International Value

Market Commentary

Period ended June 30, 2017
 

MARKET COMMENTARY

The Russell Developed ex-US Index returned +6.1% in the second quarter in US Dollar terms.  Growth stocks outperformed value stocks for the second consecutive quarter, a reversal of value’s brief but considerable advantage in 2016. With global GDP advancing at a lackluster pace since the financial crisis, investors have generally shown a preference for stocks that have exhibited above average growth.

All sectors rose during the quarter except energy, which declined 3% as oil prices fell 9%. Technology, industrials, and healthcare were the top sector performers in the quarter. European equities delivered the highest US Dollar return, driven primarily by currency strength (the Euro and Pound appreciated by 7% and 4%, respectively, against the USD).  Of the top 10 developed markets represented in the index, only Canada, Australia and The Netherlands were negative in local currency terms and only Australia (-1%) in USD terms.

Our views on the overall market remain unchanged. We are cautious given valuations above long-term historical averages, though see some valuation support provided by generally strong corporate profits and accommodating central banks. That said, we still see significant discrepancies across industries and individual securities, and with this comes opportunity. As we have discussed in the past, in the current low rate environment investors have favored sectors with stable earnings and high dividend payouts (sometimes referred to as “bond proxies”), bidding them up to levels we view as excessive; naturally, we are underweight consumer staples and utilities as a result. Meanwhile we continue to find value in financials, industrials, and technology. Our portfolio trades at a considerable discount to the broader market and at what we believe to be an absolutely attractive valuation: 8.7x normal earnings and 1.2x book value compared to 14.4x earnings and 1.7x book value for the Russell Developed ex-US Index.  

ATTRIBUTION: 2Q 2017

The Hotchkis & Wiley International Value portfolio (gross and net of management fees) underperformed the Russell Developed ex-US Index in the second quarter.  Stock selection in consumer staples, consumer discretionary, and industrials detracted from performance in the period.  The overweight position in energy and underweight position in consumer staples were more modest detractors.  On the positive side, stock selection in materials, real estate, and energy helped relative performance.  The largest individual detractors to relative performance were Barclays, Embraer, Tesco, Cairn Energy, and Adient; the largest contributors were Koninklijke Philips, Zurich Insurance Group, Nippon Electric Glass, CNH Industrial, and Willis Towers Watson. 

Composite performance for the strategy is located on the Performance tab. Returns discussed can differ from actual portfolio returns due to intraday trades, cash flows, corporate actions, accrued/miscellaneous income, and trade price and closing price difference of any given security. Portfolio attribution is based on a representative International Value portfolio. Certain client portfolio(s) may or may not hold the securities discussed due to each account’s guideline restrictions, cash flow, tax and other relevant considerations. Equity performance attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect management fees and other transaction costs and expenses.  Specific securities identified are the largest contributors (or detractors) to the portfolio’s performance relative to the Russell Developed ex-US Index. Other securities may have been the best and worst performers on an absolute basis. Securities identified do not represent all of the securities purchased or sold for advisory clients, and are not indicative of current or future holdings or trading activity.  H&W has no obligation to disclose purchases or sales of the securities.  No assurance is made that any securities identified, or all investment decisions by H&W were or will be profitable.  Quarterly characteristics and portfolio holdings are available on the Characteristics and Literature tabs. For a list showing every holding’s contribution to the overall account’s performance and portfolio activity for a given time period, please contact H&W at hotchkisandwiley@hwcm.com.  Portfolio information is subject to the firm’s portfolio holdings disclosure policy.
 
The commentary is for information purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Portfolio managers’ opinions and data included in this commentary are as of June 30, 2017 and are subject to change without notice.  Any forecasts made cannot be guaranteed.  Information obtained from independent sources is considered reliable, but H&W cannot guarantee its accuracy or completeness. Certain information presented is based on proprietary or third-party estimates, which are subject to change and cannot be guaranteed. Equity securities may have greater risks and price volatility than U.S. Treasuries and bonds, where the price of these securities may decline due to various company, industry and market factors.  Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods. The strategy invests in foreign as well as emerging market securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. All investments contain risk and may lose value. 
 
Past performance is no guarantee of future results.
 

Index definitions