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Mid-Cap Core Equity

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Inception: April 1, 1999

Investment Philosophy

Incepted in 1999, the Mid-Cap Core Equity Strategy utilizes a disciplined, fundamental bottom-up, valuation-based process to select companies that are inefficiently priced relative to the earnings growth outlook over the next three to five years. We have a preference for companies with products or services that make their customers more efficient or profitable, and are critical to their success. We look for a compelling business model, experienced management, financial strength and attractive valuation.

Investment Process

The investment process includes in-depth internal research, enabling us to identify financially sound companies that offer solid growth prospects, while selling below what we believe is their intrinsic value. Ideas are generated from a variety of sources including SEC filings, industry publications, conferences, sell side research, screens, talking to industry leaders, user experience and competitors of existing holdings.The portfolio managers utilize the range of the Russell MidCap Index to define their midcap universe, generally between $2 – $26 billion.

We use a combination of quantitative screens and qualitative fundamental research to narrow the initial universe of approximately 1,100 securities to the 45-50 securities held in the portfolio. We screen on the following quantitative criteria: top line growth, Price/Earnings, Price/Revenue, Price/Cash Flow and low leverage; all relative to the company’s own history, competitors and the market.

In addition to quantitative measures, we look for companies with the following characteristics:

  • Industry leaders in focused businesses with the ability to grow market share
  • Proven, effective management

An integral part of our investment analysis is interaction with management teams. Meetings and conference calls with management typically focus on issues related to the business outlook, market share/competitive positioning, and company strategy.

The Mid-Cap Advantage

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as of December 31, 2016

Top Ten Holdings

  1. Juniper Networks Inc.
  2. Time Inc.
  3. Copa Holdings S.A.
  4. DeVry Education Group Inc.
  5. New York Times Company
  6. TEGNA Inc.
  7. Varian Medical Systems Inc.
  8. Stericycle Inc.
  9. Teradata Corporation
  10. Gentex Corporation

 

Portfolio Construction

Additional portfolio characteristics include:

  • Concentrated portfolio of 45-50 stocks
  • Sector weight maximum of 2.5x Mid-Cap benchmarks
    (S&P MidCap 400 Index / Russell MidCap Index)
  • 6% maximum position per holding

Managers

Thyra E. Zerhusen
CEO & Chief Investment Officer

  • Swiss Federal Institute of Technology, Diplom Ingenieur
  • University of Illinois, MA in Economics

38 years industry experience

Marie L.Lorden
Portfolio Manager

  • Elmhurst College, BS
  • Keller Graduate School of Management, MBA

21 years industry experience

Mary L. Pierson
Co-CEO & Portfolio Manager

  • DePauw University, BA
  • Northwestern University, MA in Economics
  • The University of Chicago, MBA

27 years industry experience

Brian M. Washkowiak, CFA
Portfolio Manager

  • Illinois State University, BA

22 years industry experience

 

Performance

Annualized
Returns (%) as of 12/31/2016 4Q 1YR 3YR 5YR 10YR SI
Fairpointe Mid-Cap* 13.32 24.59 7.07 15.70 9.93 12.60
S&P 400 MidCap Index 7.42 20.74 9.04 15.33 9.16 10.37
Russell MidCap Index 3.21 13.80 7.92 14.72 7.86 9.16
S&P 500 Index 3.82 11.96 8.87 14.66 6.95 5.15

*Net of Fees

Commentary

Mid-Cap Core Equity – 4Q 2016 Review

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Portfolio

as of December 31, 2016

Holdings By Sector

Sectors (GICS) % of
Portfolio
% of
S&P 400
SPDR
Consumer Discretionary 35.49 11.46
Information Technology 21.09 16.97
Energy 6.24 3.61
Materials 9.68 7.45
Health Care 7.39 7.30
Telecommunications 0 0.17
Industrials 13.21 15.24
Consumer Staples 0.87 4.05
Utilities 0 5.73
Real Estate 0 10.90
Financials 6.02 17.12

Characteristics

  • P/E (forward 1-year) 16.40
  • P/Sales (forward 1-year) 0.80
  • Long Term Debt/Capitalization 34%
  • ROE 5-year Average 16.0%
  • Long-Term Earnings Growth Rate (5-years) 10%
  • P/E to Long-Term Earnings Growth Rate 1.6
  • Average Mkt Cap ($mil) $5,886
  • Dividend Yield 2.3%
  • Turnover (3-year annualized) 35.82%
  • Alpha (3-year) -2.01
  • Beta (3-year) 1.16
  • The above information is based on a representative account.

DISCLOSURE

The above information is based on a representative account.

The Mid-Cap Composite contains fully discretionary equity accounts that follow the mid-cap style. The Mid-Cap Composite represents portfolios that seek long-term total return through capital appreciation by investing primarily in mid-cap stocks. For comparison purposes the composite is measured against the S&P MidCap 400 and Russell MidCap indices. The S&P MidCap 400 is a market value weighed total return index that represents the performance of the medium-capitalization sector of the U.S. Securities market. The Russell MidCap is a market value weighed total return index that represents the mid-cap segment which measures the performance of the 800 smallest companies in the Russell 1000 index. Both indices are representative of the types of equity assets invested by Fairpointe Capital. Market indices are unmanaged and do not reflect the deduction of fees. You cannot invest in an Index and the performance of the index does not represent the performance of any specific investment. The minimum account size for this composite is $2.5 million. Prior to May 1, 2011 the account minimum was $5 million. Effective March 31, 2013, the account minimum has gone back to $5 million. The Mid-Cap composite was created January 1, 2005. Performance presented prior to May 1, 2011 occurred while the Portfolio Management Team was affiliated with prior firms and the Team was solely responsible for selecting the securities to buy and sell.

Fairpointe Capital is an independent registered investment adviser.

The firm maintains compliant presentations and a complete list of composite descriptions which are both available upon request. Please send inquiries to mkatauskas@fairpointecapital.com or call 312-477-3300.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results. Market, economic, company, and industry specific conditions are considered during the investment selection process. This was a period of generally rising security prices.

The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all dividends, capital gains, and other earnings. Net of fee performance is calculated using actual fees.

Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request