CAMBIAR SMALL CAP VALUE COMMENTARY 2Q 2021
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CAMBIAR SMALL CAP VALUE 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 of a the face of higher prices and a recovering labor market.
new all-time high). Small cap stocks were also positive
in the quarter, with the Russell 2000 Index adding In our view, the Fed’s policy moves made in the early
4.3%. Market volatility has declined throughout the days of the pandemic were key in providing a necessary
year, providing a relatively placid backdrop for stocks backstop for risk assets. Yet this ultra-accommodative
to drift higher. Investor sentiment continues to seesaw policy stance is now resulting in market conditions
between reflation/reopening plays and longer duration commonly associated with asset bubbles. As the
cyclical growth stocks, with the latter outperforming in recovery in the U.S. economy continues to take hold,
the second quarter 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 VALUE
CONTRIBUTORS DETRACTORS
Top Five Avg. Weights Contribution Bottom Five Avg. Weights Contribution
Perficient 2.23 0.70 James River Group 2.06 -0.32
Switch 2.45 0.68 InnovAge Holding 1.95 -0.35
Bed Bath & Beyond 1.72 0.66 Bottomline Technologies 1.95 -0.35
NETSTREIT 2.25 0.51 Exelixis 2.04 -0.36
Advanced Energy Industries 1.08 0.51 Emergent BioSolutions 1.56 -0.71
A complete description of Cambiar’s performance calculation methodology, including a complete list of each security that contributed to the performance
of the Cambiar portfolio mentioned above is available upon request. Please contact Cambiar at 1.888.673.9950 for additional information. Past
performance is no guarantee of future results.
2Q 2021 YTD 1 Year 3 Year 5 Year 10 Year Since Inception
Small Cap Value (gross) 3.4% 17.6% 51.2% 13.1% 13.9% 9.7% 10.8%
Small Cap Value (net) 3.2% 17.1% 50.0% 12.1% 12.9% 8.7% 9.7%
Russell 2000 Value 4.6% 26.7% 73.3% 10.3% 13.6% 10.9% 8.2%
Small Cap Value (Institutional) Composite Inception Date: 11.30.2004 / See Disclosure – Performance
The Cambiar Small Cap Value (SCV) portfolio posted reflation theme that drove returns in the first quarter,
a positive return in the second quarter, while trailing sector leadership was mixed in 2Q. Energy was the
the Russell 2000 Value Index. In contrast to the
2 Cambiar Small Cap Value Commentary | 2Q 2021notable standout performer to the upside, as the sector not be all that surprising that the SCV portfolio has
continued to move higher in conjunction with oil prices. been challenged to keep pace. That said, market
sentiment can turn very quickly, particularly if the cost
Given the diffuse nature of the small-cap equity of capital begins to rise and company attributes such as
markets, individual companies typically do not have leverage ratios, free cashflow yield, and margins take on
a material impact on index performance. But that increased importance. Our goal is to remain disciplined
has not been the case thus far in 2021, as chat room in managing the SCV portfolio with a bias towards
stocks such as Gamestop and AMC Entertainment quality businesses, as we view this approach to be the
have posted meteoric returns – providing a boost to the best way to compound wealth over time, vs. taking
Russell 2000 Value Index and a headwind for most on excessive risk to outperform in a euphoric market
active managers who did not hold these companies. For environment
example, not owning AMC resulted in a 117 basis point
relative performance drag in the quarter. Gamestop will As one would expect, valuations within small-caps
no longer have an impact in the small cap space, as the are approaching historical high watermarks as well.
stock made an unprecedented move from the Russell Small-cap companies have been direct beneficiaries of
2000 Value Index to the Russell 1000 Growth Index the economic recovery and have also been boosted by
during the most recent Russell rebalancing in June. fiscal and monetary stimulus. A notable result of the
stimulus has been rising inflation expectations and a
In Cambiar’s view, the primary takeaway is the high-risk subsequent move in interest rates. Higher interest rates
appetite that has taken hold of the small-cap market are not necessarily a red flag for small-cap stocks; on a
since the reopening trade commenced in November. historical basis, small-caps have tended to outperform
The sudden shift from defense to offense has been their large-cap counterparts during periods of rising
unmistakable, with the highest beta/lowest quality rates. However, small-cap companies typically have a
stocks pacing the advance over the past seven months. greater dependence on the debt markets – such that
This risk-on mindset is best represented in the following their cost of capital may increase as rates rise. The
graph, which segments returns in the Russell 2000 takeaway for Cambiar is to remain focused on quality
Value Index on a Return-on-Equity (ROE) quintile from companies with strong balance sheets, which has been
November to quarter-end: a key factor in the strategy’s ability to outperform during
periods of volatility. Selectivity is also likely to have a
more meaningful impact on performance in the coming
Russell 2000 Value - Performance by ROE quarters.
(11.6.20 - 6.30.21)
92.5%
At a sector level, Technology was a bright spot for the
Highest Lowest SCV portfolio in 2Q – via the portfolio’s overweight
allocation 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
R2000V: 55.5% 61.4% now translating into higher margins. Cambiar believes
the company is well-positioned to benefit from the
expansion of the highway internet and increasing
49.0% demands for improved security. Lastly, Switch possesses
44.5%
43.7% a unique attribute in that the company is able to
achieve 100% of its power generation from renewables.
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Cambiar also generated above-benchmark returns
Source: FactSet
within Real Estate and Consumer Discretionary. Real
estate stocks continue to recover after their pandemic-
induced drawdown. Cambiar’s REIT positions focus on
June represented the ninth consecutive month of single-tenant properties, with an emphasis on a diverse
positive returns for the Russell 2000 Value Index. portfolio of underlying companies. With consumption
Given the clear skew to more speculative stocks that trends clearly on the rise, we view our holdings to
have been in place for much of this period, it should remain in good position to benefit. Within Consumer
3 Cambiar Small Cap Value Commentary | 2Q 2021Discretionary, Cambiar’s sole holding in the sector (Bed LOOKING AHEAD
Bath & Beyond) continues to execute on its turnaround
plan under new CEO Mark Tritton. Since taking over the As we reach the halfway mark of 2021, small-cap
helm in 2019, Mr. Tritton has implemented a number equities have posted strong gains amid widespread
of programs to reduce BBBY’s cost structure while optimism regarding economic growth and the
investing in initiatives such as private labels that can corresponding positive impact on corporate earnings.
boost margins. This path towards sustainable growth Yet with much of this good news largely reflected in
and profitability should result in continued upside for current valuations, Cambiar anticipates small-cap
the stock price in the coming quarters/years. returns in the second half of the year to be more
muted. The bar for future gains has been raised via
In a continuation from the first quarter, Healthcare a combination of elevated valuations and heightened
stocks trailed the broader small-cap market in 2Q, as investor expectations, and storm clouds in the form of
investors sought out stocks more closely correlated to tapering activities are beginning to build. Intra-year
reopening activities. The SCV portfolio subsequently drawdowns in the small-cap market are common, and
was hampered by both an overweight allocation we do not expect 2021 to be any different in this
to Healthcare stocks, as well as below-benchmark regard.
performance within the sector. Biotech company
Exelixis was one of the primary detractors during the At a macro level, all eyes will be on the Federal Reserve,
quarter, as the company declined after announcing as investors look for any signals about a potential
disappointing trial results for their immunotherapy change in monetary policy. In our view, the market’s
drug, Cabometyx (Cabo). Despite this setback, the consternation over dot plots, verbiage, and timing
company’s strategy is still to expand the indications loses sight of the bigger takeaway – i.e., the economy
in which Cabo can be combined with other drugs, is well down the path of recovery, thus the need for
and more trial results are anticipated later this year. crisis-level monetary support is no longer necessary.
Drug manufacturer Emergent Biosolutions was another Whether tightening takes place in 2022 or 2023, it is
laggard in the quarter, as the stock sold off after almost certainly a when, not if, scenario. The resulting
announcing manufacturing problems of the COVID-19 path for stocks will be a bumpier ride than the current
vaccine in one of its facilities. Overhangs in the form of glidepath, yet with elevated stock volatility comes price
reputational risk and the ability to sign new contracts dislocations that can provide attractive attachment
are valid concerns. That said, we view the decline to be points for managers who are patient and properly
overly punitive relative to Emergent’s adjusted revenue/ prepared. That is the focus at Cambiar.
earnings profile. While disappointed by this unforeseen
event, we are staying the course for now – while We appreciate your continued confidence in Cambiar
continuing to closely monitor the situation. Investors.
Cambiar’s non-ownership of energy stocks was an
additional detractor in the quarter, as the sector
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
discipline 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.
4 Cambiar Small Cap Value Commentary | 2Q 2021DISCLOSURE Performance: The performance information represents the respective Cambiar strategy composite and may be preliminary. Returns are presented gross (g) and net (n) of management fees and include the reinvestment of all income. Gross and net returns have been reduced by transaction costs. Net returns are also reduced by actual investment advisory fees and other expenses that may be incurred in the management of the account. Gross returns for the Cambiar Small Cap Value Composite (Institutional) include accounts with both gross and “pure” gross performance. “Pure” gross returns do not reflect the deduction of any expenses, including transaction costs. “Pure” gross returns are applicable to separately managed accounts that are part of broker-affiliated or broker-sponsored programs, including wrap programs, that waive commission costs or bundle fees including commissions (SMAs). ”Pure” gross returns are supplemental information. SMAs often incur bundled fees, charged by the wrap sponsor or affiliated broker, that may include transaction costs, investment management, portfolio monitoring, consulting services, and custody fees. Net returns for SMAs are calculated by deducting the investment advisory fees from the client’s account as reported by the wrap sponsor or affiliated broker, or as received by Cambiar. Cambiar negotiates advisory fees with each individual client or relationship. Please refer to our Form ADV Part 2A for additional disclosures regarding our investment management fees. Net of fees performance reflects a blended fee schedule of all accounts within the relevant composite. Cambiar clients and mutual fund investors may incur actual fee rates that are greater or less than the rate reflected in this performance summary. Returns are reported in U.S. dollars. Index returns include the reinvestment of all income, and assume no management, custody, transaction or other expenses. Each index is a broadly based index that reflects overall market performance and Cambiar’s returns may not be correlated to the index against which it is compared for a number of reasons including investment approach and number and types of holdings. Each index is unmanaged, and one cannot invest directly in an index. Cambiar’s past results do not necessarily indicate Cambiar’s future performance and, as is the case with all investment advisors who concentrate on equity investments, Cambiar’s future performance may result in a loss. The top/bottom contributors is for a representative portfolio in the strategy. A complete description of Cambiar’s performance calculation methodology, including a complete list of each security that contributed to the performance of the portfolios, is available upon request. Please contact Cambiar at 1-888-673-9950 for additional information. Small Cap Value Benchmark: The Russell 2000® Value Index is a float-adjusted, market capitalization-weighted index comprised of firms in the Russell 2000® Index that experience 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. Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar. Due to market risk and uncertainties, actual events, results, or performance may differ materially from that reflected or contemplated in such forward-looking statements. All information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation. Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time, do not represent all of the securities purchased, sold, or recommended by Cambiar, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. As with any investments, there are risks to be considered. All material is provided for informational purposes only and there is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. For statistics definitions, please visit www.cambiar.com/definitions. Russell: Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Cambiar Investors, LLC. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Cambiar’s presentation thereof. 5 Cambiar Small Cap Value Commentary | 2Q 2021
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