Lombardia Capital Small Cap Value Strategy Overview Q1 2015

1ST QUARTER 2015
SMALL CAP VALUE
STRATEGY OVERVIEW
FIRM OVERVIEW
Lombardia Capital Partners, LLC (LCP) is an
employee owned minority boutique asset
manager specializing in U.S. and non-U.S. value
equities. We offer investment management
services to institutional, public, corporate,
multi-employer, and not-for-profit clients.
We manage approximately $3.5 billion from
our offices in Pasadena, CA and Chicago, IL.
Our suite of domestic and global equity value
strategies
provide
diverse
investment
opportunities for prospective clients who seek
long-term risk adjusted outperformance.
SMALL CAP VALUE STRATEGY
 Assets under management: $2.7 billion
STRATEGY OBJECTIVE
The Small Cap Value (SCV) strategy seeks capital appreciation through valueoriented stock selection. It employs a strategy of buying stocks below intrinsic
value and selling stocks as they become fully priced, have a change in thesis, or if a
better opportunity exists. In addition to valuation, stocks are evaluated for
anticipated fundamental catalysts, which will narrow the discount between the
current price and intrinsic value. We favor companies with strong balance sheets,
free cash flow generation, liquidity, high interest coverage, and below average
levels of debt relative to its industry and sector.
Additionally, our price-to-intrinsic process is focused on normal earnings power
three years out, which is longer than most street analysts. We feel this approach can
allow a company to emerge from a temporarily depressed state to a normal
operating state. Many investors are focused on quarterly and annual earnings, which
often are too short-term to make proper valuations. This philosophy has proven to
be successful based on the product and portfolio managers’ track record.
While we may be broadly characterized as a relative value manager, we invest in
more attractive relative and absolute return securities in the investment universe.
Since we believe the required rate of return for the small cap value asset class is 9%,
and the objective is to outperform the small cap market by 300 basis points in the
long-term, we have a minimum hurdle rate for new investments of 12%.
INVESTMENT PROCESS
(closed to new investors)
We implement our value investing philosophy through:

Benchmark: Russell 2000® Value Index


85-100 portfolio holdings

5% maximum cash weighting


INVESTMENT TEAM
Al Marley, CFA
Partner, Chief Executive Officer,
Senior Portfolio Manager
Fernando Inzunza, CFA
Partner, Portfolio Manager
Andy Absler, CPA
Partner, Portfolio Manager
Deep fundamental research. Our research is rigorous, independent, and
objective. Valuations drive our investment decisions as we focus on company
and industry fundamentals rather than temporary, short-lived impairments to
securities.
Group vetting. Investment committee members each face a high level of
scrutiny for portfolio candidates and existing holdings. Our culture allows us to
thoroughly and honestly challenge each other’s investment theses.
A long-term view. In valuing securities, we determine normalized earnings
many years out. Under our model, portfolios and the relevant universe are
constantly reviewed for issues offering the highest discounts to intrinsic value.
RESEARCH
Research is assigned across sixty sub-sectors within the investment universe. Each
member of the team is responsible for approximately one-fifth of the sub-sectors.
The investment professional assigned to a particular sub-sector must utilize their
own inputs in order to drive valuations three years forward. Once valuations are
inputted into the model, fundamental research drives the investment decision.
Research consists of analyzing balance sheets, company conference calls, industry
conferences, and company visits.
SELL DISCIPLINE
James Veers, CFA
Partner, Portfolio Manager
Daniel Holland
Senior Research Analyst
The team will make the decision to sell or trim a stock when:



The stock appreciates such that its expected rate of return no longer warrants a
position in the portfolio.
There is a negative change in the original thesis and rationale for purchase.
A stronger opportunity exists to replace it and strengthen the portfolio.
LOMBARDIA CAPITAL PARTNERS, LLC
Headquarters: 55 South Lake Avenue, Suite 750 • Pasadena, CA 91101 • P: (626) 568 2792 • F: (626) 568 2771
30 North LaSalle Street, Suite 4030 • Chicago, IL 60602 • P: (312) 269 1060 • F: (312) 269 1061
[email protected] • www.lombardiacapital.com
1ST QUARTER 2015
SMALL CAP VALUE
STRATEGY OVERVIEW
PORTFOLIO ATTRIBUTION
For the quarter ending March 31, 2015, the Small Cap Value
Composite underperformed the Russell 2000® Value Index. On a
gross of fees basis, the Small Cap Value Composite returned
0.18% versus the Russell 2000® Value Index return of 1.98%.
Quarter-to-date ending March 31, 2015, the portfolio’s stock
selection was negative, subtracting approximately 173 bps. Stock
selection was positive/neutral in four of ten sectors, with
Consumer Staples (+50 bps) and Financials (+34 bps)
performing the best. This was offset by negative stock selection
in six of ten sectors, with Information Technology (-86 bps),
Consumer Discretionary (-68 bps), and Energy (-53 bps)
performing the worst. Sector selection had a negative impact
subtracting approximately 1 bps in the quarter.
The primary focus of the portfolio strategy remains stock
selection. In accordance with the investment strategy, the
portfolio is diversified with exposure to each of the benchmark
sectors. Sector weightings are the result of our bottom-up stock
selection process. For the quarter ending March 31, 2015, the
largest
sector
overweights
were
Industrials
(+5.55%),
Information Technology (+3.10%), and Consumer Discretionary
(+0.03%). The largest sector underweights were Financials (5.63%), Utilities (-2.94%), and Health Care (-1.71%). The weighted
average market capitalization of the portfolio was above the
benchmark, $2,193 million versus $1,830 million. The median
market capitalization was significantly higher than the
benchmark, $1,464 million versus $657 million. Price-to-earnings
of the composite was lower, 13.5x versus 20.5x, while our
dividend yield was 2.1% versus 2.0% for the index.
ANNUALIZED COMPOSITE RETURNS*
Gross of Fees
Net of Fees
R2000® V
20%
15%
10%
5%
0%
-5%
QTR
1 YR
3 YR
5 YR
7 YR
10 YR
Since
Inception
Gross of Fees
Net of Fees
R2000® V
QTR
0.18%
-0.07%
1.98%
1 YR
2.99%
1.97%
4.43%
3 YR
14.14%
13.01%
14.79%
5 YR
13.55%
12.43%
12.54%
7 YR
11.77%
10.67%
8.94%
10 YR
9.92%
8.84%
7.53%
Since Inception
13.07%
11.95%
10.88%
PORTFOLIO CHARACTERISTICS
SECTOR WEIGHTINGS (%)
Small Cap Value†
R2000® V
Price to Earnings (Prev. 4 Qtrs)
13.5x
20.5x
Price to Book
1.4x
1.6x
Dividend Yield
2.1%
2.0%
Median Market Cap (millions)
$1,464
$657
Wtd Market Cap (millions)
$2,193
$1,830
Price to Cash Flow
8.5x
15.4x
LT Debt to Total Capitalization
33%
33%†
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
†Data source: Baseline
Financials
Information Technology
Telecomm
Utilities
0%
10%
20%
LCP SCV
30%
40%
R2000® V
*Inception date is 12/31/02.
Data as of March 31, 2015.
Supplemental information supplements the GIPS® Performance Presentation.
See accompanying GIPS® performance presentation for performance disclosures.
Past performance is not indicative of future results. Data is subject to change on a daily basis.
GICS Sectors; Index source: Russell Investments.
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1ST QUARTER 2015
SMALL CAP VALUE
COMMENTARY
PORTFOLIO COMMENTARY*
Not a lot changed within U.S. small cap stocks during the first quarter of
2015. Volatility declined, and the Russell 2000® Value Index gained just
under 2.0%. This return was better than that of large cap stocks for the
second quarter in a row. The price of oil continued to decline which
negatively impacted stocks in the Energy sector.
Outside of the domestic equity landscape, the world has been much
more interesting. The Federal Reserve ended its QE program last year,
and continues to look toward a normalization of monetary policy. In
March, the Fed removed the word “patient” regarding when it might
raise interest rates. Meanwhile, the European Central Bank began its
own quantitative easing program. This helped to weaken the Euro
against the U.S. Dollar by the largest quarterly amount since its creation
in 1999. The move also pushed European government bond yields
sharply lower. Lower yields have strengthened equity markets in Europe
much as the Fed’s QE program is thought to have strengthened our
domestic stock market. Germany’s DAX gained a remarkable 22% in
three months, its best first quarter since creation in 1998. Chinese and
Japanese stock markets were also up double digits in the first quarter.
Money appears to be flowing into markets of countries whose
governments are making efforts to boost their economies.
We mention these global factors to point out stock markets, in the short
term, are at times more affected by macro events (top-down) than
individual company results (bottom-up). Our Small Cap Value
Composite is focused domestically, and all of these global issues likely
had only a modest affect on our market. Two main top-down factors
affecting stocks this year are: 1) the price of oil which continued to
decline; and 2) foreign currency exchange rates, to which some of our
companies have significant exposure. We expect these two factors
could make it difficult for the overall market to report healthy earnings
growth this year.
The Energy sector’s profits should be down
significantly, and profits recorded in weakening foreign currencies will
be translated into fewer U.S. dollars. For U.S. exports competing
globally, prices may have to decline to remain competitive. Predicting
commodity prices or exchange rates is not our expertise. We did not
predict current volatility in oil prices or exchange rates, and are not
predicting where prices and rates go from here.
Our investment process, which focuses on bottom-up fundamentals of
companies, was challenged in the first quarter. The Small Cap Value
Composite gained a positive 0.18% gross of fees, lagging the Russell
2000® Value Index by 1.80%. On average our stocks were up, but too
many of our holdings declined, which led to our relative
underperformance. While returns were impacted by oil and exchange
rates, most of performance was driven by company–specific factors.
The lower oil price was the main reason the Energy sector suffered the
biggest divergence in return (Energy fell -7.20%) versus the Russell
2000® Value Index (+1.98%). All other sectors posted gains during the
quarter.
Our stocks within Energy fared worse than the sector
benchmark, and declined by -22.8% as a group, gross of fees. Two of
our energy companies own ships which supply offshore oil and gas
installations around the world. They were hit hard by the market and
led to our underperformance in Energy. We expect our Energy holdings
to make it to the other side of this oil price decline, but we believe it is
too soon to be aggressive. We did not add meaningfully to any of our
Energy positions in the quarter.
-6.7% gross of fees. This was our worst-performing sector in the first
quarter on a relative basis. One of our larger holdings in Info Tech, a
distributor of enterprise cabling and connectivity products, generates
31% of its revenue outside of N. America. Its results are also negatively
impacted by a decline in the price of copper, which itself was down in
part because it is a global commodity priced in U.S. Dollars. The stock
was the largest negative contributor in the sector. Five of the next sixlargest negative contributors in Info Tech generate between 40-89% of
their revenue outside of N. America, and we believe that exposure had
some negative impact on their stock prices as well.
Stock selection was also weak in Consumer Discretionary, where our
stocks lagged the sector benchmark by -5.5% gross of fees. This
negative performance is not the result of any macro factors, but
reaction to individual company news. Outerwall, which operates
automated retail kiosks offering convenient products and services for
consumers, was the largest detractor and fell by -11.7% in the quarter.
Fundamental results remained intact, but the board of directors
unexpectedly fired the CEO in the midst of good results and the market
sent the stock lower. We believe a new CEO will be hired without any
significant change in the company’s strategy. With a solid outlook for
earnings and cash flow, the stock was our largest holding in the sector
as we entered the first quarter. Following additional purchases at
advantageous prices during the quarter, it is now one of the portfolio’s
top 10 positions.
Many times our weakest performers from prior quarters turn out to be
the strongest performers in the current quarter. NuSkin is an example.
The stock performed poorly in 2014, but gained 38.6% in the first
quarter. It was the strongest individual contributor to performance. The
position is still a detractor over the past 5 quarters, but we are pleased
to see the positive contribution. The company’s earnings outlook has
not changed much since the end of 2014, but the market appears to be
comfortable that earnings have troughed for now with the possibility
for growth ahead. As a result, NuSkin benefited from a revaluation with
a higher P/E ratio on current earnings. We trimmed the position on
strength.
Another area of strength in the portfolio came from our holdings of
insurance companies and banks. All six insurance companies in the
portfolio, gained during the quarter, and five outperformed the industry
benchmark return of 1.79%. Among our Banks, BankUnited led the way
with a positive return of 13.7%. The Florida-based bank reported a
strong quarter of loan growth which surpassed expectations.
BankUnited was our 6th-largest position at the end of 2014, helping the
stock to contribute second-most to relative performance during the first
quarter. BKU is now our largest position in the Financial sector.
Stocks remain historically expensive based on P/E, which is our primary
valuation metric. However, we did find nine stocks of attractive
businesses with discounted valuations that our team decided to
purchase in the quarter. Ten stocks were exited during the quarter, with
all but one of those sales due to appreciation outpacing the growth of
our valuations. We continue to work towards maintaining a diversified
portfolio of stocks offering attractive expected returns.
The currency effect on our stocks is limited and is spread throughout
the portfolio. However, stock selection was worst in Info Tech where
we believe our companies have the most foreign currency exposure to
earnings results. Our Info Tech stocks lagged the sector benchmark by
*Portfolio commentary is based on the Small Cap Value Strategy composite. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory
clients. Past performance does not guarantee future results. Any securities mentioned are provided for informational purposes only and should not be deemed as a recommendation to
buy or sell. Portfolio holdings are subject to change at any time.
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1ST QUARTER 2015
SMALL CAP VALUE
GIPS® PERFORMANCE PRESENTATION
Year
End
Total Firm
Assets
(USD)
(millions)
Composite
Assets
(USD)
(millions)
Number of
Accounts
End of
Period
Net
Internal
Composite
Dispersion
2014
$3,718
$2,574
41
4.22%
3.09%
2.07%
0.02%
12.66%
2013
$3,739
$2,701
51
34.52%
40.20%
38.84%
0.15%
15.95%
15.82%
2012
$2,920
$1,411
54
18.05%
11.72%
10.62%
0.04%
18.84%
19.89%
26.05%
Russell
®
2000 Value
Index Return
Composite Annual
Performance Return
Gross
Composite
Ex-Post
Standard
Deviation
Benchmark
Ex-Post
Standard
Deviation
12.79%
2011
$2,700
$1,320
56
-5.50%
1.54%
0.53%
0.35%
25.64%
2010
$2,725
$907
46
24.50%
25.65%
24.42%
0.29%
29.94%
28.37%
2009
$1,990
$481
32
20.58%
35.88%
34.56%
0.32%
27.85%
25.62%
2008
$1,342
$381
38
-28.92%
-26.95%
-27.70%
0.25%
21.18%
19.14%
2007
$1,595
$276
26
-9.78%
-2.53%
-3.50%
0.05%
11.64%
12.59%
2006
$1,100
$136
11
23.48%
22.32%
21.12%
0.06%
12.08%
12.33%
2005
$856
$151
12
4.71%
-1.62%
-2.60%
0.19%
14.63%
14.09%
N.A.1 – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year
Lombardia Capital Partners, LLC, previously known as Valenzuela Capital Partners, LLC, is an independent registered investment adviser. It
changed its name to Lombardia Capital Partners, LLC on July 17, 2006. This was solely a name change and the firm did not change its
investment process or personnel at that time.
Lombardia Capital Partners, LLC (LCP) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and
presented this report in compliance with the GIPS standards. LCP has been independently verified for the periods of January 1, 2003
through December 31, 2013 by Ashland Partners and Company LLP. Verification assesses whether (1) the firm has complied with all the
composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to
calculate and present performance in compliance with the GIPS standards. The Small Cap Value Composite has been examined for the
periods of January 1, 2003 through December 31, 2013. The verification and performance examination reports are available upon request.
Small Cap Value Composite includes all institutional, discretionary, fee paying, equity portfolios that invest in small cap value U.S. equities
with the goal of providing long-term capital growth and steady income from a well-diversified strategy. The strategy is comprised of funds
investing in companies generally with market capitalizations that are representative of the Russell 2000® Value Index. The strategy allows
for equity exposure ranging between 80–95%. Results are based on fully discretionary accounts under management, including those
accounts no longer with the firm. Beginning January 1, 2003, composite policy requires the temporary removal of any portfolio incurring a
client-initiated significant single cash inflow or outflow of at least 10% of portfolio assets. The temporary removal of such an account
occurs at the beginning of the month in which the significant cash flow occurs and the account re-enters the composite at the beginning of
the month after the cash flow. Additional information regarding the treatment of significant cash flows is available upon request. Past
performance is not indicative of future results.
Currency used to express performance is U.S. Dollar. Returns include reinvestment of all income. Returns gross of management fees do not
reflect deduction of investment advisory fees. Actual returns will be reduced by investment advisory fees and other expenses that may be
incurred in the management of the account. Actual investment advisory fees incurred by clients may vary. LCP’s advisory fees are
described in Form ADV Part 2, and Small Cap Value investment management fees are generally: 1.00% on the first $20 million, 0.85% on
the next $20 million, 0.75% on the next $10 million, and 0.70% above $50 million.
Fees are collected quarterly, which produces a compounding effect on the total rate of return net of management fees. For example, the
effect of investment management fees on the total value of a client’s portfolio assuming (a) $1,000,000 investment, (b) portfolio return of
8% a year, and (c) 1% annual investment advisory fee would be $10,416 in the first year, and cumulative effects of $59,816 over five years
and $143,430 over ten years. The net-of-fee performance was calculated deducting on a monthly basis the highest fee of 1.00%.
Internal composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire
year. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The Small
Cap Value Composite was created January 1, 2003. The firm’s composite list and descriptions are available upon request.
BENCHMARK: The benchmark is the Russell 2000® Value Index. Performance returns of the indices are used as a comparable rate of
return based on the similarity of investment holdings with those of the Composite. The rates of return for the indices do not include any
transaction costs, management fees, or other costs. Indexes are unmanaged and cannot be invested in directly. Russell Investments 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 LCP. Russell Investments is not responsible for the formatting or configuration of this material or for
any inaccuracy in LCP’s presentation thereof.
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