Commentary - September 2024Greenspring Mid Cap Fund
The Fund’s Portfolio Managers discuss mid-cap outperformance and relative valuation, the potential effect of interest rate cuts on the portfolio companies, and their evaluation of cash deployment strategies.
Mid-caps outperformed their larger peers in the third quarter. Are mid-sized businesses still attractively priced?
In the quarter ended September 30, 2024, the Russell Midcap Index outpaced the S&P 500 Index, gaining over 9% compared to the Index’s approximately 6% gain. After this outperformance, mid-cap valuations remain historically undervalued. In fact, the price-to-forward 12 months earnings ratio for the mid-cap index was roughly 82% of the S&P 500’s, near 20-year lows.
We believe the attractive valuations in mid-cap stocks present a compelling opportunity to invest in the Cromwell Greenspring Mid Cap Fund. Over the past three years ended September 30, 2024, the Fund’s equity holdings have outperformed the Russell Midcap Index by over 1,100 basis points with 16% less risk.
Outperformance With Less Volatility over 3 Years
| Cumulative Total Return | Standard Deviation | |
|---|---|---|
| Fund’s Equity Holdings1 | 30.12% | 16.44% |
| Russell Midcap Index | 18.26% | 19.65% |
| +1,186 bps | 16% Less Risk |
Source: Morningstar, 9/30/24. Expense Ratio: 1.16%
Click here for standardized performance. The performance data shown represents past performance. Past performance is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information through the most recent month end please call 855.625.7333 or visit thecromwellfunds.com.
The Fund was previously managed as a mixed-asset portfolio investing mostly in mid-cap equities along with some fixed income securities before joining the Cromwell Funds in August 2023. Specifically, from the end of 2020 to August 2023, the Fund held between 11% and 20% in fixed income securities.
How do rate cuts by the Federal Reserve affect the Fund’s holdings?
The Fed appears focused on normalizing interest rates and stimulating the economy to ward off any significant economic slowdown. Lower rates reduce borrowing costs, which should help ease pressure on consumers and businesses, potentially accelerating growth for many of the Fund’s holdings.
During the higher-rate environment, our companies were able to use their strong balance sheets and free cash flow to make strategic investments and pursue shareholder-friendly initiatives, to build long-term value. While these actions may not always lead to higher near-term share prices, their benefits may often become more evident as interest rates decline and the economy strengthens.
Looking ahead, there is the potential for continued volatility in interest rates, monetary policy and economic growth expectations. However, focusing on companies with strong balance sheets and robust free cash flow generation, we believe our portfolio is less reliant on favorable macroeconomic conditions to create value.
How do you evaluate cash deployment? Would you please provide examples of holdings that have created value?
Our investment approach focuses on identifying profitable, cashgenerating businesses with the financial flexibility to deploy capital strategically. In the 12 months ended September 30, 2024, approximately 85% of the companies in the Fund’s portfolio repurchased shares, 60% reduced their net debt, and 60% raised their dividend (about 75% pay a dividend).
Importantly, we prefer to see management teams allocate capital based on what they believe is most appropriate. These decisions change over time and may vary depending on the market environment or available opportunities. For example:
- Ziff Davis, a digital media and internet company, views making acquisitions as a key part of its core business strategy, focusing on acquiring assets at attractive prices, thus enhancing free cash flow generation. However, in recent years, the company refrained from completing any transactions due to inflated valuations, preferring to build its cash balance. Ziff viewed repurchasing their own stock as a better value than pursuing expensive mergers or acquisitions. However, during the third quarter, the company seized the opportunity to acquire CNET Media Group, identifying it as a good asset at an attractive price.
- EMCOR Group, a provider of mechanical and electrical construction and other building services, has experienced significant growth and free cash flow generation over the past 10 years. Management has deployed this capital in a variety of ways, including repurchasing about 30% of its outstanding stock, reinvesting in its business, making a series of value-creating acquisitions and raising its dividend—all while maintaining a net-debt free balance sheet.
In any given year, the relative attractiveness of these actions will vary. Consequently, it’s crucial to have a shareholder-oriented management team that can determine which cash deployment strategy will generate the best overall shareholder value.
