Key Investment Theme: Rebuilding Following Natural Disasters

Cornerstone Mid Cap 30 Fund - The Portfolio Managers discuss the Fund's most recent rebalance and the emergence of a major investment theme of rebuilding after the natural disasters of 2017. They highlight the changes in the portfolio composition year over year, details the Fund's top sector weightings, and share insights on what might drive Fund performance in 2018.

 

December 2017
  • Neil J. Hennessy
    Neil J. Hennessy
    Chief Market Strategist and Portfolio Manager
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager

What were some notable shifts in sector weightings after the most recent rebalance? 

Perhaps the most notable shift in the portfolio weightings was an increase in the Consumer Discretionary sector. Stocks in the homebuilding, gaming, and auto industries were added to the Fund, resulting in an increase in exposure to the sector from 23% after the rebalance in late 2016 to about 33% following the most recent rebalance. Interestingly, despite the Fund’s heavy weighting in the Consumer Discretionary sector, no retailer remains in the Fund. While some retail stocks did meet the Fund’s criteria, stocks in other consumer-oriented industries had better price appreciation over the last 12 months and were ultimately selected for the Fund.

We believe the current economic environment is favorable for consumer-related stocks and the increased weighting in the Consumer Discretionary sector is a reflection of overall strength in consumption patterns, bolstered by a strong labor market and high and rising consumer confidence.

The Fund’s Industrials sector weighting also climbed from approximately 20% after the rebalance in late 2016 to about 33% following the most recent rebalance. The outlook for industrial companies remains positive. Industrials stocks that met the Fund’s stringent criteria include Rush Enterprises, Inc., XPO Logistics, and Manitowoc.

What theme has emerged from the most recent rebalance?

One central theme that has unfolded from the most recent rebalance is the focus on rebuilding America after the 2017 natural disasters. The Fund owns several stocks tied to the anticipated wave of reconstruction following the destruction caused by Hurricanes Harvey, Irma and Maria as well as the California wildfires.

For example, the portfolio includes the following construction-related companies:

- Boise Cascade sells lumber and wood products.

- Homebuilders KB Home and LGI Homes, Inc. operate in areas most impacted by recent natural disasters.

- Builders FirstSource supplies building products to professional homebuilders.

What is your 2018 investment outlook for this Fund? 

We believe there could be two strong drivers of Fund performance over the next 12 months:

  1. Strong revenue and earnings growth. Revenues and earnings for many companies in the Fund are anticipated to grow at a robust rate of 10% to 15% over the next twelve months.
  2. Newly signed Tax Reform bill. We believe mid-cap stocks are clear beneficiaries of the Tax Reform bill. The Fund holds mid-sized companies with primarily domestic businesses that have historically been taxed at a rate of between 32% and 35%. With a much lower tax rate of 21%, the Fund’s holdings could see a significant boost to their earnings per share in 2018.

After a year of strong performance for most stocks and sectors and a significant upward move in valuations, we anticipate that investors will continue to invest in growth companies, but may be more sensitive to the valuations they are being asked to pay. In short, we believe investors will be looking for growth at a more reasonable price. In this environment, we believe the Fund, which seeks stocks with solid growth characteristics and attractive valuations, should perform well.

Diversification does not assure a profit nor protect against loss in a declining market.