Global Value

Market Commentary

Period ended September 30, 2019


The MSCI World Index returned +0.5% in the third quarter of 2019, and is now up more than +17% since the beginning of the year.  Global central bank policy continues to be accommodative; in the US, the Federal Reserve’s FOMC lowered the Fed Funds rate by 25 basis points for the second time this year, which now stands at 2.0% (upper bound).  The rate cut was widely expected and triggered little reaction from global equity markets.  The price of crude oil spiked following the drone attacks on Saudi refineries, but this was short-lived and Brent crude finished the quarter down -9%.  Energy was the MSCI World Index’s worst-performing sector, declining -6% in the quarter.  It has been the index’s worst-performing sector over the past year returning -16% (Brent has declined -27% over the past year), and has been the worst-performing sector in three of the past four calendar quarters.  Utilities +7%, real estate +4%, and consumer staples +4% were the best-performing sectors in the quarter.  These are also the top three sectors, by far, over the past year.  The MSCI World Index is up +2% over the past 12 months with these three sectors are up considerably more: utilities +22%, real estate +17%, and consumer staples +12%. 

Concerns about slowing economic growth have become increasingly pervasive amid trade negotiations and geopolitical uncertainty (e.g. Brexit in the UK, potential impeachment proceedings in the US).  As a result, US treasuries rallied during the quarter with the yield on the 10 year note falling below 1.5% in late August—for about a week, the 2-year treasury yield exceeded the 10-year treasury yield.  This is noteworthy as earlier recessions have been preceded by similar 10-year/2-year yield curve inversions.  The time between inversion and recession has varied significantly, from several months to more than 2 years. 

The timing of the next global economic slowdown and/or recession is unclear but it is certainly possible in the near to intermediate term. Despite this, we are overweight cyclicality in our portfolio – particularly financials and industrials – as this is where we see the greatest price vs. fair value dislocation in the market. We believe we own good businesses with strong balance sheets that will enable these companies to grow their value through the economic cycle.

To illustrate our approach given the current state of affairs, consider the thesis behind our positions in banks (the portfolio’s largest absolute and relative industry weight) and utilities (the portfolio has no exposure).  The MSCI World Bank Index trades at 10.1x consensus earnings, which is 13% below its long term average of 11.7x.  The MSCI World Utilities Index trades at 18.1x consensus earnings, which is 14% above its long term average of 15.8x.  Returns-on-equity for the two indexes are similar1.  Dividend yields are also similar but because valuations are so different, utilities have to pay out about 2/3 of their earnings in dividends while banks pay out less than half of their earnings to arrive at similar yields2.  Because banks retain more of their earnings, it has allowed them to amass capital and strengthen their balance sheets, and in recent years, buyback their own stock.  Given the information above, for the two indexes to generate equivalent returns going forward, one of several things would need to occur.  The valuation gap would need to widen even further, utilities would need to accelerate earnings growth, or banks would need to suffer a major destruction of capital.  To us these seem like unlikely scenarios because the valuation gap is already near an all-time wide, organic growth prospects for utilities are limited, and banks have accumulated near record levels of excess capital on their balance sheets to protect against a downturn.  Thus, we view banks as superior risk-adjusted investments irrespective of near-term economic growth. 

The portfolio continues to trade at a large discount to the market.  The portfolio trades at 7.2x normal earnings compared to 16.5x for the MSCI World Index.  It trades at 1.1x book value compared to 2.3x for the index.  This valuation discount combined with healthy balance sheets and good underlying businesses has us confident about the portfolio’s prospects as we look forward.  


The Hotchkis & Wiley Global Value portfolio (gross and net of management fees) underperformed the MSCI World Index in the third quarter of 2019.  We believe the strategy’s ability to invest across the cap spectrum is a long-term advantage, but this was a headwind during the quarter as small and mid cap stocks lagged large and mega caps.  Stock selection in industrials, energy, and technology also detracted from performance.  Positive stock selection in financials and healthcare, along with the underweight position in materials helped relative performance.  The largest individual detractors to relative performance were Whiting Petroleum, General Electric, Discovery, Embraer, and Corning; the largest positive contributors were Vodafone, BAE Systems, Wells Fargo, AIG, and Societe Generale.    


Haseko is a contractor for the condominium industry in Japan and is vertically integrated into the design, construction, sales, management and refurbishment of condominiums. The Company has a dominant market-share in its core geographies trades at a low multiple of earnings, has a net cash balance sheet and returns capital to shareholders.   

Royal Dutch Shell is an integrated oil company.  Shell should see higher earnings power under normal oil price estimates as they have slight production growth with capital expenditures below depletion, depreciation and amortization for the foreseeable future.  Additionally, Shell should earn higher returns than anyone outside of Qatar in their growing liquid natural gas business.  Furthermore, Shell’s downstream and, to a lesser extent, gas businesses are insulated from oil prices and should continue to generate reasonable returns at low crude prices. Capital allocation is good, and we believe a meaningful portion of free cash flow will be returned to shareholders via dividends and buybacks.  Shell has a healthy capital structure and trades at an attractive valuation. 

UnitedHealth Group is the largest and most diversified managed care organization in an industry where scale is a significant competitive advantage. UNH has the largest and fastest growing share in Medicare Advantage, the biggest opportunity in managed care. UNH is also well positioned in Medicaid, another growth opportunity. UNH is a high quality business with above average growth prospects, sticky and stable earnings, and a good balance sheet Industrial (CNH) is the world’s second largest agricultural machinery manufacturer, with presence in every major global market. 



1 9.1% ROE for banks, 10.9% ROE for utilities, based on FY1 consensus estimates.
2 4.3% dividend yield for banks, 3.5% dividend yield for utilities.  44% dividend payout ratio for banks, 64% payout ratio for utilities.

Composite performance for the strategy is located on the Performance tab. Returns discussed can differ from actual portfolio returns due to intraday trades, cash flows, corporate actions, accrued/miscellaneous income, and trade price and closing price difference of any given security. Portfolio characteristics and attribution based on representative Global Value portfolio. Certain client portfolio(s) may or may not hold the securities discussed due to each account’s guideline restrictions, cash flow, tax and other relevant considerations. Equity performance attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect management fees and other transaction costs and expenses.  Specific securities identified are the largest contributors (or detractors) to the portfolio’s performance relative to the MSCI World Index. Other securities may have been the best and worst performers on an absolute basis.  The “Largest New Purchases” section includes the three largest new security positions during the quarter based on the security’s quarter-end weight adjusted for its relative return contribution; does not include any security received as a result of a corporate action; if fewer than three new security positions during the quarter, all new security positions are included.  Securities identified do not represent all of the securities purchased or sold for advisory clients, and are not indicative of current or future holdings or trading activity.  H&W has no obligation to disclose purchases or sales of the securities.  No assurance is made that any securities identified, or all investment decisions by H&W were or will be profitable. The value discipline used in managing accounts in the Global Value strategy may prevent or limit investment in major stocks in the MSCI World, MSCI World Value, MSCI World Bank and MSCI World Utilities indices and returns may not be correlated to the indexes. Quarterly characteristics and portfolio holdings are available on the Characteristics and Literature tabs. For a list showing every holding’s contribution to the overall account’s performance and portfolio activity for a given time period, please contact H&W at  Portfolio information is subject to the firm’s portfolio holdings disclosure policy.
The commentary is for information purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Portfolio managers’ opinions and data included in this commentary are as of September 30, 2019 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. Certain information presented is based on proprietary or third-party estimates, which are subject to change and cannot be guaranteed. Equity securities may 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 value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during a given period. The strategy invests in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. All investments contain risk and may lose value. 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 for full disclaimer.
Past performance is no guarantee of future results.

Index definitions