Manager Commentary

Market Commentary
Equity markets’ strong first quarter performance was eradicated in the second quarter as concerns surrounding global economic stability overshadowed respectable company results. The Russell 2000 Index returned -9.9% and the Russell 2000 Value Index returned -10.6% during the second quarter of 2010. China’s economic slowdown, growing European debt worries, financial reform uncertainty, and a plunge in consumer confidence fueled a broad market decline. The “Flash Crash” on May 6th intensified investor angst. Implied equity volatility as measured by the VIX Index, also known as “The Fear Index”, doubled during the quarter. This renewed anxiety resulted in a flight to safety driving 10-year Treasury yields below 3% and bolstering the US Dollar relative to other major currencies.

Non-cyclical sectors outperformed cyclical sectors during the quarter as utilities, telecommunications, and consumer staples held up better than materials, industrials, and financials. Large cap value stocks declined less than their growth counterparts, but small cap value stocks declined more than their growth counterparts. Apart from this, the equity market’s descent was remarkably broad. The correlation of stock returns during the quarter has been surpassed only three percent of the time over the past 84 years¹. The widespread nature of the market’s slump has created uncommon valuation opportunities in numerous first-rate franchises. We maintain a keen focus on these companies, particularly those that have cut substantial costs in light of the recent recession. This retrenchment has put considerable cash on balance sheets and supported both earnings and free cash flow. The combination of these traits should result in sizeable returns of capital to shareholders in the form of dividend increases and/or share repurchases. The quality of the underlying franchises and the compelling valuation support provides reason for value investors to remain optimistic.

The equity market’s earnings per share and earnings multiple (i.e. P/E ratio) remain well below historical trends. Corporate America’s sizable retrenchment should translate into earnings reversion with even a modest recovery in demand. Systemic uncertainties (e.g. the oil spill) may prolong demand recovery as consumers and businesses remain cautious, but we believe this reversion is inevitable and will produce disproportionately accretive earnings.

Q2 2010 Attribution
The Hotchkis and Wiley Small Cap Value Fund outperformed the Russell 2000 Value Index for the quarter. Positive stock selection in the consumer discretionary and technology contributed to the outperformance. Valassis Communications (advertising, 3.8%)*, Miller Industries (towing, 3.6%)*, and Lawson Software (0.0%)* were the largest individual contributors to quarter performance. Stock selection in healthcare and energy detracted from performance—King Pharmaceuticals (2.6%)* and Stone Energy (2.5%)* were two of the largest detractors.

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The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment results and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, access our website at www.hwcm.com.

Mutual fund investing involves risk. Principal loss is possible. For mid-cap and small cap portfolios, investing in small and medium-sized companies involves greater risks than those associated with investing in large company stocks, such as business risk, significant stock price fluctuations and illiquidity.

Fund holdings and sector allocations are subject to change and are not a recommendation to buy or sell any security. Current and future portfolio holdings are subject to risk. Value stocks may underperform other asset types during a given period.

The opinions expressed are those of the portfolio managers as of 6/30/10 and may not be accurate reflections of their opinions after that date. There is no guarantee that any forecasts made will come to pass. The Fund may not continue to hold the securities mentioned and the Advisor has no obligation to disclose purchases or sales of these securities. Free cash flow is earnings before depreciation, amortization, and non-cash charges minus maintenance capital expenditures. Price-to-earnings ratio (P/E) is a common tool for comparing the prices of different common stocks and is calculated by dividing the current market price of a stock by the earnings per share. Earnings per share (EPS) is calculated by taking the total earnings divided by the number of shares outstanding. Correlation is a measure of the interdependence of two random variables that ranges in value from -1 to +1, indicating perfect negative correlation at -1, absence of correlation at zero, and perfect positive correlation at +1. The Chicago Board Options Exchange Volatility Index (VIX Index) reflects a market estimate of future volatility based on a range of near-term, at-the-money options on the S&P 500.

Data as of 6/30/10.
*Represents percentage of total portfolio at 6/30/10.

The Russell 2000 Index, an unmanaged index, is comprised of the 2,000 smallest companies in the Russell 3000 Index. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The indexes do not reflect the payment of transaction costs, fees and expenses associated with an investment in the Fund. The Fund’s value disciplines may prevent or restrict investment in major stocks in the benchmark indices. It is not possible to invest directly in an index. The Fund’s returns may not correlate with the returns of their benchmark indexes.

Short-term performance, in particular, is not a good indication of the Fund’s future performance, and an investment should not be based solely on returns.

You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest. The Fund's prospectus, which can be obtained by calling 1.800.796.5606, contains this and other information about the Fund. Read the prospectus carefully before you invest. You may also print the current prospectus from this website under "Download Center".

The Hotchkis and Wiley Funds are available only to residents in the United States and its territories

NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The Hotchkis and Wiley Funds are distributed by Quasar Distributors, LLC