Contrarian Thoughts

A Change of Benchmark

February, 2019

Our primary investment objective for the Linde Hansen Contrarian Value Fund is clear: we want to achieve long term growth of capital, with income as a secondary objective.  Regardless of our quest for absolute return, our regulator – the Securities Exchange Commission – requires us to select an index to provide our investors something to which to compare our performance.  Attentive readers of our printed materials may have noticed that we recently changed our benchmark for reporting purposes; we are now using the S&P 400 Mid-Cap Value Index instead of the Russell Mid-Cap Value.  There are no investment implications of the change; we just didn’t feel it was worth paying Russell $10,000 per year to advertise their brand when we can use another similar index for free.

With this change in our regulatory benchmark, we thought we’d take the opportunity to point out how we believe our contrarian value style of investing differs from the index (and probably most of our peers as well).

The importance of understanding your comparables as well as what you own was highlighted in a recent piece of research that is well worth reading if you are an investor interested in the use of indexes for both investing your money as well as measuring your performance (Passive In Name Only: Delegated Management And “Index” Investing, Adriana Z. Robertson).  Perhaps the most important conclusion of the paper – which may be obvious by the title – is the author’s assertion that index investing is not passive investing and, in fact, is active.  We wholeheartedly agree, and encourage everyone to read this piece to gain a good understanding about the role indexes are playing in the investing world today.

But it’s the author’s discussion of measuring investment performance against a benchmark that intrigued us:

… any comparison against a benchmark is as much about the benchmark as it is about the comparator. While the old adage refers to the comparison of apples to oranges, one could just as well compare oranges to apples. Concretely, when the comparator of interest is a stock portfolio, this implies that it is crucial to understand the details of the benchmark index. Otherwise, any comparison is, at best, useless, and at worst, misleading.

We know what’s in our portfolio, but wanted to take this opportunity – spurred on by Ms. Robertson’s paper – to have a brief discussion of some of the ways our Contrarian Value portfolio differs from our benchmarks, past and present.

Though we don’t constrain our investment process by market capitalization, we are aware that our Contrarian Value portfolio has a higher weighted average market capitalization – at about $19 billion – than either of our benchmarks.  The S&P Mid-Cap’s weighted average market capitalization is just over $4 billion, while the Russell Mid-Cap comes in at almost $13 billion.  Our portfolio runs higher in average capitalization as we have let a couple of our holdings become bigger as they have appreciated in value; in our process, capitalization is not a reason to sell.  However, in general we initiate new positions in stocks that are more akin to the capitalization of the S&P Mid-Cap as that is the natural hunting ground for the type of investments we prefer.

On a valuation basis, the p/e  of the Contrarian Value portfolio is cheaper than that of our benchmarks past and present: we have a forward p/e of just over 10x, while the S&P Mid-Cap runs almost 15x p/e and the Russell Mid-Cap, 17x.  This reflects our investment process where we look for companies that we believe are under-earning their normal levels of profitability but have in our estimation a credible plan to improve that return over our investment horizon of three to five years.

In contrast to the benchmarks, we have a very concentrated portfolio.  Our Contrarian Value portfolio has 34 stocks with an average weight of a bit over 2%; the S&P Mid-Cap Value index has almost 300 stocks with an average weight of just over 0.3%, and the Russell Mid-Cap Value has almost 600 stocks with an average weight of just about half that of the S&P Mid-Cap.

And finally, our Contrarian Value portfolio is very different from both our past and present benchmarks in that our exposure to rising interest rates should be much less due to our lower weighting in these types of stocks.  Generally, interest rate sensitive stocks are defined as Financial, Utility and Real Estate Investment Trusts (REITs); these stocks represent 38% of the S&P Mid-Cap index, and 44% of the Russell Mid-Cap index.  Our Contrarian Value portfolio has less than an 8% weight in interest rate sensitive stocks as we see little upside to this type of investment in a flat to rising interest rate environment; we’re trying to capture value in other companies where we believe they have greater control of their fortunes.

It should be readily apparent that we don’t use indexes in our investment process; we are not closet indexers.  Many investors would assume that most active managers operate this way, but we don’t believe that’s so.  In our experience, most active managers start the “portfolio construction” process by selecting an index they want to be measured against, and then select stocks and position sizes based on that benchmark.  Relative performance is their objective; it’s how they keep their jobs.  Over time, the perpetual weighing of the “business risk” of underperforming their benchmark distracts many portfolio managers from what should be their primary focus – investment returns – and is, in our opinion, why there are fewer and fewer truly active managers of equity portfolios today.

The SEC requires registered investment companies (mutual funds) to have at least one widely recognized, broad index as a comparator for investors to use when evaluating a fund’s performance.  To accomplish this regulatory mandate, we’ve chosen benchmarks that broadly match our portfolio’s external characteristics.  But what these indexes don’t do is match our intent.

An index is nothing but a mirror, with no intent but to reflect the market.  In contrast, our intention with the Contrarian Value Fund is to build wealth over time using a value discipline that has proven to work in the past.  We are not looking to provide relative performance.  Whatever index we may chose as our benchmark, you can count on us to continue with our Contrarian Value discipline, building a portfolio of stocks of companies that are taking actions we believe will improve their profitability over time to the benefit of us and our fellow investors.                                                                                                                       


The S&P MidCap 400 Value Indexis a Style Index constructed and managed by the S&P Dow Jones Indices division of S&P Global.  The index is meant to provide a proxy for the performance of mid-capitalization stocks designated by S&P as “value”.  S&P measures value stocks using three factors: the ratios of book value, earnings, and sales to price. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments.  Constituents are drawn from the S&P MidCap 400.

The Russell Midcap Value index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values.

Weighted Average Market Cap illustrates the average market capitalization of a portfolio taking into account the market capitalization and percentage of net assets for each security within a portfolio

P/E Ratio  – the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).  P/E is one of the most widely-used stock analysis tools used by investors and analysts for determining stock valuation. In addition to showing whether a company’s stock price is overvalued or undervalued, the P/E can reveal how a stock’s valuation compares to its industry group or a benchmark (like the S&P 400 Value Index).

Forward P/E Ratio – also known as estimated price to earnings, calculates the P/E ratio using future earnings guidance rather than trailing figures. This forward-looking indicator is a tool for comparing current earnings to future earnings and can help to provide a clearer picture of what earnings will look like – without changes and other accounting adjustments.


There is no guarantee that the fund will meet its objectives, generate positive returns, or avoid losses.  Past performance does not ensure future results.  Investors should carefully consider the investment objectives, risks, charges and expenses of the Linde Hansen Contrarian Value Fund.  This and other important information about the fund is contained in the prospectus which can be obtained by calling 1-855-754-7933. The prospectus should be read carefully before investing. The Linde Hansen Contrarian Value Fund is distributed by Northern Lights Distributors, LLC, member FINRA. Linde Hansen & Co., LLC is not affiliated with Northern Lights Distributors, LLC.

Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.  Information presented as of 1/31/2019.  Portfolio holdings are subject to change and should not be considered investment advice. Mutual Funds involve risk including the possible loss of principal. There is no assurance that the fund will meet its investment objectives, you may lose money by investing in the Fund.

Investing in undervalued securities involves the risk that such securities may never reach their expected market value, either because the market fails to recognize a security’s intrinsic worth or the expected value was misjudged. A value investment style may go in and out of favor causing the Fund to underperform other investment styles. The Fund is ‘non-diversified’, and thus invests its assets in a smaller number of companies than many other funds and as a result a change in the value of a single security may have significant effects on the Fund’s value. Investments in foreign securities carry special risks, including foreign political instability, greater volatility, less liquidity, financial reporting inconsistencies, and adverse economic developments, all of which may reduce the value of foreign securities. Many of these risks can be even greater when investing in countries with developing economies and securities markets. Smaller capitalization companies may have a narrower geographic and product/service focus and be less well known to the investment community, resulting in more volatile share prices and liquidity. Larger capitalization companies pose the risk that larger, more established companies may be unable to respond quickly to new competitive challenges such as changes in consumer tastes or innovative smaller competitors. Mid-Capitalization companies may be more vulnerable to adverse business or economic events than larger, more established companies. Mid-sized companies may pose risks including liquidity, market and financial resources and may depend upon a relatively small management group. Investments in companies involved in special situations, such as reorganizations or restructurings, may involve greater risks when compared to the Fund’s other strategies. Failure to anticipate changes affecting these types of investments may result in permanent loss of capital.  5210-NLD-2/14/2019


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