Hillcrest Commentary


Q3 2021 The Evolving Trajectory of 2021 and the Value of Process Discipline

The Hillcrest investment process was rewarded in the third quarter amid what could broadly be characterized as a more normal market environment. Business fundamentals notably garnered renewed interest in the period as companies with attractive business prospects and healthy financial positions performed well. A range of valuation factors also demonstrated a notable degree of efficacy consistent with historical levels in the period. Of course, these recent tailwinds for companies with compelling fundamentals represent a material shift from the prevailing market environment seen in the first half of the year. As we have previously detailed, the first half of 2021 was dominated by fundamentals and operational quality falling sharply out of favor amid the rise of meme stocks, burgeoning market speculation, and investors reaching irresponsibly far on the risk spectrum in an attempt to chase the rebound trade.

Q2 2021 A Tale of Two Markets

The second quarter of 2021 was comprised of two starkly differentiated market environments. The first of these environments constituted approximately the first half of the quarter. It was widely positive with a renewed market focus on valuations and business fundamentals after many investors had spent the earliest months of the year reaching irresponsibly far on the risk spectrum. However, the market experienced a dramatic and sudden shift away from this more rational investing environment in mid-May. The market environment that subsequently dominated the second half of the quarter bore virtually no similarities to the earlier portion of the period as fundamentals fell out of favor. Many investors seemingly regressed to the capricious risk-on behavior seen in the prior quarter. The striking reversal in the period is manifested in the chart below, displaying the cumulative active return of Hillcrest’s Small Cap Value (SCV) strategy versus the Russell 2000 Value index throughout the second quarter.

Q1 2021 A Multifaceted Environment

The first quarter of the year brought several encouraging developments in the overall market environment. The most notable of these favorable takeaways was that the extremely high valuations carried by many high growth market segments faced a growing degree of healthy skepticism from investors. Investors seemed to increasingly question the prospects of the over-valued companies that have been touted as beneficiaries of the disruptive technology and growth at all cost themes. These companies had risen dramatically as investors fell victim to classic behavioral biases such as herding towards popular ideas while ignoring fundamentals. Concurrent with this still emerging shift in the collective investor psyche, the market also responded to small-cap value companies’ extremely attractive valuations. These developments resulted in a performance backdrop in which the Hillcrest Small Cap Value strategy generated significant absolute returns that dwarfed the returns of many large and growth-focused market segments. We are encouraged by the small-cap value company returns, given that this performance represents the beginning stages of a resurgence in the equity style after many investors had unjustifiably shunned it in recent years.


Q4 2020 Quarterly Insight: Reflecting on 2020

Q3 2020 Quarterly Insight: The Opportunity in Small Cap Value

Q2 2020 Quarterly Insight: An Update on Investing in an “Unprecedented” Environment

Q1 2020 Quarterly Insight: Investing in an “Unprecedented” Environment