Capital Income Fund (HWIIX)


The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Investment return and principal value of the fund will fluctuate, and shares may be worth more or less than their original cost when redeemed. Click quarter-end or month-end to obtain the most recent fund performance.

Manager Commentary
Period ended September 30, 2019



The Hotchkis & Wiley Capital Income Fund invests in both value equity securities and high yielding fixed income securities with an emphasis on income generation.  The long-term allocation target between value equities and high yielding fixed income securities is 50/50.  The portfolio has two benchmarks, the S&P 500 Index (“the equity benchmark”) and the ICE BofAML US Corporate, Government & Mortgage Index (“the fixed income benchmark”).  These benchmarks are averaged, using the portfolio’s long-term allocation targets, to produce a “50/50 blended benchmark” to help assess performance.


The S&P 500 Index returned +1.7% in the third quarter of 2019, and is now up more than +20% since the beginning of the year.  The ICE BofAML US High Yield Index returned +1.2% in the third quarter of 2019 and is now up more than +11% since the beginning of the year.  The Federal Reserve’s FOMC (Federal Open Market Committee) lowered the Fed Funds rate by 25 basis points for the second time this year, which now stands at 2.0% (upper bound).  With inflation benign and economic growth modest, albeit positive, the rate cut was widely expected and triggered little investor reaction.  The price of crude oil spiked following the drone attacks on Saudi refineries, but this was short-lived and WTI (West Texas intermediate) crude finished the quarter down -8%.  Energy was the worst-performing sector in both equity and high yield markets in the quarter.  It has also been both markets’ worst-performing sector over the past year by a large margin (WTI has declined -27% over the past year). 

Concerns about slowing economic growth have become increasingly pervasive amid trade negotiations and geopolitical uncertainty (e.g. Brexit in the UK, potential impeachment proceedings in the US).  As a result, US treasuries rallied during the quarter with the yield on the 10 year note falling below 1.5% in late August—for about a week, the 2-year treasury yield exceeded the 10-year treasury yield.  This is noteworthy as earlier recessions have been preceded by similar 10-year/2-year yield curve inversions.  The time between inversion and recession has varied significantly, from several months to more than 2 years.  The timing of the next global economic slowdown and/or recession is unclear but it is certainly possible in the near to intermediate term. Despite this, we are overweight cyclicality in our portfolio as this is where we see the greatest price vs. fair value dislocation in the market. We believe we own good businesses with strong balance sheets/asset coverage that will enable these companies to grow their value through the economic cycle.

The high yield market’s default rate, including distressed exchanges, finished the quarter at 2.8% which is slightly below the long-term average of 3.5%.  The energy sector default rate is about 11%, so the high yield market’s default rate excluding energy is a modest 1.2%.  After slowing a bit in calendar year 2018, the new issue market has picked up to levels about average with the past decade and remains relatively well-behaved. 

Both the high yield and equity markets are close to fairly valued, but both also provide opportunities for active managers.  We view the ability to invest across companies of all sizes and across the capital structure as a considerable advantage in such environments. We have identified interesting opportunities across both spectrums and are optimistic about the portfolio’s prospects as we look forward.   


The Hotchkis & Wiley Capital Income Fund underperformed the 50/50 blended benchmark in the third quarter of 2019.  The average equity weight was 56% and the average high yield bond weight was 44% over the course of the quarter.  The equity overweight had a neutral performance effect as equities and high yield bonds performed similarly in the quarter.   

The equity portion of the portfolio underperformed the S&P 500 Index during the quarter.  The overweight position and stock selection in energy was the largest performance detractor.  Stock selection in technology and real estate, along with the underweight allocation to consumer staples also hurt.  Positive stock selection in healthcare and financials were positive performance contributors.  The largest individual detractors to relative performance were Whiting Petroleum, General Electric, Danieli, Geo Group, and Corning; the largest positive contributors were Vodafone, BAE Systems, Quad Graphics, Wells Fargo, and Societe Generale. 

The high yield bond portion of the portfolio underperformed the ICE BofAML US Corporate, Government & Mortgage Index and the ICE BofAML US High Yield Index.  Investment grade bonds outperformed high yield bonds during the quarter.  Relative to the high yield index, the overweight position in small and mid cap credits hurt performance as larger cap credits outperformed considerably.  The overweight position and credit selection in energy also detracted from performance, along with credit selection in basic industry and healthcare.  Positive credit selection in automotive and leisure credits were the largest positive contributors.

Mutual fund investing involves risk. Principal loss is possible. Investments in debt securities typically decrease in value when interest rates rise.  This risk is usually greater for longer-term debt securities.  Investment by the fund in lower-rated and non-rated securities presents a greater risk of loss to principal and interest than higher-rated securities.  The Fund may invest in derivative securities, which derive their performance from the performance of an underlying asset, index, interest rate or currency exchange rate.  Derivatives can be volatile and involve various types and degrees of risks.  Depending on the characteristics of the particular derivative, it could become illiquid.  Investment in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. The Fund may invest in foreign as well as emerging markets which involve greater volatility and political, economic and currency risks and differences in accounting methods.

Fund holdings and/or sector allocations are subject to change and are not buy/sell recommendations. Current and future portfolio holdings are subject to risk. Value stocks may underperform other asset types during a given period. Portfolio managers’ opinions and data included in this commentary are as of 9/30/19 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. Specific securities identified are the largest contributors (or detractors) on a relative basis to the S&P 500 Index. Securities’ absolute performance may reflect different results. The Fund may not continue to hold the securities mentioned and the Advisor has no obligation to disclose purchases or sales of these securities. Attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect the payment of transaction costs, fees and expenses of the Fund. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss in a declining market.

Credit Quality weights by rating were derived from the highest bond rating as determined by S&P, Moody's or Fitch. Bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard & Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from 'AAA', which is the highest grade, to 'D', which is the lowest grade. In limited situations when none of the three rating agencies have issued a formal rating, the Advisor will classify the security as nonrated.

Investing in high yield securities is subject to certain risks, including market, credit, liquidity, issuer, interest-rate, inflation, and derivatives risks.  Lower-rated and non-rated securities involve greater risk than higher-rated securities.  Equities, bonds and other asset classes have different risk-return profiles, which should be considered when investing.  All investments contain risk and may lose value. 

The ICE BofAML index data referenced is the property of ICE Data Indices, LLC (“ICE BofAML”) and/or its licensors and has been licensed for use by Hotchkis & Wiley. ICE BofAML and its licensors accept no liability in connection with its use. See Index definitions for full disclaimer.

The average annual total returns for the ICE BofAML US High Yield Index were 1.22%, 6.30%, 6.07%, 5.36% and 6.56% for 3Q19, one-year, three-year, five-year and Since 12/31/10 periods ended September 30, 2019, respectively.

Index definitions

Glossary of financial terms