Current News Page 1 Market Commentary 2 Investment Philosophy & Process 4
PRODUCT SUMMARY 6
Cramer Rosenthal McGlynn, LLC is a leading
value-oriented investment firm with approximately $8 billion in
assets under management. Since our firm was founded
in 1973, our client list has grown to include corporate
and public pension plans, endowments and foundations,
hospitals, community and religious organizations,
Taft-Hartley and multi-employer funds as well as individual and
family trusts. The intellectual coherence of our investment
philosophy is a genuine strength. Companies we buy and
hold are characterized by three attributes: change, neglect
and valuation. The hunt for these attributes provides a
solid foundation for every stage of our investment process.
Cramer Rosenthal McGlynn, LLC
520 Madison Avenue, 20th Floor
New York, NY 10022
T 212.326.5325
[email protected]
www.crmllc.com
Third Quarter 2015 Commentary
Contents
Third Quarter 2015 Commentary
Current News
We are pleased to announce the addition of Ming Li Kwang
to our research team. Ming has over 10 years experience
as an analyst covering Asia and Japan. Previously, she was
a senior investment analyst at Maverick Capital and Chilton
Investment Company in New York and Hong Kong. She has
additional experience covering Asian equities at Goldman
Sachs and UBS Securities. Ming is fl uent in Mandarin,
Japanese, and Cantonese. She received an MBA from
New York University and a BA from National University of
Singapore and Akita University. Ming will contribute to our
international research efforts with a focus on Asia and we
look forward to her contributions to the fi rm.
Assets Under Management (In Millions)
Total Assets ...$7,751
Representative Clients
Archer Daniels Midland Company Baptist Healthcare System
California Winery Workers Pension Plan Trust City of Phoenix Employees’ Retirement System Cedars-Sinai Medical Center
Entergy Corporation Indiana University
Manchester Capital Management, LLC McLaren Health Care Corporation Mississippi State University Saint Gobain Corporation
United States Holocaust Memorial Museum University of Cincinnati
CRM selected the clients listed above based on a variety of objective criteria including the size of the account, type of account, management style and geographic location of the cli-ent. CRM does not know whether the listed clients approve or disapprove of CRM or the advisory services provided by CRM.
Market Commentary
In tribute to the late Yogi Berra, the third quarter was “déjà
vu all over again.” The equity markets produced negative
returns and the infl uential events were very reminiscent
of the third quarter in 2011. The U.S. Congress is once
again unable to exercise fi
scal responsibility creating
uncertainty on the budget and debt ceiling. Unlike 2011,
the Republicans control both houses of Congress, but they
have been incapable of unifying their party to avoid another
legislative showdown. The Chinese economy has been
slowing for many quarters, but the sudden devaluation of
the Yuan caught markets by surprise in mid-August. Most
of the economic data out of China confi rms a slowdown
and their stock markets have been on an eye-popping
roller coaster ride all year. Commodity prices remained
under pressure, providing additional headwinds for many
developing countries caught in a negative feedback loop
of weaker exports and higher infl ation. This stagfl ation is
contributing to some political instability and episodic social
unrest. Developments in Europe were less of a factor than
2011, but growth remains modest and the ECB seems
poised to provide more QE stimulus before year-end.
Despite a stronger 2Q GDP report and positive revisions,
most U.S. economic data for 3Q was on the weaker side
and corporate earnings (even excluding energy) have been
anemic.
The Federal Reserve remains an enigma. For more than
a year, they have indicated a desire to begin normalizing
federal funds rates. On a number of occasions, the equity
and bond markets seemed prepared for the Fed to act.
This indecision has been another weight upon the equity
markets. The Fed seems encouraged by employment trends
and its eventual impact on infl ation, but then succumbs to
concerns over issues and events off our shores. The U.S.
Fed cannot become the world’s central bank, but it is not
clear the voting members of the FOMC have solved this
dilemma. We have been in the camp of wanting the Fed
to get started, as we believe the uncertainty can be more
of a weight on economic growth than the actual impact of
100bps higher rates over the next year.
Assets Under Management
As of September 30, 2015 (In Millions)
Mid Cap Value $1,518 Small/Mid Cap Value $2,980 Large Cap Opportunity $588 All Cap Value $1,212 Small Cap Value $981 Alternatives, Other $451 Global Opportunity, International Opportunity $19
There were a number of other important factors this past quarter. Volkswagen has seemingly
perpetrated one of the largest industrial frauds in history. It’s a nightmare for its customers and
a reminder of the importance of insisting on sound corporate governance. Glencore, the mining
and commodity trading giant, saw its stock plummet and its credit default swaps soar as “black
box” balance sheet fears gripped the markets. More recently, as commodities have stabilized, so
have the Glencore securities. Hillary Clinton, clearly seeking to redirect the media’s attention from
Trump and the other Republican candidates, tweeted the equivalent of a “healthcare grenade”
eight trading days before the end of the quarter. While there is merit to policing price gouging,
the entire sector became tarnished. Healthcare stocks faced rapid multiple compression after
having been the leadership group for the past two to three years. There always seems to be
a domino effect or circular logic at play whenever the markets convulse, but widening credit
spreads, concerns over the ability to access equity and debt markets weighed heavily on master
limited partnerships and other yieldco type securities as well as merger & acquisition activity.
Hedge funds reportedly suffered from much of the above turbulence, which apparently led to
further balance sheet derisking. All in all, it made for a tough quarter for the markets.
Where do markets go from here? If the fi rst week of the new quarter is any guide, then the new
leadership groups might be energy, materials, and industrials. It’s not unusual for stocks, which
have underperformed year to date, to face additional selling pressure at third quarter end. It’s
natural to expect some bounce in the fi rst days and weeks of a new quarter. This seasonal
phenomenon got an extra kick from the disappointing September monthly employment report.
Following so closely behind the Fed’s decision not to raise rates, it was like lighting a match on a
ring of fi re. The dollar depreciated, emerging market currencies rallied; commodities (particularly
oil) rallied; and energy, material, and industrial stocks took fl ight globally. As poor performing
sectors, they had been heavily shorted and institutional investors were likely underweight
energy. Has the world really changed in a week? It is too early to say whether this rotation has
any fundamental underpinnings. If the U.S. economic data decelerates such that the Fed is
compelled to remain on hold, the currency markets could continue to prop up commodity prices
and help these sectors maintain this momentum. Third quarter earnings reports will confi rm
how diffi cult it was last quarter for these companies, but probably not provide much help on the
immediate future. Commodity prices and currencies will need to sustain the recent trends to
infl uence 2016 fi nancial results.
We continue to focus on the many companies being favorably impacted by signifi cant change
and transformation across most sectors. It has been a sellers’ market given low interest rates
and a number of our holdings have taken advantage of the environment and announced
important divestitures. We have other holdings and continue to evaluate potential new ideas
in companies that are also changing their revenue mix and raising capital through spin-offs.
These actions can facilitate a revaluation of the parent company as well as create potential new
investment opportunities in the spun entity. The market volatility and uncertainty around policy
and economic direction should provide a foundation for differentiated stock selection to be
rewarded in the months ahead.
Our track record, spanning over 40 years, is testament to our success in serving clients and providing strong investment performance. Clients benefit from consistent application of one cohesive philosophy and process, implemented by a team with diverse experience in appraising the intrinsic value of companies.
Investment Philosophy
CRM views investment prospects on a long-term basis. Our relative value oriented investment philosophy seeks to outperform the broad market and pertinent indices over a full market cycle by participating in good market periods and limiting declines in poor periods. CRM believes that successful investing is a result of recognizing and responding to changes that may positively impact the future prospects of a business enterprise. These changes often lead to a temporary misunderstanding or relative neglect which reduces the risks of investing at a point in time. As relative value investors, we seek to invest in companies which are trading at a discount to their own history and peers based upon prospective free cash flow and earnings. In summary, our investment approach is predicated on change, neglect and valuation.
Change
CRM seeks to identify change at an early stage that may be material to the future operations of publicly traded companies. The financial markets are rich with change. On a regular basis, investors are presented with acquisitions, divestitures, spin offs, cost restructurings, geographic expansions, management changes, regulatory changes, new products, joint ventures and capital returns to shareholders. Based on the experience of our research team, we identify many situations where these changes lead to an attractive investment thesis either in the company being directly impacted by the observed change and/or in a broader set of companies which are similarly affected.
Neglect
In its earliest stages, change tends to be greeted with skepticism. The uncertainty resulting from the change creates a period of relative neglect or lowered expectations as investors wait for more clarity. We try to evaluate neglect by studying sell side analyst coverage, institutional ownership, key concepts in behavioral finance such as over and under reactions to news flow, and having a differentiated view about the future outlook for the business.
Valuation
When change meets neglect, the intrinsic value of a company may exceed the current stock price. We appraise the business using a number of methodologies, but most are dependent upon our modeling of future free cash flows. We are seeking to normalize the cash flow and earnings streams for one time or unusual items which themselves often create neglect. As relative value investors, we are looking to invest in companies which are trading at a discount to their own history, peers, and when appropriate, our assessment of its value to a strategic or private equity buyer.
.
Investment Philosophy
& Process
Investment Process
CRM generates ideas from both qualitative (approximately 75%) and quantitative (approximately 25%) sources. Qualitative ideas emanate from: company presentations, news services, due diligence on existing holdings, our internal research data base, leveraging investment themes and rich text screening for specific change expressions such as acquisition, restructuring, etc. The quantitative sources include: screening for stocks which have underperformed the market or peer companies over certain time periods, screening for companies which are fundamentally underperforming peers as expressed by operating margins which are below their own history or peers and ranking stocks by sell side or buy side sentiment. Ideas that are being actively researched are what we call “work in process.” These names are reviewed regularly by portfolio managers and stocks are added or deleted to focus the team’s research efforts. Part of processing an idea includes preparing an Investment Case which documents the investment thesis. It consists of a brief company description, a discussion of the change(s), an assessment of the relative neglect and valuation. It also includes an assessment of the risks relevant to the thesis and our determination of a fair price target at that point in time.
Buy Discipline
Our investment process is team oriented and collaborative. There are typically multiple analysts/portfolio managers engaged in a review and discussion of new ideas and Investment Cases. A financial model in sufficient detail and relevant due diligence will also be prepared and reviewed as part of the evaluation process. If the risk/reward is deemed attractive by the portfolio managers in the context of their overall portfolio construction, a decision will be made by the portfolio managers to initiate a position in the stock. The portfolio managers will modulate the position size depending upon the relative attractiveness of the idea, the expected return and other risk considerations.
Sell Discipline
CRM’s process is focused not only on building the Investment Case, but also on understanding how the case might deteriorate. The Firm’s sell discipline is ultimately dependent upon the written Investment Case for the stock. A position will be sold when one or more of the following occurs: an established price target is approaching or is attained, implying the stock has reached our estimation of fair valuation; a factor in our initial investment thesis has deteriorated causing us to reassess the potential for the company; or we identify a more promising
investment opportunity. After a decision to sell is made, the investment is replaced by either a new idea or existing holdings which offer a greater risk/reward profile.
Product Summary
PRODUCT/INCEPTION ASSETS 09/30/2015 (In Millions) VEHICLE MINIMUM INVESTMENT ANNUAL MANAGEMENT FEE/EXPENSE RATIO1 STATUSAll Cap Value
January 2002
$1,212 Separate Account US Concentrated
Mutual Fund, CRIEX (Institutional) Mutual Fund, CRMEX (Investor) CRM US Equity Opportunities UCITS A Shares, ISIN IE00B5ZXDG51 B Shares, ISIN IE00B3PZWY82 S Shares, ISIN IE00B43N7R95
$10 Million $25 Million $1 Million $2,500 $1,000 $100,000 $100,000 1.00% on the first $25m 0.75% thereafter TBD 1.25% on all assets 1.50% on all assets 0.80% MF; 0.97% TER 1.20% MF; 1.95% TER 1.60% MF; 1.90% TER Open Open Open Open Open Open
Large Cap Opportunity
January 2005
(includes assets of PCG Large Cap Opportunity)
$588 Separate Account
Mutual Fund, CRIGX (Institutional) Mutual Fund, CRMGX (Investor)
$10 Million $1 Million $2,500 0.75% on the first $25m 0.65% on the next $25m 0.55% on the next $50m 0.50% thereafter 0.90% on all assets 1.15% on all assets Open Open Open
Mid Cap Value
January 1998
$1,518 Separate Account
Mutual Fund, CRIMX (Institutional) Mutual Fund, CRMMX (Investor)
$10 Million $1 Million $2,500 1.00% on the first $10m 0.75% on the next $15m 0.65% on the next $25m 0.55% on the next $50m 0.50% thereafter 0.82% on all assets 1.03% on all assets Open Open Open
Small/Mid Cap Value
April 1973
$2,980 Separate Account
Mutual Fund, CRIAX (Institutional) Mutual Fund, CRMAX (Investor)
$10 Million $1 Million $2,500 1.00% on the first $25m 0.70% on the next $25m 0.60% on the next $50m 0.40% thereafter 0.88% on all assets 1.09% on all assets Open Open Open
Small Cap Value
October 1995
$981 Separate Account
Mutual Fund, CRISX (Institutional) Mutual Fund, CRMSX (Investor)
$10 Million $1 Million $2,500 1.00% on all assets 0.86% on all assets 1.09% on all assets Open Open Open Global Opportunity January 2009 $3 Separate Account
Mutual Fund, CRIWX (Institutional) Mutual Fund, CRMWX (Investor)
$25 Million $1 Million $2,500 0.90% on the first $25m 0.80% on the next $75m 0.70% thereafter 1.25% on all assets 1.50% on all assets Open Open Open International Opportunity January 2009 $16 Separate Account
Mutual Fund, CRIIX (Institutional) Mutual Fund, CRMIX (Investor)
$25 Million $1 Million $2,500 0.90% on the first $25m 0.80% on the next $75m 0.70% thereafter 1.25% on all assets 1.50% on all assets Open Open Open Long/Short
All Cap – February 1993 Windridge – April 2002 Global Opp. - February 2010
$340 $58 $69
Limited Partnerships & Separate Account Limited Partnerships & Separate Account Limited Partnerships & Separate Account
$1 Million $1 Million $1 Million
1.00%+20% carried interest for LP 1.00%+20% carried interest for LP 1.50%+20% carried interest for LP
Open Open Open
For more information regarding investing in any one of these current products please contact the CRM Marketing Team at 212.326.5325. Shares of CRM Funds are distributed by ALPS Distributors, Inc. Please note that shares of a mutual fund may only be offered through a pro-spectus. Investors should carefully read a prospectus and consider the investment objectives, risks, charges and expenses before investing. Investing in non-U.S. securities involves special risks such as, greater social, economic, regulatory, and political uncertainties, and currency fluctuation. To request a copy of a prospectus for any CRM Mutual Fund product, please call 800.276.2883 or visit www.crmfunds.com.
