Episode - Nuance Concentrated Value Semi-Annual Update

Sharpe Focus is a new podcast series featuring discussions with the Nuance Investment Team. We will be covering topics that we believe our partners will find insightful. Nuance is a boutique value manager that is 100% employee-owned. 

The team focuses on buying leading business franchises with sustainable competitive positions that are trading at a discount to our internally derived fair value. We aim to outperform our primary and secondary benchmarks on an absolute and risk-adjusted basis, as measured by Sharpe ratio, over the long term.

In this episode, Scott Moore, Jack Meurer, D. Adam West, and Jenny McBee discuss the Nuance Concentrated Value strategy semi-annual update.

The views expressed are those of Nuance Investments as of the date of this podcast and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as investment advice. To view the most current and standardized performance figures available click here for Nuance Mid Cap Value and here for Nuance Concentrated Value. To view the most current top holdings click here for Nuance Mid Cap Value and here or Nuance Concentrated Value.

Investing involves risk, including the possible loss of principal. For more information or a copy of our disclosure brochure, please contact client.services@nuanceinvestments.com. Past performance is not a guarantee of future results.

Scott Moore, CFA

Jack Meurer, CFA

D. Adam West, CFA

Jenny McBee, CFA

[00:00] Jenny McBee

Hi everyone and welcome to our Sharpe Focus with Nuance Investments podcast. My name is Jenny McBee. Today’s topic will be our semi-annual update on our Concentrated Value strategy.

We do have a presentation which includes standardized performance and disclosures to go along with this podcast. You can find our podcast site at nuanceinvestments.com/podcast. From there, if you navigate to the semi-annual call podcast for Concentrated Value, you will see an option to click on podcast materials, which will have a presentation.

You can also email us at client.services@nuanceinvestments.com and let us know you’d like our Nuance Concentrated Value semi-annual call presentation and we’ll send it over. With that, let’s get to our Nuance Concentrated Value semi-annual call. I’m joined today by several of my colleagues, Scott Moore, our founder, president, and CIO, as well as Jack Meurer and Adam West, who are all portfolio managers on the strategy.

As usual, we’ll begin by giving an update on the firm and team. We will also go through a summary of the investment process and a review of performance. We will conclude the podcast with a discussion on our investment outlook.

Scott, I’ll turn it over to you.

[01:19] Scott Moore

Thanks, Jenny, and thanks to everyone joining us today. On page three, we’ll get started with the Nuance Firmwide update.

As we approach our 17th anniversary here at Nuance, our long-term performance continues to be a point of emphasis and our short-term performance a disappointment. As noted on our year-end 2024 call with clients, for years, we’ve discussed our own internal performance objectives and our expectations of reasonable performance contours, including periods of time where our products might struggle versus our primary and secondary benchmarks. Higher beta years, momentum-only years, or years where valuation just isn’t considered to be a primary factor in the market, can be difficult for us in our process.

2023 and 2024 fell into this broad category of years, and unfortunately, the first six months of 2025 hasn’t changed this dynamic. The reality of the last two and a half years or so is that growth, speculation, beta, and unprofitable companies have led the markets. Certainly, this sort of environment has occurred before and will occur again, but it does not change the fact that value-as-a-style has beaten growth.

Low-to-average beta stocks as a group have beaten high beta stocks, and profitable companies have beaten profit-less companies over the long term with less risk. Recently, I’ve been asked by several clients if value-as-a-style is dead. It’s a question I heard a lot in the late 1990s, and my answer is clear.

Absolutely not. I would suggest firmly that this period is part of a market cycle that we have seen come and go over time, and that buying world-class franchises at attractive multiples is core to any well-managed portfolio over the long term. The topic of this call, our Nuance Concentrated Value Strategy, is ranked fourth percentile versus Lipper Multi-Cap Value peers, first percentile versus Morningstar Mid-Cap Value peers, and ninth percentile versus Morningstar Large-Cap Value peers from a sharpe ratio or risk-adjusted return ratio since the inception of the product.

In fact, both of our Nuance Mid Cap Value and Nuance Concentrated Value products have been tenth percentile or better for each period that we can calculate our primary performance statistic since the inception of our firm. It’s a unique historical data set. Those results have led to assets under management growth for our firm for the nearly 17 years of our existence.

From our $30 million of seed capital in 2008, we are very pleased to be managing almost $2 billion still today. While down from last year due to short-term performance issues, we are certainly pleased at the level of AUM and the trust our clients continue to show us and have shown us over the years. Turning to page four, you can see the investment team that manages the assets for all of our products.

Our Nuance team emphasizes detailed and thorough fundamental company analysis and strict and deep valuation studies to derive risk-rewards and investment ideas to be our peers and benchmarks each day. On a personal note, I want to wish Darren Schryer and John Sigmon both well as they have left the firm to pursue other endeavors. Both of their last days were June 30.

They both largely covered the Health Care sector and I will be taking over that sector personally after being the primary coverage analyst on the space for the first 10 years or so of the firm. In summarizing our team, this group has cumulatively over 60 years of investment experience with the vast majority of it coming within the context of the Nuance investment process. Importantly, this group largely grew up on the Nuance investment process and we’ve utilized the approach in the business cycles, including the nifty-fifty and tech boom eras in the mid to late 90s, the subsequent tech bust and lost decade of the S&P 500 as mega cap multiples contracted to the commodity and leveraged finance boom and bust of 05 through 08, which culminated ultimately in the financial crisis that ended in 2009, to an elongated 10-year economic expansion period that was interrupted by the COVID pandemic and then onward to today’s mega cap growth, speculative and profitless, and generally risk-focused market preferences.

On page 5, you can see a single-page schematic of our Nuance process. This process has not changed since the inception of Nuance and you can be sure it’s not. Consistency of process through all cycles is critical to consistent execution and long-term performance.

The summary is that Nuance is a bottoms-up classic value firm searching for leading business franchises to monitor, study, and purchase only when the risk-reward is better than that of the market set of opportunities based on our work. That is typically when a stock is facing under-earnings due to a transitory negative event. These negative items can cause temporary under-earnings, which then cause stocks of good companies to go down and get attractive from a risk-reward perspective.

Over the years, we have searched for great companies that have the traits of Nuance leading businesses, but only a select group make our Nuance approved list. The search starts in the quantitative part of our process as we search for companies with the traits of leaders. Those traits include above-average returns on capital versus sub-industry peers, better than average balance sheets versus their sub-industry peers, and typically number one or number two market share positions that we believe are sustainable over time.

The next phase of our process is the study of the sustainability of a company’s competitive position and the avoidance of competitive transitions. This is the primary way our team avoids capital destruction and absolute lost dollars for our clients. With those traits, sustainability is understood, and we then research, model, and study the business in depth for many years, some as many as two to three decades now.

Our financial modeling work hinges on forecasting each business to a proprietary mid-cycle or what we call normal set of financial statements. With this mid-cycle or normal set of financial statements, which include proprietary estimates of earnings, EBITDA, raw free cash flow, and dividends, we then perform an extensive valuation study of each company. Evaluation study emphasizes both a fair or intrinsic value estimate today, along with the knowledge that today’s fair value will be grown into the future.

Study also includes a very important trough value study. It focuses on how low we believe a stock can trade during a difficult or recession-like period for the economy or the company specific. We believe that our equal emphasis on risk and reward has led to over 16 years of first to ninth percentile risk-adjusted returns versus our various peers.

With that, I’ll turn the call over to 15-year veteran and portfolio manager, Adam West, for a discussion of 2025 performance thus far. Adam.

08:26] Adam West

Thank you, Scott. Now we will outline our performance objectives, along with the critique of 2025 through the first six months.

First, we would remind our clients of our four primary performance objectives. These are goals we set forth at the inception of Nuance and goals we have conveyed to our clients over the years. If you are a regular reader of our quarterly Perspectives, we outline these goals and our results in more detail each quarter.

First, we have set a goal to beat our primary benchmark more times than not on a calendar to year basis. I’m happy to report that we have accomplished this goal, beating our benchmark 12 out of our first 17 years. Our second goal is to beat our primary benchmark through a full market cycle and over the long term and do so with less risk.

You can see on page 6, since our 2008 inception, we are pleased to report that we have also accomplished this goal, beating our benchmark on an annualized basis, net of fees, and importantly doing it while taking less risk. Our annualized standard deviation since inception has been significantly less than our benchmark. Our third goal, beat our secondary benchmarks on an annualized net of fee basis through a full market cycle and over the long term and do so with less risk.

We are now trailing the S&P 500 over the period and while our performance has come with less risk as measured by standard deviation, our sharpe ratio is now slightly behind the S&P 500 since inception. While this is disappointing, this is not unexpected after a period in which growth has outperformed value so significantly. And finally, we want to beat our peer groups on an annualized net of fee basis since inception and do so with less risk.

Page 7 shows our performance versus our peers over our 16 plus year history. You can see we are 36th percentile versus the Morningstar Large Cap Value peer group, 59th percentile versus Mid Cap Value peers, and 37th percentile versus the Lipper Multi Cap Value peer group on a total return basis since our 2008 inception. If you reference the middle data column on page 7, which is standard deviation or measure of risk, we are among least risky products as measured by standard deviation versus our peers.

And when taking those two together, you can see our sharpe ratios or risk-adjusted return in the last column yields a 9th percentile ranking versus the Morningstar Large Cap Value peers, a 1st percentile ranking versus Mid Cap Value peers, and a 4th percentile ranking versus Lipper Multi Cap Value peers since our inception in 2008. Now let’s discuss our year-to-date performance in 2025. As of 6/30, our strategy was down (0.91) percent net of fees versus the Russell 3000 Value index up 5.55 percent.

You can find our standardized performance figures on slide 6. Turning to page 8, we can discuss what drove our performance versus our benchmark for the first six months of 2025. Top attributors to the performance so far this year include, number one, the Utilities sector, where our overweight to the Water Utilities industry outperformed. Water Utilities have been the best performing industry within Utilities this year, following last year where they were the worst performing industry.

We still believe there are several attractive opportunities in this space, and we added to our position in California Water Services Group (CWT) in the period. Number two, the Consumer Discretionary sector was a positive contributor, where we benefited from being underweight as well as our stock selection as Nike (NKE) outperformed during the period. And finally, our underweight in the Energy sector was a positive to performance.

The biggest detractors to performance in 2025 have been the Industrials sector, where our overweight to the Ground Transportation sub-industry underperformed. We have invested in several leading trucking companies, which we believe are currently under-earning their long-term potential, and we have added to our weighting throughout the year through the underperformance, particularly in Marten Transport (MRTN). We have written and spoken about our investment in truckers several times over the past two years, and we have a podcast on this topic available for anyone who wants to learn more.

Also detracting from performance was the Information Technology sector, primarily due to stock selection as our investment in Rogers Corporation (ROG) underperformed. And lastly, the Health Care sector had a negative impact on performance, primarily due to our position in Dentsply Sirona (XRAY), which we exited during the period. As a team, we conducted a thorough review of Dentsply Sirona (XRAY), along with our other holdings in the dental space.

We now believe that several dental equipment categories are being disrupted by new technologies and imaging and software and allowing new entrants to gain share in general equipment and supplies categories. We believe that what had historically been a stable, oligopolistic market share structure is fragmenting, with new entrants offering lower-priced, value-oriented products that are gaining share from the historical leaders in categories such as dental implants and endodontics. Due to these factors, we exited our positions in Dentsply Sirona (XRAY) and Envista (NVST), swapping into other companies that we believe have more stable, competitive positions, which Jack will highlight in our Outlook.

You can also read more about this transition in our 6/30 Perspectives. With that, we’ll move to our Mid-Year Outlook, and I will turn the call over to Jack.

[13:45] Jack Meurer  

Thanks, Adam.

Moving on to our Mid-Year Outlook for 2025, I’ll start with a few observations regarding the current investment environment, and as a reminder, the following comments are informed by our team’s study of our group of nuanced leading business franchises, which we analyze one stock at a time. To start, we would describe the investment environment currently, and really over the last few years, as one that has rewarded risk and speculation generally. Regarding investment styles, growth has outperformed value by an order of magnitude over this time, and even within the value indices, it’s been the riskier or higher beta stocks that have been leading the way.

As another example, simply buying unprofitable companies has been a winning strategy as well over this period. As many of our longtime clients know, environments like these can be particularly challenging in the short term for our style of investing at Nuance, which is focused on owning value priced stocks of high-quality businesses while taking less risk than the broader market. As a reminder, our team and our process has experienced other periods where risky investing has been in favor, and this experience in our study of history would suggest that it’s these types of periods that, while painful in the short term, ultimately create the conditions for outperformance and lower-risk value investing going forward.

So with that, we’ll move on to portfolio positioning. One sector that our team continues to find compelling risk-reward opportunities is in the Consumer Staples sector, with our larger positions including select household product companies such as Henkel (HENKY), a leader in adhesives and select household product categories, which we believe remains materially undervalued. As well as a one-off opportunity in leading beauty product company Estée Lauder (EL).

While we highlighted our Estée Lauder (EL) investment on our year-end 2024 call, tariff-related fears earlier this year created what we viewed as a large dislocation in the stock, allowing us to further lower our average cost. The stock has since rebounded and contributed positively to performance for the first half of the year. At the same time, however, our investments in household product stocks have underperformed, and we’ve taken the opportunity to reduce our weight in Estée Lauder (EL) and increase our weight in household product companies, including Clorox (CLX).

Clorox (CLX) is a leading provider of bleach and other household cleaning products in the U.S., as well as a leader in several other categories, including charcoal with their Kingsford brand, trash bags with their GLAD brand, lip balm with Burt’s Bees, and cat litter with Fresh Step. The past few years have been abnormally volatile for Clorox (CLX), beginning with what we would characterize as extreme over-earning during the 2020 and 2021 periods spurred by pandemic-related demand. This was then followed by trough returns on capital in 2022 due to input cost inflation and other excess costs, including the unwinding of high-cost outsource manufacturing contracts that they utilized to meet the peak demand in the prior years.

Following this, the company has seen further transitory pressures in the form of a cybersecurity event that caused manufacturing outages and short-term share loss, as well as excess costs related to the implementation of a new ERP system and other technology spending. While Clorox (CLX) has now increased prices to offset most of the excess input cost inflation, it is still under-earning our estimate of normal earnings power due to ERP implementation costs, as well as elevated advertising costs while it attempts to regain market share lost during the cybersecurity incident. We estimate that within the next 12 to 18 months, these cost headwinds will revert and operating margins could improve by up to 200 basis points due to the completion of the ERP, with additional margin expansion coming over time in the form of operating leverage on the advertising spend and improvements in manufacturing capacity utilization.

The company has a strong balance sheet and trades at around 15 times our estimate of normalized earnings power at the end of the second quarter, a significant discount to where it has traded over time and represents what we believe to be an attractive risk reward. Additionally, we continue to be overweight the Health Care sector. We believe there’s under-earning in life science and markets due to both public and private funding cuts, which has impacted select companies like QIAGEN (QGEN).

We’re also finding compelling risk rewards in one-off stocks like Hologic (HOLX) and Solventum Corporation (SOLV), which I will highlight in more detail. Solventum Corporation (SOLV), which was spun out of 3M Company (MMM) in April of last year, is a leader in a variety of critical healthcare product categories, including wound care, infection prevention, surgical supplies, dental consumables, and health system software. In our estimation, the company is under-earning our view of normalized earnings power today for reasons primarily related to the spinoff from its parent company.

The spinoff resulted in excess costs and disruptions, including rebranding certain products, skew rationalization across their portfolio, and outsource manufacturing and supply chain costs the company is experiencing in the near term as they work to disentangle from 3M Company (MMM). As the company progresses as a standalone entity, we estimate earnings power of around $6 per share can be achieved, which is above Wall Street consensus estimates of around $5.5 per share for 2025. Additionally, earlier this year, the company announced the sale of their purification and filtration business at what we view as a favorable valuation multiple of around 20 times enterprise value to EBITDA, certainly much higher than the valuation of Solventum Corporation (SOLV) as a whole.

The company will use the resulting cash proceeds from the sale to improve the balance sheet, which combined with the stock trading at what we think is an undemanding 12 to 13 times PE multiple on our estimated normal earnings, we believe Solventum Corporation (SOLV) represents an attractive one-off risk-reward opportunity versus a much more expensive market. As Adam mentioned, we continue to view select Water Utilities as attractive in the current environment, and following a strong first-half performance within our UK water utility investments, we have trimmed our positions there and added to our favorite U.S. water utilities, including California Water Service Group (CWT), which is now our largest position in the sector. Lastly, within Industrials, we continue to view the trucking industry and specifically the well-capitalized leaders such as Werner Enterprises (WERN) and Marten Transport (MRTN) as the compelling pocket of under-earning and under-valuation in the economy.

As noted earlier, we highlighted this opportunity on our last call, and for more detail, I would point you to our podcast episode where we discuss the trucking thesis at length. I’ll finish our Outlook discussion with one final observation on the current environment. While this now multi-year period where our style of investing has been out of favor is certainly a bit tiring, a long time horizon and a study of history suggests that these periods are cyclical in nature, and while we can’t know for sure when investor risk preference will change, we may be seeing what we believe could be the very early signs of that change.

In just the second quarter alone, four stocks in our portfolio were subjects of circulating strategic and financial buyer interest, something we have not seen in some time, and which suggests to us that other investors are beginning to see the value in the types of stocks that we own. This group of stocks included Hologic (HOLX), which received an offer from private equity to take the company private, Calavo Growers (CVGW), which received an unsolicited proposal to acquire the entire company, Estée Lauder (EL) Companies, which rallied following the death of their chairman and patriarch who was long viewed as an impediment to the company being acquired, and lastly Northern Trust Corporation (NTRS), which was approached by Bank of New York Mellon (BK) expressing interest in a merger. While there’s certainly no guarantee that any of these proposed transactions reach the finish line, the level of interest alone we think is a hopeful sign that lower risk value stocks may be at the very early stages of returning to favor.

As always, our team at Nuance appreciates your support, and Jenny will provide some closing remarks. Jenny.

[21:25] Jenny McBee      

Thanks, Jack. I want to thank everyone for taking the time to listen to our semi-annual podcast today, and we’d love to hear from any of our listeners with any feedback or follow-up questions they might have.

We’ll see you soon for our next Sharpe Focus with Nuance Investments podcast.

[21:42] Disclosure

The views expressed are those of Nuance Investments as of the date of this presentation and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as investment advice.

This audio recording should be reviewed in conjunction with the accompanying disclosure or composite presentation, which contains standardized performance figures and other important information. Investing involves risk, including the possible loss of principle. For more information or a copy of our disclosure brochure, please contact client.services@nuanceInvestments.com.