacoast Banking Corporation of Florida Lakeland Financial Corporation IBERIABANK Corporation Carolina Financial Corp Raymond James Financial, Inc Western Alliance Bancorp Ameris Bancorp * Preliminary. Periods greater than one year are annualized. Historical performance cannot guarantee future results. See specific performance disclosures at the end of the presentation. returns are gross returns. 3

4 9/30/8 to /3/8 (continued ) SMID Cap Russell 500 TM Index Attribution Analysis To To Utilities Materials Berry Global Group Inc Ingevity Corporation Bemis Company, Inc Sensient Technologies Corporation Balchem Corporation Ferro Corporation Innophos Holdings, Inc Energy World Fuel Services Corporation Callon Petroleum Company Parsley Energy, Inc. Class A Health Care Orthofix Medical, Inc AngioDynamics, Inc Globus Medical, Inc. Class A Encompass Health Corporation Bio-Rad Laboratories, Inc. Class A AxoGen, Inc Insulet Corporation NuVasive, Inc Bio-Techne Corporation Integra LifeSciences Holdings Corporation Communication Services Live Nation Entertainment, Inc [Cash] U.S. Dollar [Unassigned] Consumer Staples Church & Dwight Co., Inc Lancaster Colony Corporation TreeHouse Foods, Inc Ingredion Incorporated Flowers Foods, Inc Spectrum Brands Holdings, Inc returns are gross returns. 4

5 9/30/8 to /3/8 (continued ) SMID Cap Russell 500 TM Index Attribution Analysis To To Industrials Waste Connections, Inc Healthcare Services Group, Inc Roper Technologies, Inc Granite Construction Incorporated Carlisle Companies Incorporated IDEX Corporation ESCO Technologies Inc Westinghouse Air Brake Technologies Corporation SPX Corporation Harris Corporation Middleby Corporation CoStar Group, Inc ITT, Inc Graco Inc Tetra Tech, Inc Allegiant Travel Company WageWorks, Inc TransUnion JELD-WEN Holding, Inc Standex International Corporation Information Technology MAXIMUS, Inc Black Knight, Inc Avalara Inc U, Inc Integrated Device Technology, Inc x8, Inc Guidewire Software, Inc Jack Henry & Associates, Inc Skyworks Solutions, Inc PTC Inc Tyler Technologies, Inc returns are gross returns. 5

6 9/30/8 to /3/8 (continued ) SMID Cap Russell 500 TM Index Attribution Analysis To To Information Technology (continued ) BlackLine, Inc Blackbaud, Inc Bottomline Technologies (de), Inc FLIR Systems, Inc RealPage, Inc Real Estate Equity Commonwealth TOTAL returns are gross returns. 6

7 /3/7 to /3/8 SMID Cap Russell 500 TM Index Attribution Analysis To To Consumer Discretionary Consumer Staples Information Technology Health Care [Cash] Energy Real Estate Materials [Unassigned] Communication Services Industrials Financials Utilities TOTAL returns are gross returns. Segall Bryant & Hamill is a Registered Investment Adviser, established in 994. SBH provides fee-based management of fixed income and equity portfolios for institutional clients and high net worth individuals. The SMID Cap composite was created in January, 007. Prior to July, 03, the SMID Cap composite was named Small Cap Expanded Core. The SMID Cap composite is an equity strategy consisting of companies with a market capitalization that typically does not exceed the largest market capitalization company in the Russell 500 TM Index. Accordingly, the composite is benchmarked against the Russell 500 TM Index and/or the Russell 000 Index. The Russell 500 TM index is a subset of the Russell 3000 and measures the performance of the 500 of the smallest companies. These companies generally have a weighted average market value of $5. billion. The Russell 000 Index is a subset of the Russell 3000 and measures the performance of the 000 smallest companies. These companies generally have a weighted average market value of $. billion. The SMID Cap composite is comprised of all fee paying, discretionary accounts managed to this investment approach which have assets greater than $ million and one month of returns. Accounts falling below the $ million threshold are not eligible for inclusion in the composite. In addition, accounts that have a significant cash flow, defined as 5% of the market value, will be removed from the composite until the next reconciliation and calculation period. Gross results are shown net of trading costs and include the reinvestment of all dividends and interest. Net results are shown net of management fees as well as trading costs and include the reinvestment of all dividends and interest. Net results reflect actual fees paid. The current fee schedule applicable to the SMID Cap composite accounts is 0.85% on the first $5 million of assets, 0.75% on the next $5 million of assets and 0.65% over $50 million of assets. Actual fees will vary. All information is based on US dollar values. s are calculated on a capitalization and time weighted basis and linked quarterly. Dispersion of returns is measured by an equal weighted standard deviation of all the accounts in the composite for a full year period. Neither the composite nor the benchmark returns reflect the withholding of any taxes for ordinary income or capital gains. It should be noted that principal risk is taken and that historical performance can not guarantee future results. A complete list and description of the firm's composites, as well as additional information regarding policies for valuing portfolios, calculating returns and preparing compliant presentations, is available upon request from SBH. Revised April 08. SEGALL BRYANT & HAMILL 540 West Madison Street Suite 900 Chicago, IL 6066 Phone (3) 474- Toll Free (800) Fax (3)