After more than a decade of strong trailing returns in US equities, 2022 has seen most headline domestic equity indices decline by anywhere from 10% to 20%. And after a long run of growth outperforming value and large caps outperforming small caps, value has indeed come back into favor: Russell Value and Growth Index Performance
As of September 15, 2022. Source: Morningstar. Past performance is no guarantee, nor is it indicative, of future results. Please refer to the end of this page for Important Disclosures and Definitions.
While value has come back in favor versus growth, the same can’t be said of small cap versus large cap, with small cap underperforming large cap year-to-date and over the trailing twelve months (albeit modestly year to date):
Looking into the valuation of large-cap portfolios relative to small-cap portfolios, investors will find that the current market pullback has made small caps even cheaper on a price-to-earnings basis. Small-cap stocks (as represented by the Russell 2000 Index) now trade at low double-digit earnings multiples and a meaningful discount relative to large-cap stocks (as represented by the Russell 1000 Index), which we have historically viewed as an attractive valuation to consider increasing exposure to the asset class on an absolute or relative basis, respectively. Russell Large-Cap and Small-Cap Index Valuation
As of September 15, 2022. Source: Morningstar. P/E = Price-to-earnings. P/B = Price-to-book. TTM = Trailing twelve months. Past performance is no guarantee, nor is it indicative, of future results. Please refer to the end of this page for Important Disclosures and Definitions.
According to research from the Leuthold Group, the valuation disparity that exists between small-cap and large-cap stocks is unusual: This is only the fourth time in the last 40 years that the difference has been this large (early 90s, late ‘90s to early ‘00s, briefly in 2020, and recently). Small Cap to Large Cap Historical P/E Ratio (x100) Source: Leuthold Group, as of 8/31/2022.P/E = Price-to-earnings. Past performance is no guarantee, nor is it indicative, of future results. Please refer to the end of this page for Important Disclosures and Definitions.
Within the small-cap universe, small-cap value looks more attractive than growth: Russell Small-Cap Value and Small-Cap Growth Index Valuation
Source: Morningstar. P/E = Price-to-earnings. P/B = Price-to-book. TTM = Trailing twelve months. Past performance is no guarantee, nor is it indicative, of future results. Please refer to the end of this page for Important Disclosures and Definitions.
Investors have the opportunity to purchase small-cap value stocks at a high single-digit multiple of earnings, a roughly 60% discount to small-cap growth stocks, or at book values that are less than half of the small-cap growth proxy.
For more than 20 years, the FPA Queens Road Small Cap Value Fund has sought to outperform the Russell 2000 Value Index by consistently applying its investment process through the rigorous application of four core tenets:
With the recent increase in volatility across global equities—and especially domestic small-cap stocks—the FPA Queens Road Small Cap Value team is seeing an uptick in the number of potentially attractive investment opportunities being considered for inclusion into the portfolio. Naturally, we hope this unusual situation will provide attractive risk-adjusted returns over the long-term for patient investors seeking to benefit from this opportunity.
Finally, Steve Scruggs was recently interviewed by Citywire to discuss his approach to value investing. A link to the article on FPA’s website is below.
FPA Queens Road in the News: Portfolio Manager Steve Scruggs Talks Value and Joining FPA
For more information about the Fund, the Fund’s Overview page can be accessed at the link below.
IMPORTANT DISCLOSURES AND DEFINITIONS
This communication does not constitute, and should not be construed as, an offer or solicitation for the purchase or sale with respect to any securities, products or services discussed, and neither does it provide investment advice. You should consider the FPA Queens Road Small Cap Value Fund (the “Fund”) investment objectives, risks, and charges and expenses carefully before you invest. The Prospectus details the Fund's objective and policies and other matters of interest to the prospective investor. Please read the Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at www.fpa.com, by calling toll-free, 1-800-982-4372, or by contacting the Fund in writing.
The Fund's Total Annual Operating Expenses before reimbursement is 1.07% (Investor Class), 0.96% (Advisor Class), and 0.91% (Institutional Class). The adviser has contractually agreed to waive its management fees and to make payments to limit Fund expenses, until February 1, 2024 so that the total annual operating expenses (excluding interest, taxes, brokerage fees and commissions payable by the Fund in connection with the purchase or sale of portfolio securities, fees and expenses of other funds in which the Fund invests, and extraordinary expenses, including litigation expenses not incurred in the Fund’s ordinary course of business) of the Fund do not exceed 1.04%, 0.99% and 0.89%, for Investor Class, Advisor Class, and Institutional Class shares, respectively. These fee waivers and expense reimbursements are subject to possible recoupment by the adviser from the Fund in future years (within the three years from the date when the amount is waived or reimbursed) if such recoupment can be achieved within the lesser of the foregoing expense limits or the then-current expense limits. The expense limit agreement may be terminated only by the Fund’s Board of Trustees, upon written notice to the adviser. Prior to November 1, 2020, the Fund had a unitized fee structure that limited annual operating expenses to 1.18%.
The prospectus for the Fund dated September 28, 2022, and corresponding supplements, can be accessed at: https://fpa.com/request-funds-literature. The most current prospectus can always be obtained by visiting the website at www.fpa.com, by calling toll-free, 1-800-982-4372, or by contacting the Fund in writing.
The performance and other statistics shown reflects the historical performance of the Fund when Bragg Financial Advisors, Inc. (“BFA”) served as investment adviser of the Fund. Effective November 1, 2020, First Pacific Advisors, LP (“FPA” or “Adviser”) became the investment adviser of the Fund and BFA transitioned to serving as the sub-adviser. BFA continues to be responsible for the day-to-day management of the Fund, subject to FPA’s oversight. No changes to the Fund’s principal investment strategies were made in connection with these changes in management of the Fund, and Steve Scruggs, CFA, Director of Research and Senior Portfolio Manager for BFA, continues to serve as the portfolio manager for the Fund.
Additional Disclosures
The statements contained herein reflect the opinions and views of the portfolio managers as of the date written, is subject to change without notice, and may be forward-looking and/or based on current expectations, projections, and/or information currently available. Such information may not be accurate over the long term. These views may differ from other portfolio managers and analysts of the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice.
Future events or results may vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments. The information and data contained herein has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data.
The information contained herein is not complete, may change, and is subject to, and is qualified in its entirety by, the more complete disclosures, risk factors, and other information contained in the Fund’s Prospectus and Statement of Additional Information. The information is furnished as of the date shown. No representation is made with respect to its completeness or timeliness. The information is not intended to be, nor shall it be construed as, investment advice or a recommendation of any kind.
Portfolio composition will change due to ongoing management of the Fund. References to individual securities or sectors should not be construed as a recommendation by the Fund, the portfolio managers, the Adviser, or the distributor to purchase or sell such securities or invest in such sectors, and any information provided is not a sufficient basis upon which to make an investment decision. It should not be assumed that future investments will be profitable or will equal the performance of the security or sector examples discussed. The portfolio holdings as of the most recent quarter-end may be obtained at www.fpa.com.
Investments, including mutual fund investments, carry risks and investors may lose principal value. Capital markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Small and mid-cap stocks involve greater risks and they can fluctuate in price more than larger company stocks. Short-selling involves increased risks and transaction costs. You risk paying more for a security than you received from its sale. Groups of stocks, such as value and growth, go in and out of favor which may cause certain funds to underperform other equity funds. The value of an individual security can be more volatile than the market as a whole and can perform differently than the value of the market as a whole.
Small Capitalization Companies: The Fund primarily invests in equity securities (common stocks, preferred stocks and convertible securities) of small-capitalization U.S. companies, defined as those with market capitalization, at the time of purchase, that is no greater than the largest market capitalization of any company included in the Russell 2000 Value Index. Investing in small companies involves special risks including, but not limited to, the following: smaller companies typically have more risk and their company stock prices are more volatile than that of large companies; their securities may be less liquid and may be thinly traded which makes it more difficult to dispose of them at prevailing market prices; these companies may be more adversely affected by poor economic or market conditions; they may have limited product lines, limited access to financial resources, and may be dependent on a limited management group; and small-cap stocks may fluctuate independently of large-cap stocks. All investment decisions are made at the discretion of the Portfolio Manager, in accordance with the then current Prospectus. Comparison to any index is for illustrative purposes only.
The prices of securities held by the Fund may decline in response to certain events taking place around the world, including those directly involving the companies whose securities are owned by the Fund. Securities in the Fund’s portfolio may underperform due to inflation (or expectations for inflation), interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, regulatory events and governmental or quasi-governmental actions. There is a risk that you may lose money by investing in the Fund.
Value style investing presents the risk that the holdings or securities may never reach their full market value because the market fails to recognize what the portfolio management team considers the true business value or because the portfolio management team has misjudged those values. In addition, value style investing may fall out of favor and underperform growth or other styles of investing during given periods.
Please refer to the Fund's Prospectus for a complete overview of the primary risks associated with the Fund.
Index Definitions
The Russell 1000 Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000 companies with relatively lower price-to-book ratios, lower forecast medium term (2 year) growth and lower sales per share historical growth (5 years).
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher forecast medium term (2 year) growth and higher sales per share historical growth (5 years).
The Russell 2000 Index tracks the stocks of small domestic companies, based on total market capitalization.
The Russell 2000 Value Index represents those stocks of the Russell 2000 Index with lower price-to-book ratios and lower relative forecasted growth rates.
The Russell 2000 Growth Index represents those stocks of the Russell 2000 Index with higher price-to-book ratios and higher relative forecasted growth rates.
Leuthold 3000 Large Cap refers to the a group of the largest companies in the U.S. based on market capitalization. It is not an investable index.
Leuthold 3000 Small Cap refers to the a group of the smallest companies in the U.S. based on market capitalization. It is not an investable index.
Other Definitions
Price to Book (P/B) is used to compare a firm's market capitalization to its book value. It's calculated by dividing the company's stock price per share by its book value per share (BVPS). An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation.
Price to Earnings (P/E) is the ratio for valuing a company that measures its current share price relative to its EPS. The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Small Cap Value Companies: The term small cap describes companies with a relatively small market capitalization. A company's market capitalization is the market value of its outstanding shares. The definition for small cap varies, but generally means a company with $300 million to $5 billion in market capitalization.
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Past performance is no guarantee, nor is it indicative, of future results and there is no assurance that the Fund’s investment objective will be achieved or that the strategies employed will be successful. As with any investment, there is always the potential for gain, as well as the possibility of loss. The FPA Funds are distributed by UMB Distribution Services, LLC. 235 W. Galena Street, Milwaukee, WI 53212.