Small Cap Value – Q3 2022 Commentary

US equity market performance was mixed in the third quarter of 2022, with most major market indices down low single digits on a percentage basis over the three-month period.  The Russell 2000® Value (R2V) Index declined 4.61%, the Russell 2000® Growth Index was up +0.24%, and the S&P® 500 Index fell 4.88%.  The quarter was a tale of two halves: From June 30th to August 16th, the R2V increased 16.7%, and from August 16th to September 30th, the R2V fell 18.7%. 

The Kennedy Capital Small Cap Value (SCV) composite declined 2.58% (gross of fees) and 2.79% (net of fees) during the quarter, outperforming the R2V by 2.03% (gross of fees) and 1.82% (net of fees).  For the rolling 12-month period, the SCV composite declined 12.0% (gross of fees) and 12.8% (net of fees), compared to the R2V’s decline of 17.7%.  Additional performance information is included in the table below.

Data as of 9/30/2022

Within the R2V, Communication Services and Real Estate were the two worst performing sectors, down 14.63%, and 11.27%, respectively.  Energy and Health Care were the top- performing sectors in the index, up 7.85% and 3.16%, respectively.  On a relative basis (vs the R2V), the best- performing sectors in the SCV composite were Industrials and Materials.  On the downside, Health Care and Consumer Discretionary were the two worst- performing sectors on a relative basis.

Tightening financial conditions, coupled with an increasingly macroeconomic uncertainty, drove higher levels of equity market volatility during the quarter.  The Federal Reserve raised the target discount rate to 3.25% (from 1.75%) over the three-month period and maintained its stance that more rate increases will likely be needed to control inflation.  The Fed’s messaging quelled hopes of a potential easing in financial conditions over the near term, and bolstered fears of a possible sharp downturn in the US economy.  In Europe, the economic picture is decidedly gloomier.  Energy shortages stemming from the war in Ukraine, high levels of inflation, and a contraction in manufacturing activity is putting downward pressure on the Eurozone economy and equity markets.

Experience tells us the most attractive long term investment opportunities present themselves during times of heightened uncertainty and bearish market sentiment.  As we’ve said before, we are not macroeconomic forecasters. The goal of our process is to create a diversified portfolio with a high probability of compounding returns above the benchmark over a market cycle. In good times or bad, when evaluating potential investments for the portfolio, we always ask ourselves the same questions:

1. Does this business typically generate returns above its cost of capital over a market cycle, and are there opportunities to reinvest back into the business at attractive rates of return?

2. Based on our fundamental research and interactions with company management, what impacts do we see to the business that could alter its returns trajectory and reinvestment opportunity set (for better, or for worse) over the next 3-4 years?

3. What is currently priced into the stock, and does it differ from our fundamental outlook for the business?

By staying disciplined to our process, we can construct a portfolio of companies that in aggregate have superior fundamental attributes relative to the overall market, but at valuation levels that give us an adequate margin of safety.  We believe this is a winning recipe for portfolio returns over the long term.

We welcome the opportunity to discuss any questions or concerns you may have, and we thank you for the opportunity you have given us to manage your account.


Frank Latuda, Jr., CFA®


Chief Investment Officer & Portfolio Manager

McAfee Burke, CFA®


Portfolio Manager

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Important Disclosures

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.

Kennedy Capital Management LLC (“KCM”) is a Missouri corporation 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.

The Small Cap Value Composite contains fully discretionary small cap value accounts that are invested in small cap companies that have favorable cash flow values relative to their current market value.  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.

Returns are presented gross and net of investment advisory fees and include the reinvestment of all income.  Gross of fees 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.

Portfolio Sector Weightings are subject to change at any time.  Sector weightings are based on the Global Industry Classification Standard (“GICS”) classification scheme and are measured as a percentage of the total portfolio 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.

GICS was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International Inc. (“MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) and is licensed for use by Kennedy Capital Management.  Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification.  Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto.  The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Kennedy Capital Management.  Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Kennedy Capital Management’s presentation thereof.

The Russell 2000® Value Index measures the performance of small-cap value segment of the U.S. equity universe.  It includes those Russell 2000® 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 2000® Value Index is constructed to provide a comprehensive and unbiased barometer for the small-cap value segment.  The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set and that the represented companies continue to reflect value characteristics.

The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000® companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 year). The Russell 2000® Growth Index is constructed to provide comprehensive and unbiased barometer for the small-cap growth segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics.

The Russell 2000® 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.

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 13.5 trillion is indexed or benchmarked to the index, with indexed assets comprising approximately USD 5.4 trillion of this total (as of Dec. 31, 2020). The index includes 500 leading companies and covers approximately 80% of available market capitalization.