Current News Page 1 Market Commentary 2 Investment Philosophy & Process 4 Important Disclosures 6
PRODUCT SUMMARY 8
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. 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
Second Quarter 2015 Commentary
Contents
Second Quarter 2015 Commentary
Current News
We are pleased to announce the addition of Blaine
Marder to CRM’s investment research team. Blaine
will serve as a senior global research analyst. Blaine
spent 11 years at Loeb King Capital as the Portfolio
Manager on a long/short pan-Asia fund while also
contributing to the research efforts on their
multi-strategy fund. Blaine has over 20 years of fi nancial
industry experience and is a graduate of the University
of Maryland and received an MBA from The Wharton
School – University of Pennsylvania. We look forward
to his contributions to the fi rm.
Assets Under Management (In Millions)
Total Assets ...$8,472
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
Similar to last quarter, the S&P 500 was once again
not a very good barometer of the underlying market or
economic conditions. It was essentially a fl at quarter for
the major averages. Smaller capitalization companies
continued to maintain a year-to-date lead over larger
capitalizations and, stylistically, growth outperformed
value. Faced with the continuing headwinds of foreign
currency translation, oil and gas weakness, and a slow
start for the U.S. economy; S&P 500 earnings are expected
to be down year-over-year in the second quarter. When
earnings growth is scarce, investors typically reward
those companies with more earnings visibility. However,
unlike the fi rst quarter, global defl ation fears receded and
yield curves in the U.S. and Europe moved higher and
re-steepened. Banks were boosted by these developments
and were one of the better performing sub-sectors,
reversing a poor fi rst quarter. Our portfolios responded
accordingly and we were pleased to see continued stock
specifi c dispersion and a better environment for our style
of investing.
Domestic economic data was better, but still erratic. The
most recent employment report is very typical of the “two
steps forward, one step back” nature of this business
cycle. Markets remain fi xated on the data trying to
anticipate the Federal Reserve’s fi rst Fed Funds rate
increase since 2006. Although volatility in U.S. equities
remains quite low, the most volatile periods are typically
around the Fed’s FOMC meeting calendar. We continue
to believe the Fed would like to see more “normalized”
rates, but are being careful not to contribute to the
premature end of this business cycle.
Beyond our shores, the cocktail of market moving news
stories seems to remain ever the same: Greece, China,
Russia, ISIS, Iran, Emerging Markets, and Puerto Rico.
Day-to-day, each has the ability to infl uence markets,
but China and the Middle East have more fundamental
Assets Under Management
As of June 30, 2015 (In Millions)
Mid Cap Value $1,785 Small/Mid Cap Value $2,983 Large Cap Opportunity $872 All Cap Value $1,327 Small Cap Value $1,102 Alternatives, Other $383 Global Opportunity, International Opportunity $20
implications, given the size of the Chinese economy and its collective impact on commodity
prices. During the quarter, there was dispersion among individual commodities. Industrial
metals were generally weaker, oil sustained its rebound off the March lows, and grains popped
near quarter-end on weather and inventory reports. Although oil was fi rmer, it seemed to
hit an intermediate upper bound as dozens of U.S. exploration and production companies
issued equity with many using the proceeds to accelerate drilling rather than debt reduction.
The number of working drilling rigs appears to have troughed and $60+ oil is a suffi cient
price deck to encourage supply. Geopolitical issues will continue to contribute to the volatility
and present opportunities, in our opinion.
The earnings picture remains murky. First quarter earnings were better than earlier fears,
but still tepid on an absolute basis. The earnings cadence is setting up to be back-end
loaded as some of the headwinds such as foreign currency translation and energy prices
will begin to anniversary. As a result, one may expect 2016 to be a better earnings year. In
the meantime, dispersion continues across and within sectors. One sector which has done
poorly year-to-date is transportation. The media likes to highlight the Dow Transportation
Index as a leading indicator and surmise this poor performance augurs tougher days ahead
for the stock market. It very well could be…or it might be presenting an attractive investment
opportunity for selected names. If the economy is going to reaccelerate as forecasted by most
economists and the Federal Reserve Bank, then at least some of the transportation players
could be interesting investments. We have very little current exposure, but are revisiting a
number of ideas which fi t our investment approach.
Those companies who have been able to navigate through the cross currents have been
rewarded while others have been punished. The winners include not only those achieving
their fi nancial goals, but also those involved in mergers & acquisitions (M&A), spin-offs,
and activism. Certain sectors such as healthcare are benefi tting from both visible earnings
growth and robust M&A activity. However, without the benefi t of M&A, the S&P 500 would
clearly have negative returns year-to-date. We continue to expect this level of activity to
continue and broaden. Transactions in excess of $10 billion are already in record territory
and are likely to continue to take place. Smaller transactions have lagged, but likely pick up
as industries become reshaped. The key variables remain the persistence of the low cost
of money, business/board room confi dence, CEO demographics/personalities, and antitrust.
The fi rst two look sustainable, the third is always an issue, and antitrust is becoming a bigger
factor as witnessed with the Sysco/U.S. Foodservice, Comcast/Time Warner Cable, and GE/
Electrolux transactions. While passive indices need broad earnings growth reacceleration
or world hot spots to cool, active managers can navigate the landscape with stock selection
benefi ting from robust corporate activity to generate favorable equity returns. We remain
quite encouraged by the amount of corporate transformation and its infl uence on our style
of investing.
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.
Important Disclosures
Performance Disclosure
Past performance is no guarantee of future results.
The performance information for each portfolio relates to composites of client accounts with particular investment strategies. Valuations and returns are computed and stated in U.S. Dollars, are dollar-weighted and reflect the reinvestment of dividends and other earnings. Performance is calculated monthly, and the gross performance results for each portfolio are presented before management fees but after all trading commissions. The net performance results are presented after deducting a management fee based on the management fee schedule that is listed in the Product Summary section. In addition, the composite for the Small Cap Value includes the performance of a registered mutual fund, and the fees for the fund are listed in the Product Summary section.
The performance information includes a comparison to various benchmarks, which are rebalanced annually. The benchmarks used for each portfolio are as follows:
• Small Cap Value: Russell 2000 Value Index and the Russell 2000 Index • Small/Mid Cap Value: Russell 2500 Value Index and the Russell 2500 Index • Mid Cap Value: Russell Midcap Value Index and the Russell Midcap Index • Large Cap Opportunity: Russell 1000 Index and the Russell 1000 Value Index • All Cap Value: Russell 3000 Value Index and the Russell 3000 Index
The Small Cap Value composite consists of all fully discretionary, fee-paying, taxable accounts by CRM managed using the same strategy as the other accounts in the composite. The Small/Mid Cap Value, Mid Cap Value, Large Cap Opportunity and All Cap Value composites consist of all fully discretionary, fee-paying, tax-exempt accounts managed by CRM using the same strategy as the other accounts in the composite. Accounts which were active during the quarter but are no longer with the firm are included in each composite.
Product Disclosures
Portfolio Commentary & Contributors/Detractors
The views expressed in this newsletter represent our opinion, which is based upon research and information available to us at time of publication. The views expressed in this newsletter should not be relied upon as fact and are subject to change at any time based upon a change in market conditions, a company’s profile or other factors. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.
Upon request, CRM will furnish a list of all securities purchased, sold or held in any of the portfolios referred to in this newsletter during the twelve month period preceding the date of the list of securities for that portfolio included in this newsletter. The methodology for calculating the top contributors and detractors is based on an absolute dollar basis over the specified time period (i.e. quarterly) within the portfolios. The methodology for selecting the initiated and fully exited positions during the quarter is based on the absolute dollar basis over the specified time period (i.e. quarterly) within the portfolios.
Composite Characteristics
Information pertaining to Composite Characteristics includes weighted average market capitalization, median market capitalization and other preliminary numbers that have been derived from FactSet Research Systems and The Bank of New York Mellon Corporation. As these numbers are preliminary, they are subject to change.
Top Ten Holdings
It should not be assumed that the Top Ten Holdings presented for each portfolio in this newsletter will, in the future, be profitable or will equal any references to performance in this commentary. Upon request, CRM will furnish a list of all securities purchased, sold or held in any of the portfolios referred to in this newsletter during the twelve month period preceding the date of the list of securities for that portfolio included in this newsletter. Holdings are subject to change at anytime.
Sector Allocation
The Sector Allocation presented for each portfolio in this newsletter may not be representative of the portfolios’ current or future investments. The source of the information for all Sector Allocations is FactSet Research Systems, Russell Sectors. Holdings are subject to change at anytime.
Product Summary
PRODUCT/INCEPTION ASSETS 06/30/2015 (In Millions) VEHICLE MINIMUM INVESTMENT ANNUAL MANAGEMENT FEE/EXPENSE RATIO1 STATUSAll Cap Value
January 2002
$1,327 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)
$872 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
$1,785 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
$2,983 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
$1,102 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 $17 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
$298 $57 $11
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.
1Expense Ratio Disclosure
The net expense ratios for the CRM Small Cap Value Fund, CRM Small/Mid Cap Value, CRM Mid Cap Value Fund, CRM Large Cap Opportunity Fund, CRM All Cap Value Fund, CRM Global Opportunity Fund and the CRM International Opportunity Fund are the ratios listed in the CRM Funds Prospectus, dated October 28, 2014. Expense ratios will fluctuate over time. CRM has a contractual obligation to waive a portion of fees through November 1, 2015 and to assume certain expenses. In addition, CRM has also voluntarily agreed to waive or cap certain fees for the CRM Large Cap Opportunity Fund. This agreement may change or end at any time. Excluding the Small Cap Value, Small/Mid Cap Value and Mid Cap Value Funds, performance would have been lower in the absence of fee waivers and expense reimbursements.