Small Cap Diversified Value Fund (HWVIX)


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 June 30, 2017



The Russell 2000 Index returned +2.5% in the second quarter.  Small cap growth stocks outperformed small cap value stocks in the quarter, with the Russell 2000 Growth Index returning +4.4% compared to the Russell 2000 Value Index’s return of +0.7%.  Year-to-date, the growth index has outperformed the value index by more than 9 percentage points, a reversal of value’s 20 percentage point advantage in 2016.  In the last few years, investors flocked to companies with high dividend payouts (i.e. bond surrogates) because interest rates have been persistently low.  In 2017, with GDP advancing at a positive but lackluster pace, investors have flocked to stocks that have exhibited above average growth.  This has not only led to growth’s outperformance but also produced a market with narrow leadership.  More than 75% of the Russell 2000’s quarter return was generated by the tech and healthcare sectors. 

Financials represent the portfolio’s second largest sector exposure (after industrials), and banks comprise a meaningful portion of that exposure.  In late June, the Federal Reserve Board completed its Comprehensive Capital Analysis and Review (“CCAR”) and did not object to the capital plans of the 34 participating companies1.  In its press release, the Fed noted that the common equity capital ratio of the 34 banks “has more than doubled from 5.5 percent in the first quarter of 2009 to 12.5 percent in the first quarter of 2017”.  Of the 34 banks, 26 are public US companies.  These 26 banks were approved for returning 100% of earnings to shareholders on average, which equates to 7.5% of their equity value; i.e. a 7.5% payout yield—a handful have a payout yield of more than 10%.  We view this as a compelling dynamic for companies that have not had better balance sheets in our lifetime. 

Small cap equity valuation multiples leave us somewhat guarded.  Valuations are above average, though a healthy corporate environment, an accommodating Federal Reserve, and a resilient consumer provide support.  Potential policy changes remain a looming uncertainty across equity markets.  Investors have favored sectors with stable earnings and high dividend payouts, bidding them up to levels we view as excessive; we are underweight REITs, regulated utilities, and consumer staples.  We are overweight industrials and energy, which we believe exhibit compelling valuations for the risks at hand.  The portfolio trades at a considerable discount to the market, largely due to this valuation dichotomy.  The portfolio trades at 8.5x normal earnings compared to 15.4x and 18.0x for the Russell 2000 Value and Russell 2000, respectively.  The portfolio trades at 1.3x book value compared to 1.4x and 2.1x for the two indices, respectively. 


The Hotchkis & Wiley Small Cap Value Fund underperformed the Russell 2000 Value Index in the second quarter.  Positive stock selection in consumer discretionary and materials were the primary positive performance contributors.  This was offset by stock selection in industrials, healthcare, and financials.  The largest individual contributors to relative performance were Office Depot, Rush Enterprises, Granite Real Estate, ARRIS International, and WestJet; the largest detractors were Energy XXI Gulf Coast, Whiting Petroleum, Embraer, Hanger and Horace Mann Educators. 


We added to the financials exposure by increasing the weight in First Hawaiian and taking a new position in TCF Financial.  We also increased the weight in industrials by adding to the positions in WestJet Airlines and Masonite International.  We reduced the consumer discretionary weight by trimming positions in Office Depot and M/I Homes—both have performed well recently. 

1While the Fed did not object to its plan, Capital One is required to address weaknesses in its capital planning process and resubmit its plan.

Mutual fund investing involves risk. Principal loss is possible. Investing in smaller and/or newer companies involves greater risks than those associated with investing in larger companies, such as business risk, significant stock price fluctuations and illiquidity. The Fund may invest in foreign securities 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. Certain information presented based on proprietary or third-party estimates are subject to change and cannot be guaranteed. Portfolio managers’ opinions and data included in this commentary are as of 6/30/17 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. 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.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform other asset types during a  given periods. Equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. 

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