Sterling Capital Stratton Small Cap Value Fund

Transcription

1 Overview Investment Objective The Small Cap Value Fund seeks long-term capital appreciation. The Fund uses a value investment approach to invest primarily in common stock of small capitalization companies (those with market capitalizations that are below the market capitalization of the largest company in the Russell 2000 Index). We believe that undervalued companies with good earnings prospects have superior appreciation potential with reasonable levels of risk. Quantitatively, we focus on a stock s fundamental valuation relative to its peers. Qualitatively, we seek to identify business catalysts which will serve to drive future earnings growth, increase investor interest and expand valuation. Effective November 16, 2015, Sterling Capital Management changed the name of the Stratton Small Cap Value Fund to the Sterling Capital Stratton Small Cap Value Fund. The name was changed as a result of the Stratton Fund being reorganized into the Sterling Capital Funds. Fund Information Performance Portfolio Manager Ticker Fund Net Assets Gerald M. Van Horn, CFA STSCX $ 1.12 billion Annualized Q YTD 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 15 Yrs. Minimum Investment $2,000 Total Operating Expenses (1) 1.11% Inception Date April 12, 1993 (1) For fiscal year ended 12/31/14 (2) The Russell 2000 Value Index is an unmanaged index (with no defined investment objective) that measures the performance of the small-cap value segments of the U.S. equity universe. Indices are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of interest, capital gains and dividends. The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Performance data current to the most recent month-end may be obtained at: or call (888) The investment return and principal value of an investment will fluctuate so that shares, when re-deemed, may be worth more or less than their original cost. Investors may incur a fee of 1.50% if shares are redeemed or exchanged within 120 days of purchase. Sterling Capital Stratton Small Cap Value Fund -9.61% -7.94% -5.87% 11.02% 12.13% 6.32% 10.00% Russell 2000 Value Index (2) % % -1.60% 9.18% 10.17% 5.35% 8.53% Key Quarterly Performance Notes The Fund posted a total return of 9.61% during the three month period ended September 30, The Staples and Utilities sectors, traditional safe havens during market selloffs, performed best within the portfolio. Holdings within and Materials & Processing were among the largest underperformers within the portfolio. The Fund outperformed the Russell 2000 Value Index by 112 basis points during the quarter. Relative performance: Positive stock selection within the Discretionary, Staples, and Utilities sectors was partially offset by negative stock selection within the Financial Services and Technology sectors. This information must be preceded or accompanied by the current Prospectus for the Funds. You should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The Prospectus should be read carefully before investing. 1

2 Third Quarter 2015 Market Commentary & Outlook Small Cap Market Review Concerns regarding global growth, especially within China and Emerging Markets, as well as continued anxiety related to the timing of the first Fed rate increase, led to widespread selling in the third quarter of 2015 with the broad Russell 2000 Index registering a decline of 11.92%. With the exception of the Utilities and Staples sectors, it was a difficult quarter for all economic sectors within the broad Russell 2000 Index. Commodity sensitive groups, and Materials & Processing, lagged by the widest margin as commodity prices remained under pressure during the quarter. Factor performance within the Small Cap universe reflected increased risk aversion as equities with lower betas, higher market caps, and higher profitability outperformed during the quarter. Within the Russell 2000 Index, Value outperformed Growth, driven in large part by the Value subindex s greater exposure to the Financials sector and lower exposure to the sector. Outlook We remain guardedly optimistic with respect to the near term outlook for the domestic economy and equity markets. Continued economic and policy divergence between the U.S. and the rest of the world will likely lead to heightened volatility through the balance of the year. The debate over the timing of interest rate increases by the Federal Reserve will take center stage for the next 3-6 months. Weakened commodity prices, especially energy, will serve as a boost to global growth, benefitting both consumers and businesses. Continued preference for equities with outsized domestic revenue exposure given the ambiguous global macro environment. Anticipate leadership by companies benefiting from a lower commodity prices, especially consumer oriented businesses, as well as U.S. focused Financials which we view as an under-loved group that will benefit from continued domestic relative strength. Risk Considerations: Value investing involves risk that the Fund s investment in companies whose securities are believed to be undervalued, relative to their underlying profitability, will not appreciate in value as anticipated. Factor Performance: Small Cap Equity Market 3-5 Year Est Growth Beta Dividend Yield Leverage Liquidity Market Cap Price Relative Strength RO E % Short Interest Valuation (P/BV) Russell 2000 Index % Return: High Quintile minus Low Quintile This chart depicts the performance of the constituents of the Russell 2000 Index based on relative fundamental characteristics. For each characteristic the constituents of the index are sorted and grouped into quintiles. The bar adjacent to each characteristic listed shows the performance of the stocks in the highest quintile relative to the performance of the those in the lowest quintile. Terms and definitions can be found on page 5. 2

3 Third Quarter 2015 Performance Attribution Analysis Top Contributors JetBlue Airways Corp. Solera Holdings, Inc. Cooper Tire & Rubber Co. Casey s General Stores, Inc. Portland General Electric Co. Bottom Contributors Belden, Inc. Qorvo, Inc. PolyOne Corp. EnerSys Moog, Inc Relative Return: Sector Allocation (%) Relative Return: Stock Selection (%) Relative Contributors Positive stock selection within the Discretionary sector led by Fund holdings Cooper Tire & Rubber, Jarden, and ANN. Positive allocation effect created by the Fund s relative underexposure to the sector, which lagged significantly during the quarter. Positive stock selection within the Staples sector led by Fund holdings Casey s General Stores and Dean Foods. Positive stock selection within the Utilities sector led by Fund holdings Portland General Electric, Southwest Gas, and Avista. Positive stock selection within the sector bolstered by Fund holdings PAREXEL and West Pharmaceutical Services Discretionary Staples Financial Services Materials & Processing Producer Durables T echnology Relative Return: Total Effect (%) Utilities Relative Detractors Negative stock selection within the Financial Services sector as Fund holdings Affiliated Managers Group, SVB Financial Group, and Medical Properties Trust underperformed during the quarter. Negative stock selection within the Technology sector as fund holdings Qorvo, PTC, and On Semiconductor underperformed their peer group. Negative stock selection within the Materials & Processing sector led by the underperformance of Belden and Polyone Discretionary Staples Financial Services Materials & Proc essing Producer Durables Technology U tilities 3

4 Portfolio Characteristics Sector Allocation Relative Sector Exposures Financial Services : 34.72% Discretionary : 12.64% Producer Durables : 12.30% Technolog y : 12.11% Materials & Processing : 6.76% : 6.26% Utilities : 6.01% Staples : 4.31% Cash : 3.17 % : 1.73% Materials & Processing Technology Discretionary Staples Producer Durables Utilities Financial Services % Over/Underweighting Versus Russell 2000 Value Top 10 Holdings % of Net Assets (1) PAREXEL International Corp. 3.16% West Pharmaceutical Services, Inc. 3.10% Jarden Corp. 2.97% Casey s General Stores, Inc. 2.90% JetBlue Airways Corp. 2.74% Signature Bank 2.65% SVB Financial Group 2.26% PolyOne Corp. 2.09% EnerSys 2.04% Siligan Holdings, Inc. 2.01% Portfolio Characteristics SCV Russell 2000 Value Number of Holdings 61 1,308 Median Market Cap $2,845mm $1,469mm Wgt. Avg. Market Cap $3,642mm $1,604mm Forward Price/Earnings 16.3x 20.2x Price/Cash Flow 12.3x 13.2x Estimated 3-5 Year EPS Growth Rate 12.3% 11.2% Historic 3 Year EPS Growth Rate 24.8% 14.2% Return on Equity 12.4% 7.3% Beta (3 Year, Weekly) (1) Current and future portfolio holdings subject to change and risk at any time. 4

5 Risk Considerations: The Fund may invest in strategies that are considered risky or invest in stocks of companies that are undervalued which may cause greater volatility and less liquidity. The Fund may invest in REITs, which may be negatively affected by conditions in the real estate industry, such as declining property values due to unanticipated economic developments. Terms and Definitions Factor performance on page 2 is measured by the following calculations and methodologies as of the beginning of the period under discussion: 3-5 Year Estimated Growth: FactSet mean consensus estimate of 3-5 year EPS growth Beta: 52 week beta versus the NYSE Composite Index, which is a broad, commonly cited US stock index. Beta is a measure of volatility, or systematic risk. Dividend Yield: Expressed as the current annual dividend rate, as a percentage of the company s common stock price Leverage: Amount of debt used to finance a firm s operations, expressed as the company s debt divided by its total capital Liquidity: Average dollar amount of stock traded per day, in any particular issue, based on 60 day average trading volume Market Cap: Total value of shares outstanding Price: Common stock price Relative Strength: 12 month relative price strength, measured by the price at the beginning of the period, relative to the previous 12 month average price Return on Equity: A measure of a company s profitability, expressed as the amount of income returned as a percentage of shareholder equity for the most recently completed fiscal year Short Interest: Percentage of a company s shares that are currently sold short, as a percentage of total shares outstanding Valuation: Represented by the price-to-book ratio, a commonly cited measure of valuation, which is calculated by dividing the market price of a stock the company s book value per share Sterling Capital Management LLC a separate subsidiary of BB&T Corporation, serves as investment adviser to the Sterling Capital Funds and is paid a fee for its services. Shares of the Sterling Capital Funds are not deposits or obligations of, or guaranteed or endorsed by, Branch Banking and Trust Company or its affiliates. The funds are not insured by the FDIC or any other government agency. The funds are distributed by Sterling Capital Distributors LLC, which is not affiliated with Branch Banking and Trust Company or its affiliates. 5