| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 11.06% | 9.06% | 9.06% |
The Hotchkis & Wiley Small Cap Value Fund outperformed the Russell 2000 Value Index in Q1 2026, returning 9.06% versus the benchmark's 4.96%. The quarter was dominated by geopolitical turmoil as U.S.-Israel strikes on Iran led to closure of the Strait of Hormuz, driving Brent crude oil up over 100% to $127/bbl. The portfolio's overweight energy position provided an effective hedge, with positive stock selection in materials and energy being the largest performance contributors. Small caps outperformed large caps despite the disruption, with the Russell 2000 returning +0.9% versus -4.2% for the Russell 1000. The team notes that small cap valuations remain attractive, trading at just 85% of large cap P/E ratios versus historical parity. They observe nascent signs that markets are refocusing on fundamentals and valuation, which should create a more conducive environment for their disciplined value approach. The team believes global crude markets face structural undersupply risks supporting higher oil prices over time, while maintaining their long-term investment focus.
The fund maintains a disciplined value approach focused on small cap companies trading at attractive valuations relative to fundamentals, with particular emphasis on energy sector opportunities driven by structural supply dynamics and geopolitical risks.
The team believes the trend toward fundamentals and valuation focus is likely to continue, creating a more conducive environment for their investment approach than experienced last year. They maintain a disciplined and long-term focused approach.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Apr 18 2026 | 2026 Q1 | - | energy, fundamentals, Geopolitical, oil, small caps, valuation, value | - | Hotchkis & Wiley's small cap value fund outperformed in Q1 2026 as geopolitical turmoil drove oil prices up 100%, benefiting their overweight energy position. Small caps outperformed large caps despite disruption, with valuations remaining attractive at 85% of large cap P/E ratios. The team sees improving market focus on fundamentals favoring their disciplined value approach. |
| Jan 29 2026 | 2025 Q4 | HWSAX, HWSCX, HWSIX, HWSZX | Correction, fundamentals, profitability, Quality, Russell 2000, small caps, Speculation, value | - | Hotchkis & Wiley Small Cap Value Fund underperformed in 2025 due to limited exposure to unprofitable, speculative stocks that dominated returns. The managers see uncomfortable parallels to the dot-com bubble and expect a meaningful correction as fundamentals reassert themselves, positioning the fund to benefit from market normalization. |
| Oct 28 2025 | 2025 Q3 | - | inflation, Quality, rates, ROE, small caps, value | WPP LN | Small cap value fund underperformed in Q3 2025's low-quality rally where speculative stocks dominated. Fed cut rates 0.25% with more cuts expected as inflation persists above target. Fund maintains disciplined focus on quality businesses with strong balance sheets and attractive valuations, expecting more selective environment ahead to reward valuation discipline. |
| Jul 27 2025 | 2025 Q2 | - | earnings, Fed policy, inflation, Russell 2000, small caps, tariffs, value | - | Small cap value offers compelling opportunities with the widest large-small valuation gap on record, rivaling the dot.com era. Despite Q2 tariff volatility and underperformance, strong corporate earnings and attractive valuations support the thesis. The fund maintains disciplined quality focus through its Fundamental Risk Rating framework while positioning for potential Fed rate cuts. |
| Mar 31 2025 | 2025 Q1 | - | energy, financials, Recession, small caps, technology, value | - | Small cap value manager maintains bottom-up approach despite Q1 2025 market decline. Russell 2000 down 17% from post-election highs on recession fears and tariff concerns. Fund outperformed benchmark through positive stock selection in technology, energy, and financials. Manager sees opportunity as valuations reach historical averages and expects fundamentals to drive future performance over momentum. |
| Dec 31 2024 | 2024 Q4 | - | Election, financials, inflation, small cap, technology, value | - | Small-cap value fund outperformed benchmark in Q4 despite negative returns as post-election optimism faded on inflation concerns. Maintains technology overweight and real estate underweight. America First policies could benefit US-centric small-caps through tax cuts and reshoring, but inflation risks persist. Wide valuation spreads favor active value management despite eight years of small-cap underperformance. |
| Sep 30 2024 | 2024 Q3 | - | energy, financials, materials, rates, small caps, technology, value | - | Small cap value fund underperformed in Q3 despite strong small cap market performance, hurt by stock selection and energy overweight. Maintains technology overweight and financials focus while avoiding high-leverage names. Positioned for lower rate environment with disciplined value approach targeting companies with strong fundamentals and attractive valuations. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q1 |
OilBrent crude oil rose more than 100% to $127/bbl following U.S.-Israel strikes on Iran and subsequent closure of the Strait of Hormuz. The portfolio's overweight energy position provided an effective hedge. The team believes the global crude market faces structural undersupply risk in coming years, supporting higher oil prices over time. |
Crude Oil Energy Geopolitical Risk Supply Shock Strait of Hormuz |
Small CapsSmall caps outperformed large caps in the quarter, with Russell 2000 returning +0.9% versus -4.2% for Russell 1000. Despite outperformance, small cap P/E ratio is just 85% of large cap market, below the long-term parity average. Small cap value continues to trade at larger-than-normal discount to small growth. |
Russell 2000 Valuation Relative Performance P/E Ratio | |
ValueSmall cap value stocks outperformed small cap growth in the quarter, with Russell 2000 Value returning +5.0% versus -2.8% for Russell 2000 Growth. The team observes nascent signs that the market is beginning to pay attention to fundamentals and valuation again, which would present a more conducive environment for their investment approach. |
Value Investing Fundamentals Valuation Market Environment | |
| 2025 Q4 |
AIAI developments from major companies are causing rapid market changes and stock price declines for quality businesses. The manager sees AI creating disruption across white collar work including finance, law, software development, and insurance. Software companies face particular headwinds from fewer seats, lower pricing power, and competition from AI-first upstarts. |
Artificial Intelligence Software Disruption White Collar Automation |
SoftwareSoftware companies are experiencing significant declines as the market reassesses AI impacts. The manager notes three vectors affecting valuations: fewer seats due to efficiency gains, lower pricing power from AI competition, and reduced new customer bookings. However, believes some software solutions won't be easily replaced and is reviewing opportunities in the wreckage. |
SaaS Enterprise Software Pricing Power Competition Valuation | |
Home ImprovementFloor & Decor represents an attractive long-term opportunity following the Home Depot disruption model. The company has depressed margins and sales per store due to post-COVID hangover and higher interest rates affecting home sales. The manager expects significant margin expansion and double-digit sales growth with favorable macro conditions. |
Retail Housing Renovation Market Share Margins | |
| 2025 Q3 |
QualityThe manager emphasizes commitment to identifying businesses with durable balance sheets, sustainable ROE, stable free cash flow, and attractive valuations. They view the third quarter as epitomizing a low quality rally where highly speculative, risky stocks dominated performance. |
ROE Balance Sheets Cash Flow Valuations Fundamentals |
ValueThe fund maintains focus on attractive valuations relative to expected earnings as a key investment criterion. The manager believes the environment will become more selective and reward discipline around valuation. |
Valuations Earnings Discipline Selective | |
| 2025 Q2 |
ValueSmall cap equities continue to exhibit valuations that are more attractive than long-term averages, particularly small value stocks. The valuation gap between large and small is among the widest on record, only rivaled by the dot.com era, after which small caps outperformed handsomely. The portfolio's price-to-earnings ratio is well below its long-term average. |
Valuation Small Caps P/E Ratio Multiples |
Trade PolicyFollowing the so-called liberation day tariff announcement on April 2nd, the index cratered -14% over four trading days. The primary reason for the recovery seems to be that the market believes tariffs will be less draconian than they appeared originally. Equities rallied when the Administration showed an openness to negotiate down and/or delay the implementation of tariffs. |
Tariffs Trade Policy Negotiation | |
RatesThe Federal Open Market Committee left the Fed Funds rate unchanged at 4.25-4.50%, citing its objective of containing inflation while supporting economic growth. The futures market is still pricing in two 25-basis point rate cuts by year-end, though these are now expected to occur later in the year with a less than 10% chance of a rate cut at the upcoming July meeting. |
Fed Funds Rate Cuts FOMC Monetary Policy | |
InflationInflation continued to show signs of moderation, though the latest Core Personal Consumption Expenditures (PCE) reading—the Fed's preferred inflation gauge—was 2.7%. This is above its 2% long-term target. |
PCE Core Inflation Fed Target | |
EarningsCorporate earnings helped boost the recovery, with nearly two-thirds of Russell 2000 companies beating consensus expectations. Despite the portfolio's underperformance in the quarter, 70% of its holdings exceeded consensus earnings expectations. Interestingly, small companies without earnings meaningfully outperformed those companies with earnings. |
Consensus Expectations Earnings Growth | |
| 2025 Q1 |
ValueThe fund maintains a bottom-up approach searching for investment ideas with a bias toward owning good companies with strong balance sheets and attractive valuations. The manager believes fundamentals should drive the market and that shunned companies operating in good businesses are likely to be better appreciated for their true earnings power. |
Value Fundamentals Balance Sheets Valuations Bottom-up |
Small CapsThe Russell 2000 Index declined significantly in Q1 2025, down 17% from post-election highs. The valuation of the Russell 2000 Index is in line with its history, suggesting small cap stocks could get cheaper from current levels. The manager focuses on small cap companies with strong fundamentals. |
Small Caps Russell 2000 Valuations Market Decline | |
| 2024 Q4 |
ValueThe fund maintains a value-oriented approach with significant valuation advantages relative to benchmarks. The spread between growth and value indices is wide, suggesting a promising outlook for value investing. The portfolio's valuation advantage combined with good underlying businesses and healthy balance sheets provides confidence about prospects. |
Value Valuation Spread |
Small CapsThe fund focuses on small-cap stocks which have underperformed large-cap for eight consecutive years through 2024. The America First policy could enhance economic prospects for US-centric businesses, a core segment of the small-cap market. Small-cap stocks initially surged 8% post-election before giving back gains. |
Small Caps Russell 2000 Underperformance | |
| 2024 Q3 |
Small CapsSmall caps outperformed large caps in Q3 2024, with the Russell 2000 delivering 9.3% returns. Small value stocks outperformed small growth stocks during the quarter. The relative valuation of small caps to large caps remains attractive, with the Russell 2000 Value Index trading at 16.7x forward P/E versus 20.8x for the Russell 1000. |
Russell 2000 Valuation Outperformance Value |
ValueThe fund focuses on identifying undervalued assets with durable balance sheets, sustainable return on equity, stable free cash flow, and attractive valuations relative to expected earnings. Small value stocks outperformed small growth stocks in the quarter, and the managers remain committed to their value-oriented investment approach. |
Undervalued Balance Sheets ROE Cash Flow Earnings | |
RatesLower interest rates are typically favorable for markets, particularly for small caps. The easing of inflationary pressures paved the way for lower interest rates, benefiting rate-sensitive sectors like real estate, communication services, financials, and utilities. The fund's decision to underweight high-leverage companies reflects focus on better risk-adjusted returns. |
Interest Rates Rate Sensitive Leverage Inflation |
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