Alma Hotchkis & Wiley Global Value Equity Fund
Alma Hotchkis & Wiley Global Value Equity Fund seeks current income and long-term capital appreciation by investing in a portfolio of global companies.
Investment manager: Hotchkis & Wiley Capital Management, LLC
Hotchkis & Wiley is an SEC-regulated, Los Angeles-based investment adviser founded in 1980, specialised in value equity and high yield bond strategies.
Cumulative Performance (%)
Fund Inception 28 February 2019
The performance data shown represents past performance. Past performance is not a guarantee of future results. Current performance may be lower or higher than the performance quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
Strategy & Manager
Investment objective: seek current income and long-term capital appreciation by investing in a portfolio of global companies
- Investment process: analyse long term company fundamentals through in-house bottom-up research aiming to identify undervalued stocks
- The fund typically holds 40 to 80 securities and generally invests in companies with a market capitalization above $1 billion
- The fund invests primarily in companies located in developed countries, with at least 40% outside the U.S. Emerging markets: up to 20%
Hotchkis & Wiley is a SEC-regulated, Los Angeles-based investment adviser founded in 1980, specialised in value equity and high yield bond strategies
- Employee owned firm: 90% of the investment team and 67% of all employees own equity
- Investment team has over 23 years average investment experience and 15 years average tenure at Hotchkis & Wiley
- Hotchkis & Wiley manages $30 billion
Scott McBride, CFA Portfolio Manager and President
Mr. McBride became President of Hotchkis & Wiley in 2016. In his role as portfolio manager, Mr. McBride plays an integral part in the investment research review and decision-making process. He coordinates the day-to-day management of Large Cap Fundamental Value, Large Cap Diversified Value, Global Value and International Value portfolios, as well as represents these strategies to current and prospective clients. He also provides expertise and insight into the consumer, financials, healthcare and technology sectors. Prior to joining the firm, Mr. McBride was an associate consultant with Deloitte Consulting and worked as an investment marketing analyst with Fidelity Investments.
Patrick Meegan, CPA Portfolio Manager
In his role as portfolio manager, Patrick Meegan plays an integral role in the investment research review and decision-making process. He coordinates the day-to-day management of all High Yield bond and Capital Income portfolios. He also provides expertise and insight into the financials and healthcare sectors. Mr. Meegan began his career at H&W as an investment analyst and became portfolio manager in 2001. Prior to joining the firm, Mr. Meegan was an audit manager at Arthur Andersen and specialized in financial statement audits and advising clients on SEC reporting issues.
Mr. Meegan, a Certified Public Accountant, received his BA in Business Administration with honors from California State University, Fullerton and his MBA with honors from the Anderson School of Management at the University of California, Los Angeles.
Judd Peters, CFA Portfolio Manager
In his role as portfolio manager, Mr. Peters plays an integral part in the investment research review and decision-making process. He coordinates the day-to-day management of Large Cap Fundamental Value, Large Cap Diversified Value, Small Cap Diversified Value and Global Value portfolios, as well as represents these strategies to current and prospective clients. He also provides expertise and insight into the capital goods, energy and technology sectors. Prior to joining the firm, Mr. Peters was an analyst in the corporate finance department of an investment banking firm.
Scott Rosenthal, Portfolio Manager
In his role as portfolio manager, Mr. Rosenthal plays an integral part in the investment research review and decision-making process. He coordinates the day-to-day management of Global Value and International Value portfolios and represents these strategies to current and prospective clients. He also provides expertise and insight into the capital goods, energy and financials sectors. Prior to joining the firm, Mr. Rosenthal was a member of the investment team at FLAG Capital Management where he worked to identify and evaluate fund-of-funds investment opportunities in venture capital and private equity. He began his career as an analyst with UBS’ Health Care investment banking group. Mr. Rosenthal received his BA in Economics from Boston College and MBA with honors from Columbia Business School.
Statistics & Commentary
The performance data shown represents past performance. Past performance is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.
Sector Breakdown as a % of AUMas of 30/09/2019
Portfolio Characteristicsas of 30/09/2019
|No of Securities||56||1650|
|Weighted Average Market Cap ($ bn)||87.3||172.8|
|Median Market Cap ($ bn)||27.7||13.2|
|Projected P/E Ratio FY2||10.3x||15.1x|
|Price / Normal Earnings||7.2x||16.5x|
|Price / Book||1.1x||2.3x|
|Price / Sales||0.8x||1.7x|
|Projected EPS Growth (%)||5.9||6.1|
|Active share (%)||92.6|
Top 10 Position Detailsas of 30/09/2019
|Security name||Sector||% AUM|
|GENERAL ELECTRIC CO||Industrials||4.67|
|AMERICAN INTERNATIONAL GROUP||Industrials||4.28|
|WELLS FARGO & CO||Financials||4.18|
|GOLDMAN SACHS GROUP INC||Financials||3.60|
|MICROSOFT CORP||Information Technology||3.33|
|BAE SYSTEMS PLC||Industrials||2.97|
|ORACLE CORP||Information Technology||2.86|
|CNH INDUSTRIAL NV||Industrials||2.74|
|SOCIETE GENERALE SA||Financials||2.65|
|MAGNA INTERNATIONAL INC||Consumer Discretionary||2.61|
Investment Manager's Commentaryas of 30/09/2019
Market Review and Outlook
The MSCI World Index returned +0.5% in the third quarter of 2019, and is now up more than +17% since the beginning of the year. Global central bank policy continues to be accommodative; in the US, the Federal Reserve’s FOMC lowered the Fed Funds rate by 25 basis points for the second time this year, which now stands at 2.0% (upper bound). The rate cut was widely expected and triggered little reaction from global equity markets. The price of crude oil spiked following the drone attacks on Saudi refineries, but this was short-lived and Brent crude finished the quarter down -9%. Energy was the MSCI World Index’s worst-performing sector, declining -6% in the quarter. It has been the index’s worst-performing sector over the past year returning -16% (Brent has declined -27% over the past year), and has been the worst-performing sector in three of the past four calendar quarters. Utilities +7%, real estate +4%, and consumer staples +4% were the best-performing sectors in the quarter. These are also the top three sectors, by far, over the past year. The MSCI World Index is up +2% over the past 12 months with these three sectors are up considerably more: utilities +22%, real estate +17%, and consumer staples +12%.
Concerns about slowing economic growth have become increasingly pervasive amid trade negotiations and geopolitical uncertainty (e.g. Brexit in the UK, potential impeachment proceedings in the US). As a result, US treasuries rallied during the quarter with the yield on the 10 year note falling below 1.5% in late August—for about a week, the 2-year treasury yield exceeded the 10-year treasury yield. This is noteworthy as earlier recessions have been preceded by similar 10-year/2-year yield curve inversions. The time between inversion and recession has varied significantly, from several months to more than 2 years.
The timing of the next global economic slowdown and/or recession is unclear but it is certainly possible in the near to intermediate term. Despite this, we are overweight cyclicality in our portfolio – particularly financials and industrials – as this is where we see the greatest price vs. fair value dislocation in the market. We believe we own good businesses with strong balance sheets that will enable these companies to grow their value through the economic cycle.
To illustrate our approach given the current state of affairs, consider the thesis behind our positions in banks (the portfolio’s largest absolute and relative industry weight) and utilities (the portfolio has no exposure). The MSCI World Bank Index trades at 10.1x consensus earnings, which is 13% below its long term average of 11.7x. The MSCI World Utilities Index trades at 18.1x consensus earnings, which is 14% above its long term average of 15.8x. Returns-on-equity for the two indexes are similar1. Dividend yields are also similar but because valuations are so different, utilities have to pay out about 2/3 of their earnings in dividends while banks pay out less than half of their earnings to arrive at similar yields2. Because banks retain more of their earnings, it has allowed them to amass capital and strengthen their balance sheets, and in recent years, buyback their own stock. Given the information above, for the two indexes to generate equivalent returns going forward, one of several things would need to occur. The valuation gap would need to widen even further, utilities would need to accelerate earnings growth, or banks would need to suffer a major destruction of capital. To us these seem like unlikely scenarios because the valuation gap is already near an all-time wide, organic growth prospects for utilities are limited, and banks have accumulated near record levels of excess capital on their balance sheets to protect against a downturn. Thus, we view banks as superior risk-adjusted investments irrespective of near-term economic growth.
The portfolio continues to trade at a large discount to the market. The portfolio trades at 7.2x normal earnings compared to 16.5x for the MSCI World Index. It trades at 1.1x book value compared to 2.3x for the index. This valuation discount combined with healthy balance sheets and good underlying businesses has us confident about the portfolio’s prospects as we look forward.
Attribution: 3Q 2019
The portfolio underperformed the MSCI World Index in the third quarter of 2019. We believe the strategy’s ability to invest across the cap spectrum is a long-term advantage, but this was a headwind during the quarter as small and mid cap stocks lagged large and mega caps. Stock selection in industrials, energy, and technology also detracted from performance. Positive stock selection in financials and healthcare, along with the underweight position in materials helped relative performance. The largest individual detractors to relative performance were Whiting Petroleum, General Electric, Discovery, Embraer, and Corning; the largest positive contributors were Vodafone, BAE Systems, Wells Fargo, AIG, and Societe Generale.
Largest New Purchases: 3Q 2019
Haseko is a contractor for the condominium industry in Japan and is vertically integrated into the design, construction, sales, management and refurbishment of condominiums. The Company has a dominant market-share in its core geographies trades at a low multiple of earnings, has a net cash balance sheet and returns capital to shareholders.
Royal Dutch Shell is an integrated oil company. Shell should see higher earnings power under normal oil price estimates as they have slight production growth with capital expenditures below depletion, depreciation and amortization for the foreseeable future. Additionally, Shell should earn higher returns than anyone outside of Qatar in their growing liquid natural gas business. Furthermore, Shell’s downstream and, to a lesser extent, gas businesses are insulated from oil prices and should continue to generate reasonable returns at low crude prices. Capital allocation is good, and we believe a meaningful portion of free cash flow will be returned to shareholders via dividends and buybacks. Shell has a healthy capital structure and trades at an attractive valuation.
UnitedHealth Group (UNH) is the largest and most diversified managed care organization in an industry where scale is a significant competitive advantage. UNH has the largest and fastest growing share in Medicare Advantage, the biggest opportunity in managed care. UNH is also well positioned in Medicaid, another growth opportunity. UNH is a high quality business with above average growth prospects, sticky and stable earnings, and a good balance sheet.
Facts & Documents
Fund Domicile: Luxembourg
Management Fee: 0.85% p.a. for I shares
Fund Type: UCITS SICAV
Fund Launch: 28 February 2019
Base Currency: USD
Depositary, Administrator, Transfert Agent: BNP Paribas Securities Services (LU)
Dealing: Each day with a 1-day notice
Cut-off time: 5 pm CET
Management Company: Alma Capital Investment Management
Investment Manager: Hotchkis & Wiley Capital Management, LLC (US)
Institutional USD Capitalisation share class
ISIN: LU1907586306 Ticker: ALHWGIU LX Launch: 28 Feb 2019
available upon request