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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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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.
"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. The semiconductor industry surged 112% while the fund maintained discipline, avoiding the mania in favor of profitable businesses with strong balance sheets and attractive valuations."
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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