All Cap Value – Q4 2023 Commentary

The second half of 2023 experienced strong performance from stocks and bonds as inflation continued to cool, and the economy continued to grow. Inflation’s recent moderation has been driven by lower energy prices, improving supply chain costs and Federal Reserve tightening. Even with the sharp increase in Federal Reserve tightening, the economy has remained surprisingly buoyant, on tailwinds from federal stimulus along with solid consumer spending spurred on by wealth creation from housing and stock market inflation. 

The value of stocks and bonds both increased during 2023 with a late surge in performance as long-term government bond yields started a sharp decline in mid-October. The S&P 500® increased 26% for 2023 with the tech heavy Nasdaq composite up 43%.  The Nasdaq’s strong performance was helped by the appreciation of hyperscale tech companies leading the strong equity markets on excitement around the rollout Artificial Intelligence technology. While the ICE Bank of America Broad Bond Market Index improved by greater than 4% for 2023 and greater than 7% for the last 2 months of the year. (Robertson, Reuters article dated 12/29/2023)

The strong stock and bond market performance during the last 2 months of the year coincided with a peak in long-term interest rates that reached a high of 5% in late October before falling 113 basis points to 3.87% by the end of the year. The strong reversal in long-term interest rates stemmed from more tepid inflation readings and declines in energy prices. Markets were also more constructive on the sustainability of economic growth with the belief that the economy would experience a historically elusive “soft landing” (improved inflation thru monetary contraction without pushing the economy into a recession). Early data supports the “soft landing” narrative, but since World War 2, the Federal Reserve’s monetary tightening actions to remove inflation has resulted in a “hard landing” recession every time except 1995. (Timiraos, WSJ article dated 9/18/2023)

The seeds of inflation started in early 2021 as aggregate demand exceeded aggregate supply. Aggregate demand increased on strong government stimulus. Aggregate supply was limited due to  COVID-19-related supply chain challenges. The inflation problem was then exacerbated by the Russian invasion of Ukraine in February of 2022 which drove up global energy prices and put further strain on the world’s beleaguered supply chain. During 2023, energy prices declined as US production moved to record output and more than offset OPEC+ supply cuts. Natural gas prices also fell as US shale production growth continued to ramp. Long-term inflation expectations seem muted with long-term bond yields discounting structural deflationary forces including declining population growth in developed economies (especially China and Europe), energy deflation from fracking technology along with strong shift towards renewables (especially in China), and productivity improvements from Artificial Intelligence and other technologies.

US economic growth has been underpinned by strong employment, rising wages and increased capital investment in the US through reshoring of supply chains, energy development of fossil fuels for export, and transformation of transportation and power grid infrastructure towards electric cars and renewable energy which is supported by government investment and incentives.

It’s still too early to declare victory on achieving a soft landing but there are some signs that this is developing. 

For 2023, All Cap Value appreciated 15.01% (gross of fees) 14.23% (net of fees) outpacing the Russell 3000® Value Index which increased 11.66% for the year. Positive stock selection has helped drive most of the positive performance relative to the benchmark year-to-date with positive stock section in the Materials, Consumer Discretionary and Information Technology more than offsetting some headwinds from Industrials, Health Care and Communication Services.  Additional performance information is included in the table below.

Data as of 12/31/2023

Even with the strong recent appreciations in equity values, our investment approach, which focuses on bottom-up analysis on returns on invested capital, continues to uncover good companies at reasonable valuations.

As always, we want to thank you for the confidence you have placed in Kennedy Capital, and we appreciate the opportunity to manage your accounts.


Frank Latuda, Jr., CFA®

Chief Investment Officer & Portfolio Manager

Thomas Leritz, CFA®

Assistant Portfolio Manager

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Kennedy Capital Management LLC (“KCM”) is a Delaware limited liability company headquartered in Missouri.  KCM is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Clients of the Firm include U.S. corporations, pension and profit sharing funds, colleges and universities, trusts, not-for-profit organizations, foundations, and individuals. KCM claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. GIPS® are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on calculating and reporting their investment results to prospective clients to ensure fair representation and full disclosure of an investment firm’s performance history.

 Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. A complete list of all securities recommended by KCM in the preceding year, a fully compliant GIPS composite report, and the list of composite descriptions are available upon request from KCM at 10829 Olive Blvd., Suite 100. St. Louis, MO, 63141.

The All Cap Value Composite invest primarily in value securities of companies without a market capitalization constraint. The Manager generally looks for undervalued companies generating cash flow returns on invested capital greater than industry peers. All Cap Value portfolios generally demonstrate valuations below and growth characteristics at or above those of the benchmark. The weighted average market capitalization of the Account will generally be reflective of the Russell 3000® Value Index. The U.S. Dollar is the currency used to express performance.

Composite specific data provided within this presentation has been calculated from accounts that are discretionary as defined in this paragraph. The assets shown are derived only from discretionary accounts. Non-discretionary accounts, as defined by KCM, are accounts that are not included in the composite due to one or any combination of the following criteria: there were significant cash inflows or outflows within the account; the account’s asset level did not meet the minimum requirement to remain in the composite; the account assets are managed by others using our non-discretionary model. The temporary removal of such an account occurs at the beginning of the month and the account re-enters the composite the month after the criteria has been met.

Performance returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross of fee returns reflect the deduction of transaction costs and custodian fees but do not reflect the deduction of investment advisory fees. Net of fee performance is calculated using gross returns less the actual applicable annual management fee applied monthly. Past performance is not indicative of future results. A client’s return will be reduced by the advisory fees as described in Form ADV Part 2A and other expenses incurred by the account. For example, an annual advisory fee of 1% compounded quarterly over 10 years will reduce a gross 14.44% annual return to a net 13.32% annual return. Form ADV Part 2A is available upon request.

The performance figures reported herein are unaudited, may be based upon information obtained via electronic data sources (”feeds”) and may be subject to change. Data feeds from many of KCM clients’ selected custodians are obtained through third party sources, and are used to compare custodial data to KCM’s client account records as frequently as daily. Monthly, KCM reviews clients’ account holdings along with cash and share quantities against the custodial statements. In some instances, variances may exist between final audited custodial information and the information KCM obtains via such data feeds. Generally, any such variances are researched and reconciled within thirty days of the period end.

The information provided should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in a KCM portfolio at the time you receive this letter or that securities sold have not been repurchased. Allocations among industries, sectors and securities may vary and are subject to change without notice. Any securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the industry or sector allocation decisions mentioned, or securities transactions or holdings discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Sector Weightings are subject to change at any time.  Sectors are based on the Global Industry Classification Standard (“GICS”) classification scheme and are measured as a percentage of the total composite in terms of asset value as of the date indicated above.  Individual client portfolios may be different based on variations in security purchase price and date, and individual client restrictions. 

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Allocations to various assets classes change over time and deviate from any stated or targeted percentages of a total portfolio as a result of market conditions and reallocation decisions. Therefore, nothing herein reflects a static portfolio allocation that will remain the same or match stated target allocations of asset classes.

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The Russell 3000® Value Index measures the performance of the broad value segment of the US equity value universe. It includes those Russell 3000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years). The Russell 3000® Value Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad value market. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.

The Russell 3000® Value Index is used as the benchmark.  The Index is unmanaged and represents total returns including reinvestment of dividends.  The benchmark is used for comparative purposes only and generally reflects the comparable risk or investment style of the Firm’s strategy.  The investment portfolios underlying the Index are different from the investments in the portfolios managed by the Firm. Certain accounts may also use other benchmarks not listed in the GIPS composite report. The Verification and Performance Examination Report does not cover the benchmark returns included in the GIPS composite report.  Investors cannot invest directly in an Index.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. According to our Annual Survey of Assets, an estimated USD 15.6 trillion is indexed or benchmarked to the index, with indexed assets comprising approximately USD 7.1 trillion of this total (as of Dec. 31, 2021). The index includes 500 leading companies and covers approximately 80% of available market capitalization.