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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 Q3 Investor Letter | Buyside Digest

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Primary Source Intelligence • Q3 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.

Fund Returns

QTD+1.88%

YTD+19.46%

Annualized+11.16%

Positioning StanceCONSTRUCTIVE

Market CapSmallCap

GeographyUS

Digest Analysis

Quick Take

"Positioned defensively in cash-generative, disciplined value companies, the strategy benefits from an overweight energy allocation and strong technology stock selection while navigating persistent inflation, rising interest rates, and cooling artificial intelligence enthusiasm."

Executive Summary

The Hotchkis & Wiley Small Cap Value Fund posted a net of fees return of 1.88% in the third quarter of 2026, bringing its year-to-date net return to 19.46%. The strategy significantly outperformed its benchmark, the Russell 2000 Value Index, which declined 4.91% during the quarter. Over 90% of this relative outperformance stemmed from favorable stock selection as market leadership rotated away from speculative, low-quality momentum stocks toward profitable, cash-generative value businesses. The portfolio also benefited from its deliberate overweight posture in the energy sector, while avoiding severe drawdowns seen across small-cap semiconductor and high-beta segments. The macroeconomic environment was characterized by rising inflation, higher bond yields, and geopolitical instability. A collapse of the US/Iran ceasefire and tanker disruptions in the Strait of Hormuz drove physical Dated Brent crude up 68% to $120 per barrel. Concurrently, persistent headline inflation prompted the Federal Reserve to raise rates to 4.0%, sending the 10-year Treasury yield to 5.3%. In addition, heightened capital intensity and financing uncertainties induced a broad reassessment of artificial intelligence infrastructure spending, causing heavy declines across small-cap technology and consumer discretionary. Portfolio performance was driven by top information technology holdings, notably Workiva and Avnet, which advanced 37% and 13% during the quarter, respectively. Advertising agency holdings WPP and Stagwell also contributed positively to returns, alongside selective positions across industrials. Conversely, stock selection in materials detracted, led by Olin declining 21% on unfavorable commodity pricing. The portfolio remains anchored by top allocations in Workiva at 6.7%, Avnet at 5.1%, SLM Corp. at 4.4%, and Stagwell at 4.3%, emphasizing financially sound businesses trading at attractive valuations.

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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

65%

CautiousHigh

Moderate (65%)

Position sizing is clearly documented across the top ten holdings, which collectively represent over 38% of fund assets, led by Workiva at 6.7% and Avnet at 5.1%. However, the letter provides attribution in the aggregate rather than detailed single-stock investment theses, reflecting a diversified portfolio structure across sectors. Conviction remains solidly supported by active sector tilting, notably an intentional overweight in energy.

Growth Outlook

45%

BearishBullish

Neutral (45%)

The macro commentary emphasizes headwinds including elevated inflation, surging interest rates, historic lows in consumer sentiment, and rising cost-of-capital concerns around AI infrastructure. Nevertheless, this cautious backdrop is balanced by constructive views on value investing, asserting that market realities will favor fundamentally sound businesses over speculative names.

Risk Appetite

55%

DefensiveAggressive

Balanced (55%)

Capital is allocated toward high-quality, profitable, and cash-generative value businesses while completely avoiding unprofitable or high-beta momentum names. Exposure to cyclical commodities is disciplined and supported by fundamental tailwinds in energy.

Capital Deployment

50%

De-riskingDeploying

Net Neutral (50%)

The letter indicates steady asset allocation with performance driven predominantly by existing stock selection rather than abrupt cash drawdown or wholesale portfolio liquidations.

Forward Guidance

50%

CautiousExpansionary

Neutral (50%)

The manager expresses confidence in current positioning and disciplined value criteria without telegraphing significant wholesale shifts or aggressive new deployment. Guidance leans toward maintaining steady exposure in established holdings as market fundamentals reassert themselves.

Language Signal

48%

BearishBullish

Balanced (48%)

The narrative balances warnings of speculative cycles, financing bottlenecks, and macroeconomic stagflationary pressures with constructive commentary on value factor outperformance and attractive holding valuations.

Perceived Risk

72%

Low RiskElevated

Elevated Risk (72%)

Specific macro risks are identified in detail, including geopolitical supply shocks in the Strait of Hormuz, 30-year yields reaching multi-decade highs, depressed consumer sentiment, and data center project disruptions.

Opportunity Density

60%

ScarceAbundant

Selective (60%)

Opportunities are described as concentrated within quality, low-valuation, and profitable small-cap franchises rather than the broad market, with speculative and capital-intensive tech sectors appearing overextended.

Time Horizon

70%

Short-TermLong-Term

Decade+ (70%)

A long-term multi-year fundamental horizon is emphasized, reminding investors that while quarterly speculative rallies occur, valuations and underlying cash flows govern compounding returns over full market cycles.