CAMBIAR SMALL CAP FUND COMMENTARY 2Q 2021
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CAMBIAR SMALL CAP FUND COMMENTARY 2Q 2021
MARKET REVIEW
U.S. equities marched higher in the second quarter, ability to execute their average inflation framework in
with the S&P 500 posting a gain of 8.6% (just shy the face of higher prices and a recovering labor market.
of a new all-time high). Small cap stocks were also
positive in the quarter, with the Russell 2000 Index In our view, the Fed’s policy moves made in the early
adding 4.3%. Market volatility has continued to decline days of the pandemic were key in providing a necessary
throughout the year, providing a somewhat placid backstop for risk assets. Yet this ultra-accommodative
backdrop for stocks to drift higher. Investor sentiment policy stance is now resulting in market conditions
seesawed between reflation/reopening plays and commonly associated with asset bubbles. As the
longer duration cyclical growth stocks, with the latter recovery in the U.S. economy continues to take hold,
outperforming as bond yields declined. monetary policy should adjust accordingly. The longer
the punch bowl remains in place, the more difficult
Risk assets were temporarily rattled in June by the it will be to remove (and the greater the ensuing
divergence in messaging coming out of the Federal hangover).
Reserve, as some policymakers shifted from a
longstanding accommodative position to a more hawkish While not currently a priority for many investors,
stance. The combination of strong inflation data and the company-specific attributes such as strong balance
associated potential for earlier-than-expected tightening sheets, defensible margins, and persistent cash flow
measures would have typically weighed on the equity generation should take on increased importance
markets. Yet stocks quickly recovered any losses and as the current cycle evolves. These fundamental
grinded higher, which speaks to the high level of characteristics remain key inputs to the buy decision
confidence that market participants have in the Fed’s here at Cambiar.
SMALL CAP FUND
Since Since
2Q21 YTD 1 Year 3 Year 5 Year 10 Year Inception Inception
- Inv - Inst
CAMSX 3.13% 16.98% 49.69% 11.77% 12.74% 8.44% 9.82% -
CAMZX 3.18% 17.07% 49.89% 11.96% 12.91% 8.66% - 12.71%
Russell 2000 Value 4.56% 26.69% 73.28% 10.27% 13.62% 10.85% 8.98% 8.73%
Inception Date: CAMSX (8.31.2004) | CAMZX (10.31.2008). All returns greater than one year are annualized. The
performance quoted represents past performance and is no guarantee of 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 the original cost, and current performance may be lower or higher than the performance quoted. For performance
data current to the most recent month-end, please call 1-866-777-8227.
As of 6/30/21, expense ratios are CAMSX: 1.25% (gross); 1.05% (net) | CAMZX 1.10% (gross); 0.90% (net). Fee
waivers are contractual and in effect until March 1, 2022. Absent these waivers, total return would be reduced. The
Fund imposes a redemption fee of 2.00% on shares held less than 90 days. Your return will be lower if a redemption
fee is applied to your account.
The Cambiar Small Cap Fund posted a positive return Given the diffuse nature of the small-cap equity
in the second quarter, while trailing the Russell 2000 markets, individual companies typically do not have
Value Index. In contrast to the reflation theme that a material impact on index performance. But that
drove returns in the first quarter, sector leadership was has not been the case thus far in 2021, as chat room
mixed in 2Q. Energy was the notable standout performer stocks such as Gamestop and AMC Entertainment
to the upside, as the sector continued to move higher in have posted meteoric returns – providing a boost to the
conjunction with oil prices. Russell 2000 Value Index and a headwind for most
2 Cambiar Small Cap Fund Commentary | 2Q 2021active managers who did not hold these companies. For As one would expect, valuations within small-caps
example, not owning AMC resulted in a 117 basis point are approaching historical high watermarks as well.
relative performance drag in the quarter. Gamestop will Small-cap companies have been direct beneficiaries of
no longer have an impact in the small cap space, as the the economic recovery and have also been boosted by
stock made an unprecedented move from the Russell fiscal and monetary stimulus. A notable result of the
2000 Value Index to the Russell 1000 Growth Index stimulus has been rising inflation expectations and a
during the most recent Russell rebalancing in June. subsequent move in interest rates. Higher interest rates
are not necessarily a red flag for small-cap stocks; on a
In Cambiar’s view, the primary takeaway is the high-risk historical basis, small-caps have tended to outperform
appetite that has taken hold of the small-cap market their large-cap counterparts during periods of rising
since the reopening trade commenced in November. rates. However, small-cap companies typically have a
The sudden shift from defense to offense has been greater dependence on the debt markets – such that
unmistakable, with the highest beta/lowest quality their cost of capital may increase as rates rise. The
stocks pacing the advance over the past seven months. takeaway for Cambiar is to remain focused on quality
This risk-on mindset is best represented in the following companies with strong balance sheets, which has been
graph, which segments returns in the Russell 2000 a key factor in the strategy’s ability to outperform during
Value Index on a Return-on-Equity (ROE) quintile from periods of volatility. Selectivity is also likely to have a
November to quarter-end: more meaningful impact on performance in the coming
quarters.
Russell 2000 Value - Performance by ROE
(11.6.20 - 6.30.21) At a sector level, Technology was a bright spot for the
92.5%
Fund in 2Q – via the portfolio’s overweight allocation
Highest Lowest as well as positive stock selection. Individual highlights
included Switch, a niche data center landlord with a
diverse and growing customer base. Switch’s value-
added services have resulted in stronger pricing, and
the company’s efforts in controlling costs are now
translating into higher margins. Cambiar believes
R2000V: 55.5% 61.4% the company is well-positioned to benefit from the
expansion of the highway internet and increasing
demands for improved security. Lastly, Switch possesses
49.0% a unique attribute in that the company is able to
43.7% 44.5% achieve 100% of its power generation from renewables.
Cambiar also generated above-benchmark returns within
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Real Estate and Consumer Discretionary. Real estate
stocks continue to recover after their pandemic-in-
Source: FactSet
duced drawdown. Cambiar’s REIT positions focus on
single-tenant properties, with an emphasis on a diverse
June represented the ninth consecutive month of portfolio of underlying companies. With consumption
positive returns for the Russell 2000 Value Index. trends clearly on the rise, we believe our holdings
Given the clear skew to more speculative stocks that remain in good position to benefit. Within Consumer
have been in place for much of this period, it should Discretionary, Cambiar’s sole holding in the sector (Bed
not be all that surprising that the Small Cap Fund Bath & Beyond) continues to execute on its turnaround
has been challenged to keep pace. That said, market plan under new CEO Mark Tritton. Since taking over the
sentiment can turn very quickly, particularly if the cost helm in 2019, Mr. Tritton has implemented a number
of capital begins to rise and company attributes such of programs to reduce BBBY’s cost structure while
as leverage ratios, free cashflow yield, and margins take investing in initiatives such as private labels that can
on increased importance. Our goal is to remain disci- boost margins. This path towards sustainable growth
plined in managing the Fund with a bias towards quality and profitability should result in continued upside for
businesses, as we view this approach to be the best way the stock price in the coming quarters/years.
to compound wealth over time, vs. taking on excessive
risk to outperform in a euphoric market environment
Diversification does not ensure a profit or guarantee against a loss.
3 Cambiar Small Cap Fund Commentary | 2Q 2021In a continuation from the first quarter, Healthcare remains to the upside. Yet with much of the good news stocks trailed the broader small-cap market in 2Q, as reflected in current valuations, Cambiar anticipates investors sought out stocks more closely correlated returns in the second half of the year to be more muted. to reopening activities. The portfolio subsequently The bar for future gains has been raised via a combi- was hampered by both an overweight allocation to nation of elevated valuations and heightened investor Healthcare stocks, as well as below-benchmark perfor- expectations, and storm clouds in the form of tapering mance within the sector. Biotech company Exelixis was activities are beginning to build. Intra-year drawdowns one of the primary detractors during the quarter, as in the equity markets are common, and we do not the company declined after announcing disappointing expect 2021 to be any different in this regard. trial results for their immunotherapy drug, Cabometyx (Cabo). Despite this setback, the company’s strategy At a macro level, all eyes will be on the Federal Reserve, is still to expand the indications in which Cabo can be as investors look for any signals about a potential combined with other drugs, and more trial results are change in monetary policy. In our view, the market’s anticipated later this year. Drug manufacturer Emergent consternation over dot plots, verbiage, and timing loses Biosolutions was another laggard in the quarter, as sight of the bigger takeaway – i.e., the economy is well the stock sold off after announcing manufacturing down the path of recovery, thus the need for crisis- problems of the COVID-19 vaccine in one of its facil- level monetary support is no longer necessary. Whether ities. Overhangs in the form of reputational risk and the tightening takes place in 2022 or 2023, it is almost ability to sign new contracts are valid concerns. That certainly a when, not if, scenario. The resulting path said, we view the decline to be overly punitive relative for stocks will likely be a bumpier ride than the current to Emergent’s adjusted revenue/earnings profile. While glidepath, yet with elevated stock volatility comes price disappointed by this unforeseen event, we are staying dislocations that can provide attractive attachment the course for now – while continuing to closely monitor points for managers who are patient and properly the situation. prepared. That is the focus at Cambiar. Cambiar’s non-ownership of energy stocks was an We appreciate your continued confidence in Cambiar additional detractor in the quarter, as the sector Investors. continued to rally in tandem with the rise in oil prices. The rationale behind our absence in Energy is part industry, part fundamental. On a market structure basis, the time to invest in a commodity business is when there is a structural scarcity of supply, and there is no shortage of production capacity in the North American oil market. From a fundamental perspective, desired business characteristics such as strong capital disci- pline and consistent returns have been hard to find in small-cap energy companies, particularly relative to other areas of the market. Our current view/positioning should not be interpreted as a permanent bias, as we continue to do work in the sector. But with current oil prices well above marginal costs, allocating new capital to the sector would be somewhat of a chasing exercise. The cure for high prices is high prices – this line of thinking may soon be applicable to the Energy sector. LOOKING AHEAD As we reach the halfway mark of 2021, the U.S. equity markets have posted double-digit returns amid widespread optimism regarding economic growth and the corresponding positive impact on corporate earnings. In aggregate, this supportive backdrop for stocks remains in place and the path of least resistance 4 Cambiar Small Cap Fund Commentary | 2Q 2021
IMPORTANT INFORMATION To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the Fund’s summary or full prospectus, which may be obtained by calling 1-866-777-7227 or by visiting our website at www.cambiar.com. Please read the prospectus carefully before investing. Risk Disclosures Mutual fund investing involves risk including loss of principal. The Fund pursues a “value style” of investing. If the Adviser’s assessment of market conditions, or a company’s value or prospects for meeting or exceeding earnings expectations is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds or market benchmarks. In addition, “value stocks” can continue to be undervalued by the market for long periods of time, and may never achieve the Adviser’s expected valuation.” In addition to the normal risks associated with investing, investments in small companies typically exhibit higher volatility. A company may reduce or eliminate its dividend, causing loses to the fund. There is no guarantee the fund will achieve its stated objective. Diversification does not protect against market loss. High short-term performance of the fund is unusual and investors should not expect such performance to be repeated. The Russell 2000® Value Index measures the performance of those Russell 2000® companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index is a float-adjusted, market capitalization weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which consists of 3,000 of the largest U.S. equities. Indexes are unmanaged and one cannot invest directly in an index. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index, with each stock’s weight in the Index proportionate to its market value. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. As of 6.30.21, the Cambiar Small Cap Fund had a 1.8% weighting in Bed Bath & Beyond, 1.7% in Emergent Biosolution, 1.8% in Exelixis, 0.0% in Gamestop, and 2.1% in Switch. For characteristics and risk definitions, please visit www.cambiar.com/definitions. This material represents the portfolio manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities. There is no guarantee that any forecasts made will come to pass. Cambiar Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Cambiar Investors LLC or its affiliates. 5 Cambiar Small Cap Fund Commentary | 2Q 2021
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