Small Cap Diversified Value Fund (HWVIX)

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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, 2017

 

MARKET COMMENTARY

The Russell 2000 Index returned +5.7% in the third quarter; the Russell 2000 Growth Index and Russell 2000 Value Index returned +6.2% and +5.1%, respectively. The S&P 500 Index returned +4.5%, its 8th consecutive positive quarter.  Dating back to 2013, this index has generated a positive return in 18 of the last 19 calendar quarters—a feat it had not previously accomplished in its 90+ year history.  Part of the reason for this impressive run was the market’s valuation at the outset of the period.  At the beginning of 2013, for example, the Russell 2000 Value Index traded at 1.3x book value; the financial crisis’ mess had been largely cleaned up but valuations remained in check.  Since then, corporate earnings have been strong and the economic environment supportive.  Accordingly, we categorize most of the performance over this period as a reversion toward normal market valuations as opposed to a market that has overheated dramatically.  Based on most valuation measures, the reversion appears to have overshot historical averages but not wildly so—we are not alarmed, we are guarded. 

Thus far in 2017, small cap growth stocks have outperformed small cap value stocks by more than 11 percentage points.  Much of this performance difference is attributable to the growth index’s large overweight in healthcare and technology and underweight in financials and energy.  The more expensive sectors outperformed the less expensive sectors this year which has led to a wide valuation discrepancy between the value and growth indexes.  We continue to find value opportunities selectively, though it is more difficult today than it was 5 years ago.  Financials, consumer discretionary, and industrials represent the portfolio’s largest weights; we have limited exposure to telecom, REITs, utilities, and consumer staples.  The former sectors not only trade at considerable valuation discounts but also have higher earnings growth expectations over the next two years compared to the latter sectors.  We are always leery of paying high multiples for stocks, particularly when growth prospects are minimal. 

While select market segments appear richly valued, we believe others remain quite attractive.  Given this dichotomy, our portfolio’s composition and its characteristics are vastly different from the index.  The valuation discount is particularly striking; the portfolio trades at 12x normal earnings compared to 16x for the Russell 2000 Value. 

ATTRIBUTION: 3Q 2017

The Hotchkis & Wiley Small Cap Diversified Value Fund (Class I) outperformed the Russell 2000 Value Index in the third quarter.  Positive stock selection in 9 of the 11 GICS (Global Industry Classification Standard) sectors drove the outperformance.  Stock selection was particularly strong in financials, industrials, and materials.  The underweight and stock selection in healthcare detracted from performance during the quarter. 

 

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 9/30/17 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. 
 

Index definitions

Glossary of financial terms