Mid caps are an attractive but often overlooked way to participate in the equity market. Portfolio Manager Stan Majcher shares his insight on the mid cap market, the management of the Fund, and illustrates why mid caps make sense for the long-term investor.
Q1: It is often reported that Wall Street research on mid cap companies is limited. What implications does this have for managers in this space?
For mid cap managers, less Wall Street research translates into more opportunities to uncover value. Our 26 investment professionals use rigorous, bottom-up fundamental research to identify companies that have the potential to add value to the portfolio over time. We believe our teamdriven, proprietary research gives us a considerable edge, particularly in underfollowed market segments such as mid cap.
Q2: Even though mid cap stocks have outperformed large cap stocks over time1 , investors often under allocate to this space. Why do you believe mid caps are often overlooked?
I've heard several justifications for the under allocation to mid cap equities. The most common is that investors believe they are getting adequate mid cap exposure through their large cap managers "dipping down" into mid cap and/or their small cap managers "reaching up" into mid cap. To an extent, this rationale makes sense.
We believe, however, that a dedicated allocation to mid cap is in the investor's best interest. Large cap stocks offer considerable liquidity for investors but are typically covered by hoards of Wall Street analysts, thereby eroding the potential for informational advantages. While these advantages are prevalent in the small cap market, obtaining sufficient liquidity can be challenging. We believe mid caps present an appealing mix of the two: uncovered valuation opportunities and ample liquidity.
Q3: The Hotchkis & Wiley Mid-Cap Value Fund is ranked in the top decile in the Morningstar Mid-Cap Value Category, based on total return, for the 1, 3, 5, 10, and 15 year periods ended June 30, 2013 out of 423, 369, 312, 176, and 64 funds, respectively. As a bottom-up value investor, what key metrics drive your stock selection to yield such outstanding results?
Normal earnings. More specifically, price relative to normal earnings is the key metric that drives our strategy. Rather than focusing on the most favorable environment, least favorable environment, or current environment, we focus on the long run "normal" environment. The competitive environment, the business cycle, and the economy ebb and flow but each tends to revert to normal over time. With this reversion in mind, we estimate the earnings-per-share that a company should earn in a normal environment and compare this to its share price.
We believe our results corroborate the effectiveness of this focus. Another benefit of this approach is that it can be applied across sectors, industries, geographies, and market capitalizations—this enables us to compare opportunities across these groupings. A strategy that focused on price-to-book in one sector and enterprise value-to-EBITDA in another sector, for example, may be disadvantaged because cross sector comparisons become problematic.
Q4: What do you view as Hotchkis & Wiley's key advantages?
Three things. First, we are an independent firm managed by employees, which means we are empowered to make decisions that are in our investors' best interests. Most important is the decision to limit assets under management to protect the integrity of the strategy. Second, we strictly adhere to a time-tested, value-oriented process that can lead to outperformance over time. Finally, our 20-person investment team averages 18 years of experience and 11 years with the firm. This team has been remarkably stable and is supported by a 6-person research associate program.
The Fund's total annual operating expense ratio as of the most current prospectus is 1.10% for I Shares, 1.35% for A Shares, 2.10% for C Shares and 1.60% for R shares. Expense ratios shown are gross of any fee waivers or expense reimbursements.
You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest. This and other important information is contained in the Fund's summary prospectus and prospectus, which can be obtained by calling 1-800-796-5606 or visiting our website at www.hwcm.com. Read carefully before you invest.
Returns shown for A and C Shares for the periods prior to their inception are derived from the historical performance of I Shares of the Fund during such periods and have been adjusted to reflect the higher total annual operating expenses of each specific Share class (Inception date: I Shares-1/2/97, A and C Shares-1/2/01). Returns shown for A Shares and C Shares without sales charge do not reflect the maximum sales load of 5.25% or the Contingent Deferred Sales Charge (CDSC) of 1.00% for the first year; if reflected, performance would be lower than shown. Returns for A and C shares reflect the deduction of the current maximum initial sales charges of 5.25% and 1.00% CDSC. C Shares convert automatically to A Shares approximately eight years after purchase. A Shares are subject to lower annual expenses than C Shares. Class I shares sold to a limited group of investors. Periods over one year are average annual total return. Average annual total returns include reinvestment of dividends and capital gains. Expense limitations may have increased the Fund's total return.
Mutual fund investing involves risk. Principal loss is possible. Investing in medium-sized companies involves greater risks than those associated with investing in large company stocks, such as business risk, significant stock price fluctuations and illiquidity. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. Based on Russell indices from 1/86 - 6/13 (inception date of Russell Midcap Value Index).
The Russell Midcap® Value Index measures the performance of those Russell Midcap® companies with lower price-to-book value ratios and lower forecasted growth values. One cannot invest directly in an index. Price/Book is the price of a stock divided by its book value. Price relative to normal earnings is the current market price per share divided by normalized earnings per share. Enterprise valueto-EBITDA measures the price an investor pays for the benefit of the company's cash flow (earnings before interest, tax, depreciation, and amortization). Opinions expressed are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.
Rankings are based on fund total returns with dividends and distributions reinvested and do not reflect sales charges. Morningstar ranks funds from 1 (being the highest percentile rank) to 100 (the lowest percentile rank). A top-performing fund will receive a rank of 1 in its category. Morningstar rankings are based on I shares only. Rankings for other classes of shares may differ. ©2013 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar (2) may not be copied or distributed and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
A Lipper Fund Award is awarded to one fund in each Lipper classification for achieving the strongest trend of consistent risk-adjusted performance against its classification peers over a three, five or ten-year period. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities. Lipper Analytical Services, Inc. is an independent mutual fund research and rating service. The award is specific to Class I shares and does not apply to other share classes of the Fund.
NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The Hotchkis & Wiley Funds are distributed by Quasar Distributors, LLC
Q1: It is often reported that Wall Street research on mid cap companies is limited. What implications does this have for managers in this space?
For mid cap managers, less Wall Street research translates into more opportunities to uncover value. Our 26 investment professionals use rigorous, bottom-up fundamental research to identify companies that have the potential to add value to the portfolio over time. We believe our teamdriven, proprietary research gives us a considerable edge, particularly in underfollowed market segments such as mid cap.
Q2: Even though mid cap stocks have outperformed large cap stocks over time1 , investors often under allocate to this space. Why do you believe mid caps are often overlooked?
I've heard several justifications for the under allocation to mid cap equities. The most common is that investors believe they are getting adequate mid cap exposure through their large cap managers "dipping down" into mid cap and/or their small cap managers "reaching up" into mid cap. To an extent, this rationale makes sense.
We believe, however, that a dedicated allocation to mid cap is in the investor's best interest. Large cap stocks offer considerable liquidity for investors but are typically covered by hoards of Wall Street analysts, thereby eroding the potential for informational advantages. While these advantages are prevalent in the small cap market, obtaining sufficient liquidity can be challenging. We believe mid caps present an appealing mix of the two: uncovered valuation opportunities and ample liquidity.
Q3: The Hotchkis & Wiley Mid-Cap Value Fund is ranked in the top decile in the Morningstar Mid-Cap Value Category, based on total return, for the 1, 3, 5, 10, and 15 year periods ended June 30, 2013 out of 423, 369, 312, 176, and 64 funds, respectively. As a bottom-up value investor, what key metrics drive your stock selection to yield such outstanding results?
Normal earnings. More specifically, price relative to normal earnings is the key metric that drives our strategy. Rather than focusing on the most favorable environment, least favorable environment, or current environment, we focus on the long run "normal" environment. The competitive environment, the business cycle, and the economy ebb and flow but each tends to revert to normal over time. With this reversion in mind, we estimate the earnings-per-share that a company should earn in a normal environment and compare this to its share price.
We believe our results corroborate the effectiveness of this focus. Another benefit of this approach is that it can be applied across sectors, industries, geographies, and market capitalizations—this enables us to compare opportunities across these groupings. A strategy that focused on price-to-book in one sector and enterprise value-to-EBITDA in another sector, for example, may be disadvantaged because cross sector comparisons become problematic.
Q4: What do you view as Hotchkis & Wiley's key advantages?
Three things. First, we are an independent firm managed by employees, which means we are empowered to make decisions that are in our investors' best interests. Most important is the decision to limit assets under management to protect the integrity of the strategy. Second, we strictly adhere to a time-tested, value-oriented process that can lead to outperformance over time. Finally, our 20-person investment team averages 18 years of experience and 11 years with the firm. This team has been remarkably stable and is supported by a 6-person research associate program.
The Fund's total annual operating expense ratio as of the most current prospectus is 1.10% for I Shares, 1.35% for A Shares, 2.10% for C Shares and 1.60% for R shares. Expense ratios shown are gross of any fee waivers or expense reimbursements.
You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest. This and other important information is contained in the Fund's summary prospectus and prospectus, which can be obtained by calling 1-800-796-5606 or visiting our website at www.hwcm.com. Read carefully before you invest.
Returns shown for A and C Shares for the periods prior to their inception are derived from the historical performance of I Shares of the Fund during such periods and have been adjusted to reflect the higher total annual operating expenses of each specific Share class (Inception date: I Shares-1/2/97, A and C Shares-1/2/01). Returns shown for A Shares and C Shares without sales charge do not reflect the maximum sales load of 5.25% or the Contingent Deferred Sales Charge (CDSC) of 1.00% for the first year; if reflected, performance would be lower than shown. Returns for A and C shares reflect the deduction of the current maximum initial sales charges of 5.25% and 1.00% CDSC. C Shares convert automatically to A Shares approximately eight years after purchase. A Shares are subject to lower annual expenses than C Shares. Class I shares sold to a limited group of investors. Periods over one year are average annual total return. Average annual total returns include reinvestment of dividends and capital gains. Expense limitations may have increased the Fund's total return.
Mutual fund investing involves risk. Principal loss is possible. Investing in medium-sized companies involves greater risks than those associated with investing in large company stocks, such as business risk, significant stock price fluctuations and illiquidity. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. Based on Russell indices from 1/86 - 6/13 (inception date of Russell Midcap Value Index).
The Russell Midcap® Value Index measures the performance of those Russell Midcap® companies with lower price-to-book value ratios and lower forecasted growth values. One cannot invest directly in an index. Price/Book is the price of a stock divided by its book value. Price relative to normal earnings is the current market price per share divided by normalized earnings per share. Enterprise valueto-EBITDA measures the price an investor pays for the benefit of the company's cash flow (earnings before interest, tax, depreciation, and amortization). Opinions expressed are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.
Rankings are based on fund total returns with dividends and distributions reinvested and do not reflect sales charges. Morningstar ranks funds from 1 (being the highest percentile rank) to 100 (the lowest percentile rank). A top-performing fund will receive a rank of 1 in its category. Morningstar rankings are based on I shares only. Rankings for other classes of shares may differ. ©2013 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar (2) may not be copied or distributed and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
A Lipper Fund Award is awarded to one fund in each Lipper classification for achieving the strongest trend of consistent risk-adjusted performance against its classification peers over a three, five or ten-year period. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities. Lipper Analytical Services, Inc. is an independent mutual fund research and rating service. The award is specific to Class I shares and does not apply to other share classes of the Fund.
NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The Hotchkis & Wiley Funds are distributed by Quasar Distributors, LLC
