Quick Take: The Heartland Select Value Fund (HRSVX) is a concentrated portfolio of deep value stocks, chosen from all market-cap sizes and industries. Hugh Denison, David Fondrie, and Ted Baszler took over the fund's management last March, following the departure of manager Gerry Sandel. Fondrie and Baszler were previously research analysts on the fund, which continues to follow a deep value focus.
This year through last month, the $92 million fund gained 6.0.%, while its all-cap value peers were up 3.3%. For the three-year period through September, the fund rose 13.9%, annualized, compared with a 9.4% return for its peers. Standard & Poor's recently reclassified the fund as all-cap value from large-cap value.
The fund is more volatile than its peers, based on standard deviation, 18.18 versus 15.38, but its annual turnover is lower than its peers, 47% versus 60.6%.
The Full Interview:
S&P: What kind of stocks do you invest in?
FONDRIE: We follow a deep value strategy of investing in companies that are undervalued relative to their intrinsic worth. The stocks typically are attractively priced relative to their earnings, cash flows and book values. While we don't have absolute quantitative parameters, we generally screen for companies with market caps of at least $500 million, stock prices of less than two times book value, and 12-month forward price/earnings ratios of below 20.
Before we invest, we identify a catalyst for each stock, like a new product or a new management team. We buy stocks that are starting to turn around or suffering depressed valuations due to short-term problems.
We invest in stocks of all market-cap sizes, and we seek a concentrated portfolio of about 35 to 50 stocks — currently, we hold 43 stocks. All of our holdings are our best ideas, but our top-ten holdings are not necessarily our favorite holdings. They may have enjoyed good price appreciation. Typically, we like to start each holding at a 2% to 2.5% position.
We stress meeting with company managements. As a firm, we met with the managements of nearly 800 companies last year.
S&P: How do the portfolio's cap-size allocations break down?
FONDRIE: As of Sept. 30, we had 24% of our assets in small-cap stocks (below $2 billion in market-cap); 46% in mid-cap names (between $2 billion and $10 billion); and the remaining 30% in large-caps (above $10 billion).
The fund's median market cap was about $3.1 billion.
Although we are fundamentally driven, we examine macro-economic trends, For example, over the past four years, small-cap stocks have performed extremely well. We now feel that sustained high oil prices and geopolitical uncertainties may lead investors to more stable larger-cap names. As a result,we are now more inclined to add to our large or mid-cap positions, rather than our small-cap holdings. Our large-cap exposure has nominally risen over the past year.
S&P: What are the principal benefits of multi-cap investing?
FONDRIE: We call invest in the best values across all market caps, and keep our winners if they appreciate. Our more liquid larger-cap holdings help lessen the portfolio's overall volatility.
Despite small-cap's recent outperformance, we are still finding attractive small-cap value companies, although they were easier to find in 2000 and 2001.
S&P: Are large-cap value stocks usually more difficult to find than small-cap value stocks?
FONDRIE: Yes, generally speaking, it is much harder to find mid- and large-cap stocks that are trading close to book value. As a result, we find a wider range of P/E's among small-cap stocks.
S&P: What are your top holdings?
