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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.
The Hotchkis & Wiley Funds are distributed by Quasar Distributors, LLC

Portfolio Managers Stan Majcher and Marshall Cowden share their current views, including:

The evolution of the energy market over the past 20 years
Current oil supply and demand dynamics, and
Where we are finding attractive opportunities

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

The portfolio manager’s views and opinions expressed in this podcast are as of November 16, 2023. Such views are subject to change 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. Any discussion or view on a particular company, asset class/segment, industry/sector and/or investment type are not investment recommendations, should not be assumed to be profitable, and are subject to change.

Click on the respective link for top ten Fund holdings as of March 31, 2025: Large Cap Value, Diversified Value, Mid-Cap Value, Small Cap Value, Small Cap Diversified Value, Value Opportunities, Global Value, International Value, and International Small Cap Value. Fund holdings are subject to change and are not recommendations to buy or sell any security. Diversification does not assure a profit nor protect against loss in a declining market.

Free cash flow - represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets; WTI - West Texas Intermediate; OPEC - Organization of the Petroleum Exporting Countries; LNG - Liquefied natural gas; NOV - National Oilwell Varco; and OECD - Organisation for Economic Co-operation and Development.

Past performance is not indicative of future performance.

Mutual fund investing involves risk. Principal loss is possible.
The Hotchkis & Wiley Funds are distributed by Quasar Distributors, LLC

Most economists expect the US economy to decline during the next few quarters as the Fed does what it takes to tame inflation. Given the negative market returns of 2022, it appears most investors expect a recession too.

Chart 1: Recession Odds

Notwithstanding the thoughtful analysis supporting economic predictions, we would note that estimating the timing, duration, and severity of recession is inherently unreliable and not terribly fruitful for long-term investors. For example, most hedge fund managers whose goal it is to beat the market based on predicting the impact of macroeconomic events have had trouble keeping up with their equity peers and the broader equity market. Analysts make simplifying assumptions to model the economy; unfortunately, the economy is too complex to be characterized by these assumptions which in turn makes their models inherently unreliable.

While fraught with uncertainty, we can look back over the last century and observe the impact of recessions on long-term stock returns. The chart below shows that 16 recessions occurred over the last century yet small cap value stocks continued to march higher. Other than the great depression, recessions were transitory events on the path to higher stock prices.

Chart 2: Small Cap Value Investment Growth

If we assume that we are going to have a recession this year, what does that mean for future returns? We looked at the last 13 recessions and noted that small cap value stocks declined by about a third on average. While you might want to avoid that nasty draw down, you might be too late as small caps have fallen -27% from the market peak in 2021¹. This steep decline suggests investors have already priced in an average recession. While we can easily incur more pain from where we are today, we note that small cap value stocks tend to more than double in price in the three years following the trough. In our experience, recessions create new opportunities to buy companies at very depressed multiples of normal or recovered earnings which sets the foundation for attractive investment results.

Chart 3: Small Value More Than Doubles on Average Following Recession Troughs

While recession concerns drove stock returns in 2022, another important driver is emerging – style reversion. History shows that the longer a style has been out of favor and the deeper the valuation disconnect from historical trend, the longer and greater the subsequent style recovery is. The last decade was one of the worst relative return periods for value, primarily due to low interest rates and the phenomenal earnings performance of mega cap tech stocks such as the FAANGS. Both trends appear to be reversing. Against this backdrop, we believe the current value recovery will likely be stronger and last longer than past value cycles.

Chart 4: Length of Value Cycles

During periods of heightened uncertainty, such as the Global Financial Crisis or the recent pandemic, we find the guiding beacon to better returns is valuation. Paying a low price relative to a company’s ability to generate sustainable long-term earnings is generally a good way to outperform the market. In fact, the longer one’s time horizon, the truer this statement is. For example, the R² of initial valuation explaining the subsequent return of the stock market jumps from less than 30%, essentially a minimal predictive value, to 80% once your investment horizon approaches 10 years². This means if you have a long investment horizon, maybe you are saving for retirement or you need to pay obligations decades in the future, you should align your portfolio with value.

Chart 5: Valuation and Future Stock Performance

From a size perspective, small cap stocks look attractive relative to large caps stocks. The only era where small caps were less expensive than today was during the tech bubble of the late 1990s.

Chart 6: Relative Valuation of Small vs Large Stocks

Looking within the small cap market, small cap value stocks look particularly attractive relative to history, especially when one excludes companies with negative earnings. This level of discount supports the expectation of strong future returns for small cap value stocks.

Chart 7: Russell 2000 Value is Cheap Relative to its History

We are frequently asked about inflation and stock prices. The short answer is value stocks do better than growth stocks during periods of inflation. When looking at the stagflation decade of the 1970s, small cap value was one of the best performing asset classes while growth was one of the worst, even worse than corporate bonds. Looking at small cap market data over the last 6 decades, value outperformed growth by 7% when inflation was over 3%. More importantly, value outperformed growth by 5% over the entire time period.

Chart 8: Small Value vs. Small Growth During Inflationary Environments

What explains this phenomenon? Inflation lowers the current value of distant cash flows. In the case of growth stocks, inflation is much more corrosive to returns because more of the future cash flow is coming from distant time periods as compared to value stocks. Drawing a bond analogy, growth stocks are long duration securities compared to value stocks. So when inflation rises, value stocks tend to outperform growth stocks.

In conclusion, we believe investors’ fear of a recession has created an opportunity for the investor with a long time horizon. Valuation of small cap value market is attractive, recent price declines have discounted a good portion of a recession impact, and the opportunity for economic recovery and the associated returns appear to be underappreciated. And finally, the value investing style is reasserting its dominance after a prolonged period of underperformance. Given the length and depth of the underperformance, we see a multi-year tailwind for value stocks.

Hotchkis & Wiley Research

¹Russell 2000 Value Index from November 8, 2021, to September 30, 2022
²BofA Global Research

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Data source: Charts 1, 6-7: Bloomberg, H&W; Charts 2 & 3: National Bureau of Economic Research (NBER), Kenneth French Dartmouth data library; Chart 4: BofA Global Research, Bloomberg, Kenneth French Dartmouth data library. Value led markets defined as a period when value outperforms growth by 10 percentage points or more; Chart 5: BofA Global Research; Chart 8: Bureau of Labor Statistics, Bloomberg, Kenneth French Dartmouth data library. Inflation represented by US Consumer Price Index Urban Consumers Less Food & Energy. Value and Growth represented by Small Value and Small Growth data series from Kenneth French Dartmouth data library.

The portfolio manager’s views and opinions expressed are as of January 27, 2023. 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 Russell 2000^® Index measures the performance 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 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. The indices do not reflect the payment of transaction costs, fees and expenses associated with an investment in the Fund. It is not possible to invest directly in an index.

The Fama-French benchmark portfolios, which are constructed at the end of each June, are the intersections of two portfolios formed on size (market equity, ME) and three portfolios formed on the ratio of book equity to market equity (BE/ME). The size breakpoint for year t is the median NYSE market equity at the end of June of year t. BE/ME for June of year t is the book equity for the last fiscal year end in t-1 divided by ME for December of t-1. The BE/ME breakpoints are the 30th and 70th NYSE percentiles.

R²is a statistical measure representing the proportion of the variance for a dependent variable that is explained by one or more independent variables in a regression model; Price-to-Earnings is the current market price per share divided by normalized earnings per share. FAANGS stocks - Meta (formerly known as Facebook); Amazon; Apple; Netflix; and Alphabet (formerly known as Google).

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Past performance is not indicative of future performance.

Mutual fund investing involves risk. Principal loss is possible.
The Hotchkis & Wiley Funds are distributed by Quasar Distributors, LLC