Carillon Eagle Small Cap Growth Fund Q1 2022 Commentary

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11.44K Followers

Summary

  • The Carillon Family of Funds spans a range of investment objectives and asset classes designed for long-term investors.
  • Small-cap stocks overall posted rather lackluster returns in the first quarter of 2022.
  • Inflation and sharply higher gasoline prices have taken a chunk out of the consumer’s pocketbook.

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Market Overview

Small-cap stocks overall posted rather lackluster returns in the first quarter of 2022. There was, however, a notable level of disparity between the two style indexes, as the Russell 2000® Growth Index (down 12.63%) significantly lagged its Russell 2000® Value Index (down 2.40%) counterpart for the sixth consecutive quarter. On an individual sector basis within the Russell 2000 Growth index, energy (up 34.17%) was undoubtedly the most notable performer as it outpaced the broader index by a considerable margin. Materials (up 0.43%) was the only other sector that posted positive absolute gains, though industrials (down 9.11%) and consumer staples (down 10.23%) also outperformed the index on a relative basis. Consumer discretionary (down 18.81%), information technology (down 14.98%), and healthcare (down 14.95%) were the worst-performing sectors.

Portfolio Review

Best Securities

Average Weight (%)

Contribution to Return (%)

Viper Energy

2.74

0.72

Chart Industries

2.91

0.49

LPL Financial

3.23

0.32

Woodward

2.35

0.28

MoneyGram International

0.28

0.19

Worst Securities

Quaker Houghton

3.27

-0.95

MarineMax

1.93

-0.69

Asana

1.02

-0.64

Everbridge

0.73

-0.63

Trex

0.83

-0.62

As of March 31, 2022. The information provided above should not be construed as a recommendation to buy, sell, or hold any particular security. The data are shown for informational purposes only and are not indicative of future portfolio characteristics or returns. Portfolio holdings are not stagnant and may change over time without prior notice. Past performance does not guarantee future results. Please note that the holdings identified do not represent all of the securities purchased, sold, or recommended for the fund. They are provided for informational purposes only. Carillon Tower Advisers, Eagle Asset Management, their affiliates or their respective employees may have a position in the securities listed. Please contact Carillon at 800.421.4184 to obtain the calculation’s methodology and/or a list showing every holding’s contribution to the overall fund’s performance during the measurement period.

Viper Energy (VNOM) owns mineral and royalty interests in oil and natural gas properties primarily in the Permian Basin in western Texas and southeastern New Mexico. Shares rose sharply as Viper is well positioned in this current market environment due to the fact it doesn’t incur the service costs to drill and complete the wells, which will likely increase dramatically and offset a portion of the upside from higher commodity prices for traditional exploration and production companies.

Chart Industries (GTLS) manufactures highly engineered equipment servicing multiple applications in the energy and industrial gas markets. After cooling off slightly in the previous quarter, the firm’s shares resumed their move higher. We believe the company should benefit from the build-out in liquefied natural gas infrastructure to assist European nations in their efforts to reduce their reliance on Russian natural gas. Additionally, Chart’s long-term fundamentals remain strong as the company continues to be positioned to benefit from clean-energy trends such as hydrogen, carbon capture, and water treatment.

LPL Financial (LPLA) is an independent broker- dealer that offers technology, brokerage, and investment advisory services to financial professionals and institutions. The company was a strong outperformer once again in the quarter as it continued to see impressive net new asset growth and has successfully integrated a recent notable acquisition. The continued move higher in interest rates has provided an additional tailwind.

Woodward (WWD) develops and produces control systems and energy conversion solutions and components for the aerospace and industrial end markets. The company’s stock was a strong performer in the quarter, as the end markets it serves began recovering in the second half of 2021 from a COVID-induced slowdown. Woodward’s relatively high exposure to narrow-body commercial jets should be a positive in the near-term, as narrow-body manufacturing, along with the demand for Woodward’s aftermarket components, is seeing a quicker recovery and is a growing share of the total fleet over their wide-body counterparts. Current energy and power demand is driving growth in power generation, as well as oil, gas, and alternative fuels, which has benefited the industrial side of the business.

MoneyGram International (MGI) is a global leader in cross-border, peer-to-peer payments and money transfers. Shares rose dramatically after it was announced the company would be acquired by a private equity firm for a healthy premium. We have since sold the stock.

Quaker Houghton (KWR) develops, produces, and markets formulated chemical specialty products. Rising input costs have pressured the company’s margins as of late, partly because a large portion of its raw materials are crude-oil based. The minor slowdown in steel production, as well as ongoing global semiconductor chip shortages, continue to limit production at the firm’s auto end-market customers, providing an additional headwind at the moment.

MarineMax (HZO) is the world’s largest recreational boat and yacht retailer. The company’s shares were pressured in the quarter as investor concerns regarding a potential slowdown in the economy have weighed on stocks in the boating industry as a whole. MarineMax was a beneficiary of the pandemic, which resulted in an influx of new boaters who are embracing the boating lifestyle, and there remains some investor debate surrounding the degree to which these higher levels of demand are sustainable.

Asana (ASAN) is a work management software platform that helps teams collaborate and orchestrate work from daily tasks to cross-functional strategic initiatives. Despite strong revenue growth, investors were disappointed at the lack of profitability in management’s guidance for 2022. We believe Asana is one of the best collaboration software companies, and given the massive addressable market, we are willing to look through the spending in the near term for the mid- to long-term gains in users and customers.

Everbridge (EVBG) is a cloud-based enterprise software provider of a real-time communications platform used by state and local governments as well as companies to send constituents email and text message alerts. After the abrupt departure of the CEO late last year and preliminary commentary regarding slowing growth in 2022, the company officially guided for even slower growth for this year because of execution issues and the postponement of deals. Although we still believe the service provided by the company is important, the lack of clarity regarding the dramatic growth deceleration left us with no option but to sell the stock.

Trex (TREX) manufactures high-performance composite decking and railing products, as well as custom- engineered railing and staging systems, for the commercial and multi-family market. After surging in the prior quarter, the company’s shares declined as rising interest rates weighed a bit on investor sentiment in stocks tied to the housing industry. Despite this, demand for the firm’s products has remained healthy, and we believe Trex should be well positioned to weather any potential downturn in the overall housing industry as its business skews heavily towards repair and remodeling as opposed to new construction.

Outlook

There is currently much to worry about with the first quarter of 2022 now behind us. Leading the list is the now-hawkish U.S. Federal Reserve (FED), which recently raised the federal funds rate 25 basis points, with perhaps up to seven increases to follow. Will these rate increases, coupled with the Fed’s efforts to shrink its balance sheet, precipitate a recession as the yield curve is currently nearing inversion? Fueling the Fed’s hawkish stance is raging inflation, which at the moment is running over 7% with the prospect of headline inflation approaching 10% in the near future. These numbers have been pushed higher by persistent supply-chain issues and sharply higher wage rates. And oh yes, there is a major war in the Ukraine, which coupled with a post-COVID recovery, has pushed oil prices to well over $100 a barrel. These sky-high oil prices augur for an economic slowdown. Upcoming year-over-year comparisons also will be negatively impacted by the absence of massive stimulus programs. Improvements in supply chain issues have certainly been slowed by the war in Ukraine as well as by further COVID- related lockdowns in China.

Somewhat offsetting the negative macroeconomic factors is the correction in high-multiple growth stocks that has recently taken place. The S&P 500 Index is now trading at a fair level of 20 times forward earnings estimates. Investor sentiment also is negative at the moment, which can generally be viewed as a positive for the market. With fixed income markets treacherous as rates rise and inflation soars, equities may prove to be the best investment alternative.

The outlook for the cyclical areas of the stock market appears mixed against a backdrop of higher commodity prices, rising interest rates, and geopolitical unrest. The energy sector looks poised for continued gains given the bullish underpinnings for oil and gas prices in light of Russia’s instability and a disciplined approach to growth from U.S. shale producers. Among the industries within the industrials sector, defense companies have seen a notable improvement in growth prospects as NATO allies increase spending to aid Ukraine and prepare for a more uncertain future. Conversely, building products companies are likely to experience a slowdown in demand following the sharp back-up in mortgage rates. Given the rapidly changing dynamic of the global economic outlook, our focus remains on finding companies that can successfully navigate the host of operational challenges, including rising raw materials costs, supply chain constraints, and a tight labor market.

To say that the healthcare sector has been under relentless selling pressure is an understatement. It is also quite an anomaly. After healthcare’s relatively extraordinary run in the decade leading up to 2021, the macroeconomic backdrop of a steepening yield curve led to a rotation into shorter-duration assets in 2021. This came at the expense of longer-duration assets often found in certain areas of the healthcare sector, such as biotechnology and healthcare equipment and supplies. Despite the now- ongoing rate increases by the Fed, with many more likely to follow, the recent yield curve inversions have raised fears of a potential economic slowdown.

Aside from these macroeconomic dynamics, we also believe there are some fundamental issues currently challenging the healthcare sector.

While a portion of rising input and transportation costs can be passed on to customers, as inflation rises there are fears among investors that many healthcare manufacturers will not be able to continue passing on these costs for much longer. Labor availability is also an acute problem, particularly among healthcare providers and hospitals, where labor shortages, specifically among nurses, likely will last for the foreseeable future. When this is combined with an aging population that has significant healthcare needs, it creates an untenable situation where care cannot be delivered in a timely or efficient manner. This has caused pressure on the revenues and margins of healthcare providers.

As the yield curve flattens, we have positioned our healthcare holdings to have both exposure to stocks with longer duration and higher growth, as well as to those with reasonable valuations, profitability, and prospects of accelerating profits.

Just as the omicron variant was beginning to wane and life was starting to normalize after two years, the world woke up to a geopolitical crisis in Eastern Europe, where Russia attacked the sovereign nation of Ukraine. We believe this situation, combined with the ongoing inflationary pressures, will make market returns more challenging in the near term and stock selection will become more important. We hope, however, that political resolutions will bring peace in Eastern Europe and remain optimistic that inflationary pressures will subside over time. Consumer spending has held up well, and enterprise spending has been increasing despite some of the issues in the supply chain, tight labor markets, and semiconductor chip shortages. Within technology, we continue to find attractive opportunities in themes such as cloud computing, artificial intelligence, mobility and telecommunications infrastructure, digital payments, the “Internet of Things,” smart homes, industrial automation, security software, e-gaming, and alternative energy.

The current outlook for the financials sector remains constructive yet volatile. Interest rates have regained their upward trajectory, moving materially during quarter. Given this backdrop, coupled with what remains solid economic growth, we see selective opportunities in the regional banking space. We see unique opportunities in those banks that are both asset-sensitive and located in geographies with outsized economic growth. In addition, we see appealing opportunities in certain financial firms that are gaining market share and will also benefit from a rising rate environment. Despite the year’s volatile start, the pace of merger and acquisition activity is expected to pick up as we move through the year. We believe this underlying environment will continue to benefit smaller advisory boutiques that are gaining share from the larger firms.

A lot has changed on the consumer landscape in the last three months. As noted earlier, inflation and sharply higher gasoline prices have taken a chunk out of the consumer’s pocketbook, and the absence of the federal government’s stimulus money will exacerbate this. Companies that sell hard goods are further challenged by supply chain issues as well as by substantially higher labor costs. Higher interest rates will further hurt consumers and certainly figure to crimp the housing market. On a more positive note, strong pent-up demand for travel should help to bolster those securities.


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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Additional disclosure: Investments in small- cap companies generally involve greater risks than investing in larger capitalization companies. Small-cap companies often have narrower commercial markets and more limited managerial and financial resources than larger, more established companies. As a result, their performance can be more volatile and they face greater
risk of business failure, which could increase the volatility of a fund’s portfolio.

Additionally, small-cap companies may have less market liquidity than larger companies. Growth companies are expected to increase their earnings at a certain rate. When these expectations are not met, investors may punish the stocks excessively, even if earnings showed an absolute increase. Growth company stocks also typically lack the dividend yield that can cushion stock prices in market downturns. Investing in mid-cap stocks may involve greater risks than investing in larger, more established companies. These companies often have narrow markets and more limited managerial and financial resources. The companies engaged in the technology industry are subject to fierce competition and their products and services may be subject to rapid obsolescence. The values of these companies tend to fluctuate sharply. Initial Public Offerings (“IPOs”) include the risk that the market value of IPOs will fluctuate considerably due to the absence of a prior market, among other factors.

Past performance is not indicative of future results and investing involves risk, including the risk of loss. All information as of March 31, 2022. Opinions expressed are the current opinions as of the date appearing in this material only. This material should not be construed as research or investment advice. No part of this material may, without Carillon Tower Advisers’ prior written consent, be copied, photocopied, or duplicated in any form, by any means.

The information provided should not be construed as a recommendation to buy, sell, or hold any particular security.

The data is shown for informational purposes only and is not indicative of future portfolio characteristics or returns.

Portfolio holdings are not stagnant and may change over time without prior notice. Carillon Tower Advisers is the investment adviser for the Carillon Family of Funds and Eagle Asset Management is the sub-adviser to the Carillon Eagle Small Cap Growth Fund. Carillon Fund Distributors is a wholly owned subsidiary of Eagle Asset Management and Eagle Asset Management is a wholly owned subsidiary of Carillon Tower Advisers. All entities named are affiliates.

Benchmark Index:

The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to- book ratios and higher forecasted growth values.

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.
Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.

Frank Russell Company (Russell) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data, and no party may rely on any Russell Indexes and/ or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not pro- mote, sponsor, or endorse the content of this communication.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

©2022 Carillon Tower Advisers, Inc. All rights reserved.

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