Value Opportunities Fund (HWAAX)


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.

Manager Commentary
Period ended December 31, 2019


The S&P 500 Index returned an impressive +31.5% in 2019.  There have been only 16 calendar years since 1926 that have been better.  The economy was strong with real GDP modestly positive, inflation range-bound around 2%, and unemployment at a 50-year low.   These economic factors proved more consequential to the market than the contentious political environment which included a trade war between the US and China and a vote along party lines in the House of Representatives to impeach the President.

The S&P 500’s forward P/E ratio went from 15.4x at the beginning of the year to 19.8x at the end of the year; the 28% multiple expansion explains nearly all of the market’s performance.  The market’s average P/E over the past 30 years is 17.1x, so it went from about 10% below average to about 15% above average over the course of the year.  Importantly, however, interest rates are considerably lower than they have been for most of that period—the 10-year treasury yield is just 1.9% compared to its 30-year average of 4.4%.  Technology was the top-performing sector by a large margin, returning +50% over the 12 months.  Energy was the worst-performing sector for the third year in a row, returning +12%.  All other S&P 500 sectors returned between +20% and +33%. 

For the third year in a row, the Russell 3000 Growth Index outperformed the Russell 3000 Value Index (+35.8% vs. 26.3%). Growth outperformed value in 7 of the last 10 calendar years with cumulative outperformance of +306% vs. +203%, or +15.0% vs. +11.7% annualized; nearly all of which occurred in the last three years. The lopsided performance has resulted in a wider-than-normal valuation spread between growth and value.  Over the past 25 years, the average forward P/E for the Russell 3000 Growth has been 21.1x compared to 15.9x for the Russell 3000 Value, which represents an average valuation spread of 5.2x.  As of 12/31/19, the forward P/E for the growth and value indices were 26.6x and 16.9x, respectively, or a spread of 9.7x. This valuation gap has only been wider 7% of the time, all of which came during the tech/internet bubble from 1999 to 2001.   Using price-to-book instead of price-to-earnings, the current valuation gap has been exceeded only 3% of the time historically, with the tech/internet bubble again representing the lone exception. 

Investors’ increasing preference for low stock price volatility explains at least a portion of the valuation gap’s widening.  The S&P 500 Low Volatility Index is composed of the 100 index stocks that exhibited the lowest volatility in the previous 12 months (i.e. the least volatile quintile of the S&P 500).  Over the last decade, the low volatility index’s forward P/E averaged about 1.0x multiple points higher than the broad index (18.8x vs. 17.8x).  The average premium over the first 8 years was 0.4x multiple points.  Over the last 2 years, the premium gapped out to 3.1x multiple points (the spread as of 12/31/19 was also 3.1x). This has caused a substantial divergence between certain industries whereby many non-cyclicals exhibit rich risk-adjusted valuations relative to their cyclical counterparts.  As an example, the forward P/E ratio for S&P 500 Utilities Index has risen by more than 60% over the last decade; the forward P/E ratio for S&P 500 Banks Index has fallen by 5% over the same period. No surprisingly, the portfolio is significantly underweight utilities and staples, given their high valuations.   

While the overall equity market appears fully valued compared to history, we believe the valuation disparities across the market create an investment environment highly conducive to long-term focused active management, particularly in relative terms. The spread between the growth and value indices is wide, suggesting a promising outlook for value.  The spread between the portfolio and the value index is also wide, suggesting a promising outlook for the portfolio. The portfolio trades at 8.0x normal earnings (historical average of 7.4x) compared to the Russell 3000 Value at 15.3x (historical average of 13.6x) and the Russell 3000 Growth at 26.4x (historical average of 19.2x). The considerable valuation advantage combined with good underlying businesses and healthy balance sheets leaves us confident about the portfolio’s prospects.     


The Hotchkis & Wiley Value Opportunities Fund underperformed the Russell 3000 Value Index in 2019. Over the course of the year, there was an unusually strong correlation between company size and performance, with larger market cap companies outperforming smaller market cap companies. Russell 3000 Value stocks that began the year with a market cap of less than $5 billion returned +15% over the year while index stocks with a market cap of more than $100 billion returned +27%.  The portfolio’s average weight to the smaller group (<$5 billion) averaged 18% throughout the year compared to 10% for the index; the portfolio’s average weight to the larger group (>$100 billion) averaged 25% throughout the year compared to 37% for the index.  The smaller cap bias had a large negative effect on relative performance along with stock selection in consumer discretionary. Fortunately, positive security selection more than offset this brisk stylistic headwind. Positive security selection in industrials and financials were the most meaningful contributors, along with the overweight positions in industrials and technology. The largest positive contributors to relative performance in the year were WestJet Airlines, Microsoft, General Electric, Goldman Sachs, and AIG; the largest detractors were National Oilwell Varco, Tesla put options, Motors Liquidation Trust, Danieli, and Royal Mail.    

Mutual fund investing involves risk. Principal loss is possible.  Investing in non-diversified funds and/or smaller and/or medium-sized companies involves greater risks than those associated with investing in diversified funds and/or large company stocks, such as business risk, significant stock price fluctuations, sector concentration and illiquidity. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund.  The Fund may invest in ETFs, which are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a discount to its net asset value ("NAV"), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Fund’s ability to sell its shares. 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. The Fund may invest in derivative securities, which derive their performance from the performance of an underlying asset, index, interest rate or currency exchange rate. Derivatives can be volatile and involve various types and degrees of risks. Depending on the characteristics of the particular derivative, it could become illiquid.

Fund holdings and/or sector allocations are subject to change and are not buy/sell recommendations. Current and future portfolio holdings are subject to risk. Certain information presented based on proprietary or third-party estimates are subject to change and cannot be guaranteed.  Portfolio managers’ opinions and data included in this commentary are as of 12/31/19 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. Specific securities identified are the largest contributors (or detractors) on a relative basis to the Russell 3000 Value Index. Securities’ absolute performance may reflect different results. The “Largest New Purchases” section includes the three largest new security positions during the quarter/year based on the security’s quarter/year-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/year, all new security positions are included.  The Fund may not continue to hold the securities mentioned and the Advisor has no obligation to disclose purchases or sales of these securities. Attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect the payment of transaction costs, fees and expenses of the Fund. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss in a declining market.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform other asset types during a given period. Equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value.


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