Fiduciary Management Q4 2023 Investment Strategy Outlook

Investment Strategy Outlook

2023 was a very strong year in global stock markets, with optimism being driven by falling inflation, tight labor markets, and a resilient consumer. Equities screamed higher in the fourth quarter (and particularly so in the U.S.), as the Federal Reserve’s December pivot toward 2024 interest rate cuts reignited investors’ risk appetite. That said, financial conditions have tightened substantially, while global growth has slowed and remains modest. Government deficits are high, debt service costs are on the rise, and global debt levels are hi ng new records – a growing concern. Equity valuations are elevated in the U.S. Large Cap arena where the concentration of the S&P 500 Index is extraordinary, but are more reasonable elsewhere. The FMI portfolios continue to offer investors quality businesses trading at discount valuations, with solid management teams and balance sheets. We strive to deliver strong risk-adjusted returns with a focus on downside protection. When markets are driven by speculative behavior like we are seeing in some segments today, patience and prudence generally pay off.

The 2023 fourth quarter and full-year performance commentary is outlined below:

FMI Small Cap Equity (MUTF:FMIJX)

In the fourth quarter, the FMI Small Cap Strategy increased approximately 12.4% (gross) / 12.2% (net), compared with 14.03% and 15.26% for the Russell 2000 Index and Russell 2000 Value Index, respectively. Relative to the Russell 2000, our top performing sectors included Producer Manufacturing, Consumer Non-Durables, and Electronic Technology, while Retail Trade, Distributi on Services, and Finance weighed. Top individual performers included Skechers U.S.A. Inc.-Cl A, Robert Half Inc., and Simpson Manufacturing Co. Inc., while BJ’s Wholesale Club Holdings Inc., Henry Schein Inc., and Genpact Ltd. underperformed.

For the calendar year, the FMI Small Cap Strategy advanced by approximately 26.3% (gross) / 25.4% (net), significantly outpacing the Russell 2000 and Russell 2000 Value, which gained 16.93% and 14.65% respectively. Our underweight and outperformance in Finance in a year with a regional banking crisis was a notable differentiator. Our housing and construction materials exposure, which we built up in 2022 into weakness, was also additive. Our valuation discipline and business quality focus have been handsomely rewarded.

FMI Large Cap Equity (MUTF:FMIHX)

In the fourth quarter, the FMI Large Cap Strategy advanced approximately 13.1% (gross) / 13.0% (net), compared with 11.69% and 9.50% for the S&P 500 and iShares Russell 1000 Value ETF¹, respectively. Relative to the S&P 500, our sector exposure in Producer Manufacturing, Health Technology, and Retail Trade aided performance, while Technology Services, Electronic Technology, and Industrial Services each failed to keep pace. Masco Corp., Dollar General Corp., and Charles Schwab Corp. outperformed, while CarMax Inc., Schlumberger Ltd., and Carrier Global Corp. each detracted.

For the calendar year, the FMI Large Cap Strategy gained approximately 21.7% (gross) / 21.2% (net), lagging the S&P 500 at 26.29%, but finishing well ahead of the iShares Russell 1000 Value ETF¹ at 11.36%. The S&P 500 has taken on a life of its own, given the incredible concentration at the top and its tilt toward growth stocks (more on this later). Value continues to be out of relative favor versus Growth, with the Russell 1000 Growth outpacing the Russell 1000 Value by over 31% in 2023. While we had a few tough stocks in 2023, the Technology sectors alone accounted for over 100% of FMI’s underperformance versus the S&P 500.

FMI All Cap Equity

In the fourth quarter, the FMI All Cap Strategy gained approximately 11.4% (gross) / 11.2% (net), compared with 12.14% for the iShares Russell 3000 ETF¹. Relative to the iShares Russell 3000, our lack of direct exposure in Energy Minerals was additive, as was our sector exposure in Consumer Non-Durables, and Health Technology. Technology Services, Finance and Distributi on Services each lagged. Skechers U.S.A. Inc. Cl A, Charles Schwab Corp. and Micron Technology Inc. contributed to performance, while Genpact Ltd., Arch Capital Group Ltd., and Arrow Electronics underperformed.

For the calendar year, the FMI All Cap Strategy gained approximately 19.9% (gross) / 19.2% (net), compared with 25.83% for the iShares Russell 3000 ETF¹. Similar to the S&P 500, the iShares Russell 3000 has also participated in the concentration of growthier names with the Technology sectors leading the way.

FMI International Equity (FMIYX)

In the fourth quarter, the FMI International Strategies gained approximately 6.4% (gross) / 6.2% (‘net’) on a currency hedged basis and 9.6% (gross) / 9.4% (‘net’) currency…