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Small Cap Value 2Q19

July 30, 2019

 

Market Commentary:

Looking back, the markets remained volatile during the quarter, after one of the strongest starts to the year, as investor sentiment oscillated with each passing headline. Growth concerns were temporarily placated with the initial U.S. GDP estimate exceeding forecasts at 3.2 percent for the first quarter of 2019, though that marked the high point for expectations. Corporations reported better than expected earnings, with management teams expressing caution regarding implications from moderating growth and disruptions from the trade dispute. Optimism around a potential trade deal was crushed as negotiations collapsed, with little progress made during the quarter. Hope rested on the G-20 meeting that happened over the last weekend in June, which produced some progress towards a resolution. These headwinds culminated in pressures on interest rates as investors moved into safe-haven assets, which sent the yield on the 10-year treasury to multi-year lows below 2 percent. Inflation has remained relatively tame, further bolstering confidence in the Federal Reserve’s pivot towards easier monetary policy and the likelihood of meaningful cuts to their benchmark rate during 2019.

Looking forward to the second half of 2019, positive corporate earnings growth still remains the most likely outcome for the full year. However, growth for earnings is increasingly dependent on an acceleration into the end of the year, as the upcoming quarterly estimate has fallen and is now flat with the prior year’s earnings. Tight labor markets and a rebound in housing from lower interest rates has continued to underpin the strength in the U.S. consumer despite the market concerns. Investors are likely to be focused on company outlooks for the remainder of the year as these issues begin to show a greater impact on their earnings and cashflows. As the economic cycle continues to progress later and later, the preference for high-quality, cash-generative businesses is likely to increase as markets become increasingly concerned for those companies with more challenged models where leverage is high, or cash generation is lower. These differences, we believe, will cause further dispersion in returns between securities, while avoiding those most exposed to a key driver of investor returns. We remain vigilant in assessing absolute risk in the securities we invest in and striving to protect client capital during these times for potential volatility from the uncertainty.

Timothy Plan Small Cap Value Fund Q2 2019 Commentary

Index Drivers:

During the first quarter, the Russell 2000 Index saw all sectors post positive returns, with Information Technology and Energy gaining the most and Consumer Staples and Financials the least.

Performance Drivers:

The portfolio’s relative performance benefitted from favorable stock selection in Materials and Utilities. ProPetro posted a strong quarter as their relationships in the shale basins, particularly the Permian, helped offset broader industry pressures. Installed Building Products gained after allaying fears regarding pricing power in the insulation installation business with tailwinds from improving housing sentiment. Innospec beat earnings handily driven by better sales and margins in their fuel specialties and oil field segments. Novanta rallied on solid organic growth and better margins as their focus on higher-growth end markets that began several years ago continues to pay dividends. Omnicell beat expectations as issues with a product transition appear to be fully resolved and execution remains good.

The portfolio’s relative performance was negatively impacted by unfavorable stock selection in Financials and an underweight to Information Technology. Penn Virginia declined after their plan to merge with another energy producer was abandoned. Columbia Banking System moved lower after missing expectations as slowing loan growth combined with higher expenses pressured their earnings. Gentherm suffered from weaker automobile volumes, leading to lower near-term guidance but management maintained their long-term guidance. Lattice Semiconductor, a recent purchase, moved modestly lower in sympathy with the market. Continental Building Products posted solid results but saw investor concerns over potential weakening in wallboard prices send shares lower as the quarter came to a close.

Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting [email protected]. Benchmark Data Source:  © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.

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Manager Commentary  / Small Cap Value

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