International Value

Market Commentary

Period ended September 30, 2018
 

MARKET COMMENTARY

In US Dollar terms, the Russell Developed ex-US Index returned +1.0% in the third quarter and is now down -1.2% since the beginning of the year. In local currency terms, international developed markets were up about 1 percentage point higher, but the US Dollar strengthened relative to most other major currencies, appreciating by +0.7%, +1.4%, and +2.7% relative to the Euro, Pound, and Yen, respectively.  Stalled Brexit negotiations and the threat of a global trade war have triggered short-lived bouts of equity market volatility across the globe, but positive economic data and strong corporate earnings growth have offset those concerns. 

International growth stocks outperformed international value stocks in the quarter slightly, extending growth’s considerable lead in recent years.  Investors’ preference for growth stocks has resulted in a large valuation gap between value and growth.  Earnings growth has been comparable, thus the primary cause of the outperformance has been the repricing of growth stocks, i.e. multiple expansion.  We do not believe that this valuation gap can widen indefinitely, and consequently we are optimistic about the prospects of value relative to growth as we look at international equity markets going forward.  

We remain overweight financials, industrials, and energy compared to the Russell Developed ex-US Index.  We are slightly overweight in technology, though we have taken considerable capital out of the sector since the beginning of the year.  We have added to consumer staples and financials, and reduced industrials since the beginning of the year—all due to relative valuation opportunities. 

The portfolio’s valuation discount relative to the market has continued to widen, which gets us excited about the portfolio going forward.  The portfolio trades at 8.1x normal earnings compared to the Russell Developed ex-US Index at 14.1x.  The portfolio’s price-to-book ratio is 1.1x compared to 1.6x for the index.    

ATTRIBUTION: 3Q 2018

The Hotchkis & Wiley International Value portfolio (gross and net of management fees) underperformed the Russell Developed ex-US Index in the third quarter of 2018.  The growth-led market was not a conducive environment for our value-focused approach.  Stock selection in materials, consumer discretionary, and communication services detracted from performance in the quarter.  Positive stock selection in real estate and technology helped performance.  The largest individual detractors to relative performance were Embraer, Vodafone, Ophir Energy, Adient, and Barclays; the largest positive contributors were WestJet Airlines, Ericsson, Frank’s International, CNH Industrial, and Credito Valtellinese.    

LARGEST NEW PURCHASES: 3Q 2018

Nufarm is a global producer & distributor of off-patent herbicides, insecticides, and fungicides. Over the last 3 years, new management has materially improved margins and returns on capital by cutting subscale geographies and refocusing on more profitable products. Additionally, recent industry consolidation should reduce competition and intensifying regulatory scrutiny should favor Nufarm’s off-patent expertise. Valuation is attractive as the share price has been pressured by temporary issues including extremely dry weather in Australia and high profile glyphosate legal activity.

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 International 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 Russell Developed ex-US 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 at quarter-end, 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 International Value strategy may prevent or limit investment in major stocks in the Russell Developed ex-US Index and returns may not be correlated to the index. 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 hotchkisandwiley@hwcm.com.  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, 2018 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 as well as emerging market securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. All investments contain risk and may lose value. 
 
Past performance is no guarantee of future results.
 

Index definitions