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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Hotchkis & Wiley Small Cap Value Fund 2026 Q2 Investor Letter | Buyside Digest

Back to Fund Profile (Hotchkis & Wiley Small Cap Value Fund)

Primary Source Intelligence • Q2 2026 Letter Analysis

Hotchkis & Wiley Small Cap Value Fund Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Hotchkis & Wiley Small Cap Value Fund. This analysis is provided for institutional research purposes only and is not investment advice.

SOURCE UNAVAILABLE

Fund Returns

QTD+7.51%

YTD+17.26%

Annualized+11.16%

Positioning StanceCONSTRUCTIVE

Market CapSmallCap

GeographyUS

Digest Analysis

Quick Take

"Hotchkis & Wiley Small Cap Value Fund underperformed in Q2 2026 as AI-driven speculation favored low-quality, high-momentum stocks over the fund's quality-focused holdings."

Executive Summary

The Hotchkis & Wiley Small Cap Value Fund returned 7.51% in Q2 2026, underperforming the Russell 2000 Value Index which returned 17.19%. The quarter was characterized by a speculative, low-quality rally driven by AI euphoria, with the semiconductor industry returning 112% despite comprising only 3% of the benchmark. The highest-beta and highest-momentum stocks dramatically outperformed quality businesses, with companies in the lowest quintile of return on invested capital outperforming those in the highest quintile by 45 percentage points—a spread nearly three standard deviations wide. Investor leverage spiked through margin debt and leveraged instruments. The fund's underperformance was driven primarily by what it did not own rather than what it did, particularly the avoidance of semiconductor names in favor of profitable software businesses. The manager questions the sustainability of the $850 billion AI data center capex spend if revenue payoffs disappoint. The team remains disciplined and long-term focused, believing the quality businesses owned are well positioned for reversion when euphoria gives way to rational fundamentals and valuation discipline.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

68%

CautiousHigh

Moderate (68%)

The fund demonstrates moderate-high conviction through its concentrated top ten holdings (totaling approximately 39.7% of assets) and willingness to accept significant underperformance rather than abandon its quality and valuation discipline. The manager articulates a clear thesis about quality businesses and mean reversion, uses declarative language about maintaining discipline, and explicitly sized the top ten positions. However, the absence of individual position-level commentary beyond percentage weights and the diversified nature beyond the top holdings (60% in other positions) prevents a higher score. The conviction is in the process and discipline rather than in specific named catalysts or timeframes for individual holdings.

Growth Outlook

20%

BearishBullish

Bearish (20%)

The manager expresses strong concern about the current market environment, characterizing it as a 'speculative, low-quality, risk-on rally' and 'speculative mania' fueled by 'euphoria' about AI. The letter warns of 'near-record extremes' in momentum and quality spreads, questions the sustainability of AI capex, and notes investor leverage has spiked. While the manager sees eventual opportunity in reversion, the current market outlook is decidedly cautious with warnings about elevated valuations and speculation.

Risk Appetite

33%

DefensiveAggressive

Defensive (33%)

The fund maintained a defensive quality tilt throughout the quarter, explicitly avoiding the speculative semiconductor rally and maintaining positions in profitable software and technology businesses. The portfolio's focus on 'quality businesses with strong balance sheets' and 'attractive valuations' that provide a 'margin of safety' indicates a risk-off positioning. The fund accepted significant underperformance rather than chase momentum, demonstrating reduced risk appetite relative to the market.

Capital Deployment

45%

De-riskingDeploying

Net Neutral (45%)

The letter provides no explicit cash level data or discussion of net deployment activity. The manager describes maintaining positions in quality businesses and avoiding semiconductor speculation, which suggests capital rotation rather than net deployment or de-risking. The fund's underperformance came from 'what the portfolio did not own' rather than selling activity, and there is no mention of raising cash or adding leverage. The stance appears to be holding steady with selective rotation, scoring slightly negative due to the defensive posture and lack of deployment language.

Forward Guidance

30%

CautiousExpansionary

Cautious (30%)

The manager's forward guidance emphasizes patience and discipline rather than active deployment. The letter states the team 'remains disciplined and long-term focused' and expects to wait for 'euphoria gives way to rational fundamentals.' There is no indication of adding to positions or deploying capital into the current rally. The stance is explicitly to maintain current positioning and wait for reversion, indicating a cautious, wait-and-see approach rather than active deployment bias.

Language Signal

28%

BearishBullish

Bearish (28%)

The letter is dominated by risk and caution language: 'speculative,' 'mania,' 'euphoria,' 'near-record extremes,' 'question whether sustainable,' 'signs are hard to miss,' and warnings about leverage spikes. While there is some positive language about the fund's quality holdings being 'well positioned for reversion,' the overwhelming directional language is bearish on current market conditions. The ratio of cautionary to constructive language is approximately 3:1.

Perceived Risk

75%

Low RiskElevated

Elevated Risk (75%)

The manager perceives elevated systemic risk in the current environment. The letter explicitly identifies multiple specific risks: AI capex sustainability concerns, near-record extremes in quality spreads (three standard deviations wide), spiking investor leverage through margin debt and leveraged instruments, and money-losing companies outperforming profitable ones. The manager draws parallels to historical speculative manias and warns that 'the signs are hard to miss.' The detailed discussion of risk metrics, leverage indicators, and valuation extremes indicates high perceived environmental risk, though the manager stops short of predicting imminent collapse.

Opportunity Density

35%

ScarceAbundant

Selective (35%)

The manager views the current opportunity set as sparse and challenging. The letter emphasizes the difficulty of finding attractive investments in the current speculative environment, with quality businesses underperforming dramatically. The manager's focus on maintaining discipline and waiting for reversion rather than finding new opportunities suggests limited attractive options at current valuations. The statement that 'quarters like this are an inherent feature of an investment approach centered on quality and valuation' implies the manager is not finding compelling new ideas that meet their criteria.

Time Horizon

72%

Short-TermLong-Term

Decade+ (72%)

The manager demonstrates a multi-year time horizon with explicit patience for mean reversion. The letter states the team 'remains disciplined and long-term focused' and expects quality businesses to be 'well positioned' when fundamentals reassert themselves. The willingness to accept significant quarterly underperformance while maintaining conviction in quality businesses indicates a 2-5 year outlook. However, the letter does not describe a permanent capital structure or decade-plus horizon, and there is some implicit catalyst dependency on the reversion of the current speculative mania, preventing a higher score.