Episode - Nuance Mid Cap Value Semi-Annual Update

Sharpe Focus is a 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 Ben Becker discuss the Nuance Mid Cap 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

Ben Becker, CFA

Ben Becker

Hi everyone, and welcome to Sharpe Focus with Nuance Investments. My name is Ben, and I’ll be your host today. The focus of today’s podcast will be a semi-annual update on our Nuance Mid Cap Value Strategy.

We have a presentation which includes standardized performance and disclosures to go along with today’s podcast. You can find this presentation, along with all of our historical episodes, on our website at nuanceinvestments.com/podcast. A link to the presentation is also included in the show notes.

If you’d like us to send you a copy of the presentation, please email us at client.services@nuanceinvestments.com. Let us know you’d like a copy of our Nuance Mid Cap Value semi-annual podcast presentation, and we’d be happy to send it over. With that, I’m joined today by several of my colleagues, Scott Moore, Founder, President, Chief Investment Officer, as well as Jack Meurer and Adam West, who are Portfolio Managers on the strategy. As usual, we’ll begin by giving an update on the firm and the team.

We’ll also go through a summary of the investment process, a review of performance, and we’ll conclude today’s podcast with a discussion on our investment outlook. Scott, I’ll turn it over to you.

Scott Moore

Thanks Ben, and thanks to everyone for joining us today.

On page three, we will get started with a Nuance Firmwide Update. As we enter our 18th year of operations here at Nuance, our long-term performance continues to be a point of emphasis, and our short-term performance an understandable disappointment. As noted on our mid-year 2025 call with clients, we have discussed our own internal performance objectives and our expectations of reasonable performance contours, including periods of time when our products might struggle versus our primary and secondary benchmarks.

Higher beta years, momentum years, or years where valuation, quality, and risk just are not considered primary factors in the market can be difficult for us and our process. Frankly, 2023, 2024, and 2025 all generally fell into this broad category. The first time we have seen three years like this since before the inception of Nuance.

The reality of the last two to three years is that growth, low-quality beta, and unprofitable companies have led the markets by a significant degree. A focus that simply does not fit well with our longstanding process, nor historical trends about performance. I would suggest to our clients that the extremity of this type of period is rare and without any guarantees is providing us all an opportunity.

As one simple and I believe powerful data point, a cap-weighted portfolio of the profitless companies in the Russell Mid-Cap Value Index was up an astonishing 73.99% this year per facts and data. Further, pointing to even more to the lower quality and speculative nature of 2025, Bank of America (BAC) Managing Director and Head of U.S. Equity and Quantitative Strategy, Svita Subramanian, notes that for 2025 the lowest quality stocks in the S&P 500 Index, those rated C and D per standard and poorest quality rankings, were up 34.34%, while the top two quality ranking groups, A-plus and A-rated, were up 3.35% and 5.32% respectively. Clearly a low quality and higher risk driven world this year and the disparity is notable.

Despite those difficult trade winds throughout most of 2025, we were pleased to outperform our primary benchmark, the Russell Mid-Cap Value Index, during the fourth quarter by about 150 basis points on the back of stock selection in the healthcare and industrial sectors and we are hopeful that some reversion to quality might be upon us. We would also note that the topic of this call, our Nuance Mid Cap Value Strategy, also continues to have first percentile performance versus its respective peer groups from a Sharpe Ratio or risk adjusted return ratio since our inception in 2008 despite these last three years. In fact, both our Nuance Mid Cap Value and Nuance Concentrated Value products have been 15th percentile or better for each period that we can calculate our primary performance statistic since the inception of our firm versus our peers.

It’s a pretty unique storable data set. Those results have led to assets under management growth for the firm over time for our 17-plus years of existence. From our $30 million seed capital in 2008, today we are managing nearly $1.4 billion.

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 beat our peers and benchmarks each day. In summarizing our team, this group has cumulatively over 60 years of experience with the vast majority of those years being in our Nuance process.

Importantly, this group largely grew up on the Nuance investment process and we’ve utilized the approach through business cycles including the nifty-fifty and tech boom eras of the mid to late 1990s, the subsequent tech bust and what has been called the lost decade of the S&P 500 index as mega cap stock multiples contracted from 2000 to 2010. We have also managed through the commodity and leverage finance boom and bust of 2005 to 2008, which culminated, of course, in the financial crisis that ended in 2009 all the way now to an elongated 10-year economic expansion period from 2010 to 2020 that was interrupted by the COVID-19 pandemic and then onward to today’s mega cap growth, mass AI spending boom, low quality and profitless focus markets and generally higher risk-oriented market preferences. That experience serves us particularly well during periods of market when our process and our goals are not in alignment with 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 assured it will not. Consistency of process through all market cycles is critical to consistent execution and long-term performance.

The summary is that Nuance is a bottoms-up classic value investment firm searching for leading business franchises to monitor, study, and purchase only when the risk-reward is better than the market set of opportunities. That is typically when a stock is facing under-earnings due to a transitory negative event. Those negative items cause temporary under-earnings, which then causes 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 their 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 a study of the sustainability of the company’s competitive position and the avoidance of competitive transitions. This is the primary way our team avoids capital destruction and absolute loss dollars for our clients. With those traits and sustainabilities understood, we then research, model, and study the business in depth for many years, some as many as two to three decades.

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

The study also includes a very important trough value study that focuses on how low we believe a stock can trade, and during a difficult or recessionary-like period for the economy or the company specifically. We believe that our equal emphasis on risk and reward has led us to 17-plus years of first percentile risk-adjusted returns versus our various peers, and I believe the market today isn’t as focused on the risk side of the equation as much as it should. With that, I will turn the call over to Vice President and Portfolio Manager Adam West for a discussion of 2025’s performance. Adam.

Adam West

Thank you, Scott. Now we will outline our performance objectives along with a critique of 2025. First, we would like to remind our clients of our four primary performance objectives.

These are goals we set forth at the inception of Nuance and are goals we have conveyed to 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 year basis.

I’m happy to report that we have accomplished this goal, beating our benchmark 11 out of our first 18 years. Our second goal is to beat our primary benchmark through a full market cycle over the long term and to 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 net-of-fee basis and, importantly, doing it while taking less risk.

Our annualized standard deviation since inception has been significantly less than the benchmark. Our third goal is to beat our secondary benchmarks on an annualized net-of-fee basis through a full market cycle over the long term and do so with less risk. Unfortunately, we have slightly underperformed versus the S&P MidCap 400 Value since our inception, and we are trailing the S&P 500 over the period as well.

While this is disappointing, it is not unexpected to be lagging behind the S&P 500 after a period in which growth has outperformed values 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 since the inception of the product in 2008.

You can see we are 41st percentile versus the Morningstar Mid-Cap Value Peer Group and 44th percentile versus the Lipper Mid-Cap Value Peer Group on an annualized return basis since our inception in 2008. If you reference the middle data column on page 7, which is the standard deviation or measure of risk metric, we are among the least risky products as measured by standard deviation versus our peers. And when taking those together, you can see our Sharpe Ratios or risk-adjusted return in the last column yields a 1st percentile ranking versus both peer groups since our inception.

Now let’s discuss our full-year performance in 2025. Our strategy was up 4.52% net-of-fees versus the Russell Midcap Value Index up 11.05%. While we are again disappointed in underperforming for the full year, we have seen hopeful signs recently that a change in sentiment could be underway and that hopefully our style of investing could return to favor. During the fourth quarter of 2025, our strategy outperformed our primary and secondary benchmarks, returning 2.85% net-of-fees versus the Russell Midcap Value up 1.42%, the S&P MidCap 400 Value up 2.06%, and the S&P 500 up 2.66%. Turning to page 8, we can discuss what drove our performance versus the Russell Midcap Value Index in 2025.

Top attributors to performance for the year include the utilities sector, where our stock selection helped contribute positive attribution for the year, including positions in United Utilities Group (UU.L), Pennon Group (PNN.L), American Water Works (AWK), and Portland General Electric Company (POR). We still believe there are several attractive opportunities in this space, and we added to our position in California Water Services Group throughout the year. The stock selection within financial sector was also a positive, as both Northern Trust (NTRS) and Globe Life (GL) were positive contributors.

We also benefited from an underweight position in several sectors, including real estate, energy, and materials. The biggest detractors to performance in 2025 include the industrial sector, where our overweight to the ground transportation sub-industry underperformed. We have invested in several leading trucking companies, which we believe are under-earning their long-term potential, and we have added to our weighting throughout the year through the underperformance, particularly in Marten Transport (MRTN).

Also detracting from performance was the information technology sector, due to our underweight position in the strong performing sector and due to stock selection, as our investment in Rogers Corporation (ROG) underperformed. Consumer Staples was a net negative in the year due to stock selection and allocation. This has been one of our largest overweight positions and was the worst performing sector in our primary benchmark.

Additionally, our investments in Clorox Company (CLX), Henkel (HENKEY), Kimberly-Clark (KMB), and Beiersdorf (BDRFY), all contributed to underperformance. We continue to believe that there are very good risk-reward opportunities in this group. The healthcare sector had a negative impact on our performance as well, primarily due to our position in Dentsply Sirona (XRAY), which we exited earlier in the year.

We wrote in detail about this decision earlier in 2025. Our underweight position in communications services also contributed negatively to our performance during the year, as did our cash position. With that, we’ll move to our outlook for 2026 and beyond, and I will turn the call over to Jack.

Jack Meurer

Thanks, Adam. Moving on to our outlook for 2026, I’ll start with just a few observations regarding the current investment environment. And as a reminder, the Perspectives shared here are always informed by our team’s study of our group of Nuance-leading business franchises, which we analyze one stock at a time.

So, to touch briefly on the current environment, 2025 was one of the more difficult years we have had over our now 17-plus year history as a firm. The market largely focused on risky or high beta stocks, artificial intelligence as a theme, the Magnificent Seven, profitless companies, and financial speculation broadly. Our investment approach at Nuance remained firmly out of favor.

Scott provided some examples in his remarks that I think underscore the headwinds we have faced throughout this period. And in our opinion, risk is being underestimated and overvalued broadly in this environment and not by a small amount. In our experience, these conditions ultimately proved to be transitory in time.

We think the relative opportunity to own high-quality businesses through a risk-aware, value-oriented investment approach is as compelling as ever as we turn the page on a new year. Which brings us to our portfolio positioning. As the market continues to chase mega-cap technology stocks or direct beneficiaries of the ongoing AI spending boom, we are finding what we believe to be significantly more compelling risk-rewards outside of the AI mania, several of which can be found within the consumer staple sector.

Our larger investments here include Clorox Company (CLX), an opportunity which we discussed in depth on our mid-year call, Henkel AG (HENKY), Kenvue, Inc. (KVUE), and Beiersdorf AG (BEI.DE), an investment which we added to significantly in the back half of 2025 as the stock underperformed the market. Beiersdorf AG (BEI.DE) is a leading global producer of beauty and personal care products, with offerings including lotions, moisturizers, deodorants, lip balm, and sun care products. It has many leading brands, most notably Nivea, which has been gaining share in recent years within body lotion and facial moisturizer categories.

Additionally, Beiersdorf AG (BEI.DE) is a leading producer of tape-style adhesives through its Tesa division. Similar to its peers, the company is currently facing a weaker consumer spending environment, particularly in Europe, which is a core geography for the business. While many beauty product categories have traditionally been higher growth than many other household and personal care categories, they can also be more discretionary in nature.

The beauty industry broadly has seen category growth slow to low single digits this past year, with Beiersdorf AG (BEI.DE)’s organic revenue growth decelerating, but still growing, to around 2% through the third quarter of 2025, which is down from its high single-digit to low double-digit growth rate of the previous two years. Notably, throughout the company’s history, the management team has run a successful long-term strategy, focusing more on revenue growth and market share gains than profitability, and once again, in their recent earnings reports, they signaled that margins are likely to be lower in the near-term than originally anticipated, as they plan to invest more in advertising and R&D to drive long-term growth. While this has resulted in declining Wall Street estimates in the near-term and a corresponding decline in the stock price, we view this as an opportune time to own a market leader in attractive categories that is under-earning its long-term potential due to its insistence on protecting market share with higher spending.

Additionally, the company has a fortress balance sheet with net cash of close to €4 billion, which is almost $4 per ADR share. We believe this cash balance represents an additional source of both under-earning as well as optionality for management to deploy it in creative ways over time. Not only should the balance sheet allow the company to weather the current deceleration in beauty categories better than peers, but management could also use it for acquisitions or to repurchase its own shares at attractive prices as they’ve done historically.

With the ADR trading below $22 per share at year-end, the shares are valued at just 15 times our view of mid-cycle earnings, representing a significant discount to our estimate of fair value. Outside of consumer staples, we’re finding attractive relative valuations and investment opportunities in several less economically sensitive areas of the market in sectors like utilities and healthcare. Within the utility sector, we continue to favor select water utility stocks like California Water Service Group (CWT) and H2O America (HTO).

These businesses possess regulatory monopoly positions and we believe have attractive long-term tailwinds for growth underpinned by the significant spending needed to repair and replace the nation’s aging water infrastructure. Both utilities are under-earning due to regulatory lag associated with the changing cost of capital environment, as well as a substantial capital investment needed for water infrastructure. We ended the year with both stocks trading around 15 to 16 times our estimated normal earnings power, a relatively undemanding valuation in our opinion.

Within healthcare, we are finding a handful of one-off opportunities, including Solventum (SOLV), the 3M Healthcare business spinoff, which is a stock that we discussed in detail on our 2025 mid-year call. Lastly, within the industrial sector, we continue to view the trucking industry and specifically leaders such as Werner Enterprises (WERN) and Marten Transport (MRTN) as a compelling pocket of under-earning and undervaluation in the economy. Marten, now a top five holding, is a leading provider of temperature-controlled truckload transportation in the U.S. with a differentiated offering across food, pharmaceutical, and packaged good industries.

Additionally, the business has one of the best balance sheets in the industry and has significant revenue exposure to multi-year dedicated trucking contracts, which has resulted in high customer and driver retention over time, a more stable return on capital profile versus its peers in what is a classically cyclical truckload industry. Following a historically tight truckload pricing market and peak return on capital environment in late 2021, many operators expanded capacity, creating oversupply, which led to a significant contraction in industry-wide pricing for truckload transportation services. The magnitude of contraction can be readily observed in drive-in spot rates, which capture the current market clearing price for truckload capacity and typically act as a precursor to the contracted rates agreed upon by Marten and its customers.

After reaching peak levels of $3 per mile, excluding fuel, at the end of 2021, spot rates fell sharply and have averaged around $1.60 per mile over the last few years as the market has been plagued by overcapacity. Marten has not been immune to these industry-wide pressures and is now operating at historically trough return on capital levels and is expected to earn just $0.20 per share in 2025, per Wall Street consensus estimates, a significant reduction from the $1.35 per share the business earned in 2022. Through this trucking down cycle, there’s been a steady stream of capacity exits and bankruptcies of many smaller, poorly capitalized carriers.

Additionally, there’s been a recent emphasis on stricter enforcement of certain regulations targeting non-compliant carriers, which appears to be further rationalizing industry capacity, with spot rates rising sharply in the fourth quarter and ending the year at close to $2 per mile. We believe we may be entering the early innings of a more durable upcycle in truckload fundamentals, providing a path to mid-cycle earnings power for Marten.

Additionally, given the business is conservatively financed with a net cash balance sheet, we believe the company is in an advantaged position to either capture profitable market share once the cycle turns in its favor or protect against any further difficult market conditions.

At the end of the year, Marten trades at just 14 times our estimate of mid-cycle earnings and represents one of the most compelling risk rewards in the portfolio. As I hope we have demonstrated by this discussion today, we believe the most compelling long-term opportunities exist outside of the popular stocks and themes that are dominating the current investment narrative. As a risk-aware, value-oriented firm with an investment approach that has now been out of favor for the last three years, one might wonder if we are due for a reversion toward risk awareness and toward high-quality, valuation-centric stocks.

While there is, of course, no guarantee how we would perform during such a transition, we certainly like the nature and setup of our portfolio of stocks versus the crowd. As always, our team at Nuance appreciates your support, and Ben will provide some closing remarks. Ben.

Ben Becker

Thanks, Jack.

Well, that concludes today’s episode. I want to thank everyone for taking the time to listen. If you have any questions about Nuance or would like to receive a copy of the presentation referenced in today’s episode, please don’t hesitate to reach out to client.services@nuanceinvestments.com. Thanks again, and we’ll see you soon for our next edition of Sharpe Focus.

Disclaimer

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.