Morningstar - Q3 2021 - 80

Investors
Clifford Capital Partners Instl CLIFX
Morningstar Category
5-Yr Annlzd Return (%)
5-Yr % Rank in Cat
Morningstar Rating
Expense Ratio (%)
Mid-Cap Value
15.91
3
QQQQQ
0.90
Source: Morningstar Direct. Data as of 06/30/2021.
Clifford Capital Focused Small Cap
Value Instl FSVVX
Morningstar Category
1-Yr Annlzd Return (%)
1-Yr % Rank in Cat
Morningstar Rating
Expense Ratio (%)
Small Value
87.25
14
NA*
1.05
Source: Morningstar Direct. Data as of 06/30/2021.
*The fund is too young for a star rating, but a separate account version
of the strategy has 4 stars.
you're wrong, " Batchelor says. " We want a culture
where we can support each other's independent
thinking, backed by data, research, and analysis. "
The Right Balance
While Batchelor makes final portfolio decisions,
he, Passey, and Nichols collaborate on ideas.
" We are usually playing in the same sandbox
when we are digging up ideas, looking for
mispriced investments wherever they are, " says
Passey. " We have an open-door policy, and
the truth is we just love to talk stocks all the time. "
Nichols tells the story behind Big Lots BIG,
another deep-value success story. The
company had had no store growth to speak
of for nearly a decade and had fallen out of favor.
" We saw assets on the balance sheet, some
warehouses and such, that we thought weren't
valued well, " says Nichols. There was also
a catalyst: a new management team, which set
about remodeling stores and acquired the rights to
the higher-quality Broyhill brand. Because
Big Lots was deemed an essential retailer, it
remained open during the pandemic and had
its best sales year ever.
" I took a position in January 2020, and when
everything sold off hard, I added to it, "
says Black. " They'd been fighting a huge value
headwind, but they stayed in there and
they finally have a tailwind-and are doing better
than most value investors. "
To build out the investment team, Batchelor
turned to former Morningstar colleague
Allan Nichols. " Allan brought new perspective and
insight, given his international expertise, "
he says, " and philosophically, it would be hard
to find a better fit. "
" I was at a fairly deep-value buy-side shop
and then at Morningstar was introduced to moats
and high quality, " Nichols says. " Ryan's strategy
was a perfect marriage for me. "
Because the strategies are highly concentrated
in 25 to 35 stocks, that kind of compatibility
is helpful. " We have a lot of conviction in what we
do, and it's hard to be on an island if your thesis is
taking longer than expected, or heaven forbid,
80
Morningstar Q3 2021
Deep-value picks like GameStop and Big Lots
are limited to less than 50% of the portfolio,
but the sleeve came close to that ceiling in 2020.
The reward/risk ratio was so promising that
it made sense to tactically overweight it, Batchelor
says: " The bargains we found in March of
last year were among the best I've ever seen. "
It paid off: Clifford Capital Partners returned
more than 75% from April 2020 through June 2021,
and Focused Small Cap Value was up nearly
100%. Batchelor attributes the outperformance to
the deep-value sleeve, and the team still sees
better opportunities there today.
" Not that we are negative on core value, "
he adds. " We love owning great businesses that
compound over time. " The team has built
a watchlist of about 135 high-quality companies
that they are ready to buy if a stock's
price drops into their range-provided the moat
remains intact and they have identified key
thesis points.
Passey offers Stericycle SRCL as an example:
" I was reading the 10-K, looking at the margins, and
I commented to Ryan that this would be a
great company to own. It was trading at 35 or 40
times earnings, and he said, 'Let me know
when it's at 20.' We laughed, but five years later,
it was at 18 times earnings. That's when we
sharpened our pencils. "
Management had added more debt to the balance
sheet, and there were some pricing pressures,
but the Clifford team believed these were
short-term problems. They first bought in 2016 and
it's still in the portfolio today. While the team
sells deep-value plays once they hit fair value, they
allow core value picks a longer leash provided
there isn't a better opportunity to be had.
A Solid Foundation
While the past year's outsize returns are
exceptional, both Clifford Capital strategies have
strong risk-adjusted performance relative
to their Morningstar Categories over the long term.
That track record is just part of the reason Biltmore
Family Office in Charlotte, North Carolina,
chose Clifford Capital for client portfolios about
a year ago. " Performance isn't the sole
determinant in our diligence process, " investment
research analyst Emma DeMane says.
" We like that they are market-cap-agnostic-able
to go where the opportunities are. "
Coyle Financial Counsel in Glenview, Illinois, has
been investing with Clifford since 2014.
" Their investment thesis is simple to understand,
and they are true to their mandate, " says chief
investment officer John Finley.
Given the resurgence of interest in value strategies
and its own great run, Clifford Capital may
be poised for growth. Meanwhile, an international
strategy is on the horizon.
Batchelor believes a foundation has been laid
to support such growth: " Every key person
at the firm has equity. We want to build a firm and
a culture that can transcend me and Wayne. " K
Laura Lallos is managing editor of Morningstar magazine.
Photography by Kim Raff.
https://www.morningstar.com/authors/44/laura-lallos
Morningstar - Q3 2021

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