Heartland Value Plus Fund Q3 2023 Portfolio Manager Commentary

Past performance is no guarantee of future results and investment returns and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance quoted. Call 800-432-7856 or visit Value Investing Manager Value Mutual Funds | Heartland Advisors for current month end performance.

Third Quarter Market Discussion

In the late stages of a bull market, there’s normally no shortage of things to worry about. It certainly feels that way today.

For instance, the yield curve isn’t merely inverted, which is historically a sign of a looming recession. The inversion between 10-Year Treasuries and 3-Month T-Bills is the longest and most severe on record. Late in the third quarter, the Russell 2000® Small-Cap Index also dipped below its 200-day moving average, pointing to a potential downtrend ahead. Meanwhile, consumer spending, the engine that drives the economy, is starting to stall. Credit card and auto loan delinquencies are climbing, as households appear to be strapped for cash. Not only has the personal savings rate plunged, but the percentage of household spending also directed at essential items, such as food, is now rising after an extended decline, another traditional red flag.

Yet, the market seems to be ignoring all of this. Investors have placed their faith in a narrative that says the Federal Reserve is about to do something it has only accomplished once in more than a century: Stick a “soft landing.” It’s a frustrating and familiar disconnect.

Growth led the markets in the first half of the year owing to the euphoria surrounding artificial intelligence-related stocks and the hope that the Federal Reserve might soon start cutting rates. Value managed to outperform in the third quarter, but even within Value, high beta has been working while defensive strategies and low volatility generally have not.

Our portfolio is priced for a recession by focusing on undervalued, high-quality names. The vast majority of our holdings pay a dividend and have compelling self-help strategies, with little debt and strong balance sheets. Until the market gives up the ghost of a soft landing, we’re committed to being patient.

Attribution Analysis & Portfolio Activity

The Value Plus Strategy was down approximately 5% in the third quarter, trailing the Russell 2000® Small-Cap Value Index, which returned -2.96%

While stock selection has been responsible for the lion’s share of our performance over the past five years, this wasn’t the case in the third quarter, when selection effect detracted in most sectors. Our Industrials holdings were a bright spot this quarter, up 4.7%, versus -3.9% for the benchmark.

We’ve seen a fair amount of insider buying in our holdings, an encouraging sign that gives us confidence to hold tight. One such company is Carter’s Inc. (CRI), which sells apparel for babies and children under the Carter’s and OshKosh B’gosh brands. So far in 2023, CRI has returned $96.6 million to shareholders in the form of share repurchases and cash dividends. That brings the repurchase and dividend totals to roughly $3 billion over the past 15 years.

Like all retailers, Carter’s has been undertaking inventory reduction in the aftermath of the pandemic. CRI, however, was 6 to 12 months ahead of other retailers in managing its inventories, a focal point of Carter’s self-help strategy. Since there is limited fashion risk in baby and infant apparel, the company recently packed a portion of its inventory in storage to be brought back later, thereby avoiding the need for steep discounts to work down backlogs. Management has also done a good job de-risking its supply chain in China and globally. For example, Carter’s was early to recognize that low water levels in the Panama Canal threatened delays through that waterway and moved to reduce the amount of its merchandise going through that route.

Meanwhile, CRI has an enviable balance sheet, very little debt, and very strong free cash flow. Yet, the stock trades at less than 12X earnings and less than 7X enterprise value to EBITDA.

Outlook

The third quarter demonstrated how challenging it can be to invest in a market driven by a narrative that does not add up. But the short-term thinking of other investors is not our concern. Our job is to keep our heads down and make sure we are positioned appropriately for the long term, by focusing on well-managed companies trading at attractive prices to their intrinsic value.

In this challenging environment, we are doing just that. Our disciplined approach allows us to become well acquainted with the stocks we own through deep research and regular engagement with the management teams of these companies. As our holdings are generally underfollowed by sell-side analysts, we are constantly checking to make sure they maintain the same level of discipline we demand of ourselves. Our intent is to avoid being reactive. But while we can’t dictate the nature of the economy or the attitudes of other investors, the one thing we can control is our understanding of—and confidence in—the strategies of the businesses we own.

Fund Returns

9/30/2023

Click to enlarge

*Not annualized

Source: FactSet Research Systems Inc., Russell®, and Heartland Advisors, Inc.

The inception date for the Value Plus Fund is 10/26/1993 for the investor class and 5/1/2008 for the institutional class.

©2023 Heartland Advisors | 790 N. Water Street, Suite 1200, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

In the prospectus dated 5/1/2023, the Gross Fund Operating Expenses for the investor and institutional class of the Value Plus Fund are 1.22% and 1.01%, respectively. The Advisor has voluntarily agreed to waive fees and/or reimburse expenses with respect to the institutional class, to the extent necessary to maintain the institutional class’ “Net Annual Operating Expenses” at a ratio not to exceed 0.99% of average daily net assets. This voluntary waiver/reimbursement may be discontinued at any time. Without such waivers and/or reimbursements, total returns may have been lower.

Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. Performance for institutional class shares prior to their initial offering is based on the performance of investor class shares. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. All returns reflect reinvested dividends and capital gains distributions, but do not reflect the deduction of taxes that an investor would pay on distributions or redemptions. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual’s return. To obtain performance through the most recent month end, call 800-432-7856 or visit Value Investing Manager Value Mutual Funds | Heartland Advisors.

An investor should consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information may be found in the Funds’ prospectus. To obtain a prospectus, please call 800-432-7856 or visit Value Investing Manager Value Mutual Funds | Heartland Advisors. Please read the prospectus carefully before investing.

As of 9/30/2023, Carter’s Inc. (CRI) represented 4.71% of the Value Plus Fund’s net assets.

Statements regarding securities are not recommendations to buy or sell.

Portfolio holdings are subject to change. Current and future holdings are subject to risk.

The Value Plus Fund invests in small companies that are generally less liquid and more volatile than large companies. The Fund also invests in a smaller number of stocks (generally 40 to 70) than the average mutual fund. The performance of these holdings generally will increase the volatility of the Fund’s returns. There is no assurance that dividend paying stocks will mitigate volatility.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The Value Plus Fund seeks long-term capital appreciation and modest current income.

The above individuals are registered representatives of ALPS Distributors, Inc.

The Heartland Funds are distributed by ALPS Distributors, Inc.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenters’ views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The specific securities discussed, which are intended to illustrate the advisor’s investment style, do not represent all of the securities purchased, sold, or recommended by the advisor for client accounts, and the reader should not assume that an investment in these securities was or would be profitable in the future. Certain security valuations and forward estimates are based on Heartland Advisors’ calculations. Any forecasts may not prove to be true.

Economic predictions are based on estimates and are subject to change.

There is no guarantee that a particular investment strategy will be successful.

Sector and Industry classifications are sourced from GICS®. The Global Industry Classification Standard (GICS®) is the exclusive intellectual property of MSCI Inc. (MSCI) and S&P Global Market Intelligence (“S&P”). Neither MSCI, S&P, their affiliates, nor any of their third party providers (“GICS Parties”) makes any representations or warranties, express or implied, with respect to GICS or the results to be obtained by the use thereof, and expressly disclaim all warranties, including warranties of accuracy, completeness, merchantability and fitness for a particular purpose. The GICS Parties shall not have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of such damages.

Heartland Advisors defines market cap ranges by the following indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Top 200®.

Because of ongoing market volatility, performance may be subject to substantial short-term changes.

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

There is no assurance that dividend-paying stocks will mitigate volatility.

In certain cases, dividends and earnings are reinvested.

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Data sourced from FactSet: Copyright 2023 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

Heartland’s investing glossary provides definitions for several terms used on this page.

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