January 2024 - HOTCHKIS & WILEY

2023 YEAR IN REVIEW
Market volatility creates opportunities for an investor willing to think differently. In 2022, when technology stocks sold off sharply, our team identified Workday (WDAY) as a compelling value opportunity – a very good business trading at a deep discount to what we believed it was worth. We purchased Workday in late 2022 and were quickly rewarded when the company’s share price rallied in 2023.

Not every investment works out quite that well or that fast. For instance, we initially purchased GE in 2018, early in the company’s turnaround. This turnaround was complicated by the global pandemic, which significantly disrupted GE’s aerospace business. However, we remained patient, as we saw considerable value in GE that was not reflected in the share price. Our patience paid off in 2023 when shares of GE rose significantly.

Meanwhile, energy stocks were a weak spot in the portfolio during the year, and we also experienced some pressure in healthcare, with both CVS and Elevance down modestly. We are still waiting for signs of operating improvement from underperforming businesses like Citigroup and Ericsson. Their share prices have disappointed, and while we see a lot of value in these businesses, this may not change until the companies start delivering better results.

As a result of the contributions from Workday, GE, and a number of other investments, the Hotchkis & Wiley Global Value strategy returned 28% net-of-fees in 2023. This was a strong result in a year when growth stocks meaningfully outperformed value.

2024 OUTLOOK
Today, after a lot of movement over the past two years, we find ourselves in a market environment that looks very similar to where we were at the start of 2022. Value spreads are wider than normal.

Chart 1: Valuation Spreads – World Growth vs. World Value

This means that while some parts of the market do not look compelling (much of mega-cap tech, for example), opportunities still exist when you start to move away from the “Magnificent Seven”.

For starters, Europe trades at an unusually large discount to the US market. We think some spread is warranted but question whether the current gap is justified.

Chart 2: Price-to-Earnings Dispersion – US vs. Europe

We’ve found some interesting ideas through our bottom-up research process and have just under 32% of our portfolio in Europe (vs. 15% for the MSCI World). Notable holdings here include Siemens, an industrial conglomerate with a fast-growing but under-appreciated software business, and the advertising holding company group WPP, which is facing some short-term cyclical headwinds.

In the US, we believe there has been multiple expansion in some areas that is unsustainable. We obviously want to try and avoid these areas. Instead, we see good value in parts of health care such as insurance and medical device maker Medtronic. We also continue to maintain overweights to banks and energy. We added some high-quality regional banks in 2023 when those stocks sold off.

While value looks inexpensive relative to growth, absolute valuations for these stocks are not far out of line with historic norms. We are not afraid to lean in with big weights when the right opportunities present themselves, but when those situations grow scarcer, we adjust. We added a few names to the portfolio in 2023, growing our holdings from 51 at the start of the year to 60 at year-end. This is the highest it’s been since 2018, though still within our target range. We believe these actions have improved the diversification and resiliency of the portfolio.

SUMMARY
Our portfolio looks very different from the market, as you can see from our high active share (93 as of 12/31/23; 5-year average = 92) and geographic / sector positioning. As a result, we have a valuation profile and long-term return opportunity that we believe is considerably more attractive than the benchmark’s.

It’s hard to predict what the market is going to do in the short term. If value outperforms, we think we’ll do well, as we have in the past. If growth further extends its advantage, this is a headwind (not insurmountable, as 2023 demonstrated). In the long term, we think security selection matters more than market cycles. We are confident that if we continue buying good assets well below their worth, we can continue to deliver good returns.

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Data source as of 12/31/23: Chart 1: BofA Research, MSCI; Chart 2: Bloomberg, representative H&W Global Value portfolio. Client portfolio holdings and characteristics may vary due to different restrictions, cash flows, and other relevant considerations.

All investments contain risk and may lose value. This material is for general information purposes and should not be used as the sole basis to make any investment decision. Views expressed are not intended to be relied upon as research regarding a particular industry, investment or the markets in general, nor is it intended to predict performance of any investment or serve as a recommendation to buy or sell securities. Hotchkis & Wiley (“H&W”) is not responsible for any damages or losses arising from any use of this information.

Net of fee performance for the Global Value Composite as of 3/31/25: 7.78%, 21.36%, and 8.48% for 1-, 5-, and 10-year, respectively. Past performance is no guarantee of future performance. Investment returns include reinvestment of dividends, interest and capital gains. Valuation is based on trade-date information and stated in U.S. dollars. Net performance results are presented after actual management fees and all trading expenses but before custodial fees. The Global Value strategy’s returns for different time periods and market cycles can result in significantly different performance results. An account’s investment guidelines, timing of transactions, market conditions at the time of investment and other factors may lead to different performance results. The Composite includes all Global Value discretionary accounts. The Global Value strategy seeks capital appreciation primarily through investments in common stocks of U.S. and non-U.S. companies, which may include companies located or operating in established or emerging markets. Composite performance is available at www.hwcm.com, located on the strategy’s Performance tab along with important disclosures included in the strategy’s GIPS Report; quarterly characteristics and portfolio holdings are located on the Portfolio and Literature tabs. Portfolio information is subject to the firm’s portfolio holdings disclosure policy.

The portfolio manager’s views and opinions expressed are as of January 20, 2024. Such views are subject to change without notice and may differ from others in the firm, or the firm as a whole. The portfolio manager’s comments may include estimated and/or forecasted views, which are believed to be based on reasonable assumptions within the bounds of current and historical information. However, there is no guarantee that any estimates, forecasts or views will be realized. In the event of new information or changed circumstances, H&W reserves the right to change its investment perspective and outlook and has no obligation to provide revised assessments and/or opinions.

The securities reflected herein are intended for illustrative purposes only and not a recommendation to buy or sell specific securities. There is no assurance that the securities discussed will remain in the portfolio or that securities sold have not been repurchased. The securities discussed do not represent the entire portfolio, may only represent a small portion of the portfolio and should not assume the securities discussed were or will be profitable or that recommendations made in the future will be profitable or will equal the performance of the securities discussed. H&W’s opinions regarding these securities are subject to change at any time, for any reason, without notice.

Information obtained from independent sources is considered reliable, but H&W cannot guarantee its accuracy or completeness. Certain information contained in this material represents or is based upon forward-looking statements. Due to various risks and uncertainties, actual events/results or performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.

Investing in equity securities have greater risks and price volatility than U.S. Treasuries and bonds, where the price of these securities may decline due to various company, industry, and market factors. Investing in foreign as well as emerging markets involves additional risk such as greater volatility, political, economic, and currency risks and differences in accounting methods. Investing in smaller, medium-sized and/or newer companies involves greater risks not associated with investing in large company stocks, such as business risk, significant stock price fluctuations and illiquidity.

A value-oriented investment approach involves the risk that value stocks may remain undervalued or may not appreciate in value as anticipated. Value stocks can perform differently from the market as a whole or from other types of stocks and may be out of favor with investors and underperform growth stocks for varying periods of time.

The MSCI World Index is a free float-adjusted weighted index capturing large and mid cap stocks. The MSCI World Value and MSCI World Growth Indices are free float-adjusted weighted indexes capturing large and mid cap stocks, exhibiting overall value or growth style characteristics, respectively. The MSCI indices represent stocks across 23 Developed Markets (DM) countries and include reinvestment of dividends, net foreign withholding taxes. The STOXX Europe 600 index has a fixed number of 600 components representing large, mid and small capitalization companies among 17 European countries. The S&P 500^®Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. See www.hwcm.com for full disclaimer.

Past performance is not indicative of future performance.

Portfolio Manager Ray Kennedy reviews:

Performance drivers in 2023
Credit market dynamics, including spreads and credit defaults
Portfolio positioning and our current assessment of high yield fundamentals, technicals, and valuation

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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. To obtain performance data current to the most recent month-end, access our website at www.hwcm.com.

Hotchkis & Wiley High Yield Fund standardized performance - from the dropdown menu, select month-end or quarter-end standardized fund performance

You should consider the Hotchkis & Wiley High Yield Fund’s investment objectives, risks, and charges and expenses carefully before you invest. This and other important information is contained in the Fund's summary prospectus and prospectus, which can be obtained by calling 800-796-5606. Read carefully before you invest.

Investments in debt securities involve credit risk and typically decrease in value when interest rates rise. Investments in lower rated and non rated securities involve greater risk. The fund may invest in derivatives, asset backed and mortgage backed securities, and foreign securities. Please read the fund prospectus for a full list of fund risks.

This material is for general information purposes and should not be used as the sole basis to make any investment decision. Views expressed are not intended to be relied upon as research regarding a particular industry, investment or the markets in general, nor is it intended to predict performance of any investment or serve as a recommendation to buy or sell securities. Hotchkis & Wiley (“H&W”) is not responsible for any damages or losses arising from any use of this information.

The portfolio manager’s views and opinions expressed are as of January 17, 2024. Such views are subject to change without notice and may differ from others in the firm, or the firm as a whole. The portfolio manager’s comments may include estimated and/or forecasted views, which are believed to be based on reasonable assumptions within the bounds of current and historical information. However, there is no guarantee that any estimates, forecasts or views will be realized. In the event of new information or changed circumstances, H&W reserves the right to change its investment perspective and outlook and has no obligation to provide revised assessments and/or opinions.

Spread usually refers to the difference between two prices (the bid and the ask) of a security or asset, or between two similar assets; Basis point (bps) is a unit equal to 1/100th of 1% and is used to denote the change in a financial instrument; Duration measures the price sensitivity of a bond to interest rate movements; LBO - Leveraged buyout.

Credit Quality weights by rating were derived from the highest bond rating as determined by S&P and Moody's. 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. Diversification does not assure a profit nor protect against loss in a declining market.

Past performance is not indicative of future performance.

Mutual fund investing involves risk. Principal loss is possible.
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