Value Opportunities Fund (HWAIX)
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.
The U.S. equity market delivered its best opening quarter since 1998, as the S&P 500 Index posted a 12.59% return. The market’s advance was prompted by continued signs of a strengthening US economy and the absence of new negative global macroeconomic developments. Consequently, the VIX Index (i.e. the “Fear Index”) declined from well above its historical average at the beginning of the quarter, to well below its historical average at the end of the quarter. As short-term fears subsided and became a less prominent driver of investor behavior, we observed a shift in the market’s focus toward underlying fundamentals and valuations of individual stocks. This type of shift has the ability to reduce the correlation of returns across securities which should form an environment conducive for bottom up, fundamental value investors.
During the quarter, cyclical sectors outperformed non-cyclical sectors. Financials, technology, and consumer discretionary stocks were among the leaders while utilities, telecommunications, and energy stocks were among the laggards. The large cap growth indices outperformed large cap value indices, primarily due to the larger weight in the strong-performing technology sector. Large, mid, and small cap stocks performed similarly.
Going forward, we remain optimistic regarding the equity market’s prospects due to considerable fundamental improvements exhibited across the corporate sector. Despite modest economic growth, companies have generated robust earnings and cash flows, which have been predominately used to reduce debt. Valuations continue to be compelling even after this quarter’s appreciation. Also, we believe the market’s affection for Treasuries is likely to recede as real yields at/below zero will eventually erode the purchasing power of institutional and individual investors alike. The 30 basis point rise in 10-year Treasury yields over the first quarter may well be a harbinger of this cautionary message.
With the lingering sovereign debt issues in Europe and the uncertain growth prospects in emerging markets, we are prepared to combat bouts of elevated volatility in the near/ medium-term. During these episodes, we have found that the changes in security prices (i.e. volatility) are often not commensurate with the changes in real risk. Our experience has shown us that focusing on corporate fundamentals is the most effective course when navigating erratic waters; we attempt to mitigate risk through sound valuation support and an exhaustive assessment of underlying company risks (excessive/hidden financial leverage, for example).
The Hotchkis & Wiley Value Opportunities Fund outperformed the Russell 3000 Value Index for the quarter by a considerable margin. Positive security selection in energy, financials, and consumer discretionary was the primary performance contributor for the quarter. Cobalt International Energy (3.9%)1, Valassis Communications (9.7%)1, and Tree.com (4.3%)1 were the largest individual contributors. Security selection in technology and telecom was the primary performance detractor for the quarter. Exelon (2.7%)1, Vodafone (3.5%)1, and put options on KB Home (0.5%)1 were the largest individual detractors.
1% of total portfolio as of March 31, 2012.
VIX Index stands for Chicago Board Options Exchange Volatility Index
Mutual fund investing involves risk. Principal loss is possible. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. Investing in smaller and/or 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. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. 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.
Fund holdings and/or sector allocations are subject to change and are not buy/sell recommendations. Current and future 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 March 31, 2012 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. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss in a declining market.
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