Fiduciary Management Small Cap Equity Q1 2022 Investment Letter

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INVESTMENT STRATEGY OUTLOOK – SMALL CAP EQUITY

The FMI Small Cap portfolios declined approximately 4.4% (gross)/4.5% (NET) in the March quarter compared to a 7.53% drop in the Russell 2000 Index, and 2.40% loss in the Russell 2000 Value Index. Areas where the portfolio had little exposure, such as Energy Minerals & Utilities, accounted for the performance difference between the Small Cap strategy and the Russell 2000 Value. Compared to the Russell 2000, sectors that helped performance included Commercial Services, Health Technology, and Technology Services. Sectors that detracted included Energy Minerals, Industrial Services, and Utilities. Henry Schein, Inc., Zions Bancorporation, N.A., and Robert Half International, Inc. added to performance in the quarter while LCI Industries, Genpact Ltd., and LGI Homes, Inc. detracted. Since the Russian invasion of Ukraine on February 24, the market has moved in somewhat of a barbell fashion, with Energy/Non-Energy Minerals and Industrial Service companies tied to these segments driving the value trade, while many speculative growth names also moved up sharply.

Quarterly investment letters across the land will be focused on the Russian invasion and what it means for geopolitical stability, supply chains, energy, inflation, globalization, economic growth, and interest rates. All of these elements were in play long before the invasion. Although markets have largely ignored it, China and Russia substantially increased their belligerence toward the U.S. (and the “West”) in recent years. A new two-pronged cold war with China and Russia has been underway for some time. Historically, sanctions have not been terribly effective, as authoritarian leaders (Mussolini, Castro, Kim Jung Un/IL, Chavez, Maduro, Khomeini) survived by controlling the narrative and crushing popular dissent. Maybe the coordinated effort of a surprisingly large number of Russian trading partners and central banks will prove to be the exception. We don’t…

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