Alma Hotchkis & Wiley US Large Cap Value Equity Fund
- Alma Hotchkis & Wiley US Large Cap Value Equity Fund seeks current income and long-term capital growth by investing in a concentrated portfolio of undervalued large US companies.
- Management of the fund is delegated to Hotchkis & Wiley LLC.
Cumulative Performance (%)
Fund Inception 6 August 2014
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 growth by investing in a concentrated portfolio of large US 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 60 securities and generally invests in companies with a market capitalization above $3 billion
- Investment strategy mirrors the Large Cap Fundamental Value strategy managed by the Investment manager since 1980
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
- George Davis, the CEO of Hotchkis & Wiley and senior portfolio manager of the fund, has over 30 years of investment experience. He coordinates the day-to-day management of around $27 billion of equity value assets
- Hotchkis & Wiley manages $30 billion
George Davis, Jr. CEO, Portfolio Manager and Principal
Mr. Davis became CEO in 2001. In his role as portfolio manager, Mr. Davis 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 and Large Cap Diversified Value portfolios, as well as represents the firm’s investment strategies to current and prospective clients. He also provides expertise and insight into the capital goods and financials sectors. Prior to joining the firm, Mr. Davis was an assistant to the senior partner of RCM Capital Management. He began his career in equity research with internships at Cramer, Rosenthal & McGlynn and Fidelity Management & Research.
Mr. Davis received his BA in Economics and History and MBA from Stanford University.
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.
Patty McKenna, CFA Portfolio Manager and Principal
In her role as portfolio manager, Ms. McKenna plays an integral part in the investment research review and decision-making process and represents the firm’s investment strategies to current and prospective clients. She also provides expertise and insight into the consumer and healthcare sectors. Prior to joining the firm, Ms. McKenna was an equity analyst at Trust Company of the West. Before entering the field of investment management, she has worked for five years in corporate finance at Bankers Trust and then at Fieldstone Private Capital Group. Ms. McKenna began her career as a forensic accountant in 1983.
Sheldon Lieberman Portfolio Manager and Principal
In his role as portfolio manager, Mr. Lieberman plays an integral part in the investment research review and decision-making process and represents the firm’s investment strategies to current and prospective clients. He also provides expertise and insight into the energy and technology sectors. Prior to joining the firm, Mr. Lieberman was the chief investment officer for the Los Angeles County Employees Retirement Association (“LACERA”). At LACERA, he was responsible for overseeing the fund’s investment activity, as well as developing and implementing investment policy, strategy and guidelines. Prior to his position at LACERA, he was manager of trust investments at Lockheed Corporation.
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 31/10/2019
Portfolio Characteristicsas of 31/10/2019
|No. of securities||51||766|
|Weighted Average Market Cap ($bn)||122.3||116.9|
|Median Market Cap ($bn)||34.5||9.4|
|Projected P/E Ratio FY2||11.4x||14.3x|
|Price/ Normal Earnings||8.4x||14.9x|
|Projected EPS Growth||5.9x||5.7x|
|Active share (%)||88.1||-|
Top 10 Position Detailsas of 31/10/2019
|Security name||Sector||% AUM|
|GENERAL ELECTRIC CO||Industrials||5.14|
|WELLS FARGO & CO||Financials||4.76|
|AMERICAN INTERNATIONAL GROUP||Industrials||4.26|
|MICROSOFT CORP||Information Technology||4.26|
|GOLDMAN SACHS GROUP INC||Financials||3.84|
|ORACLE CORP||Information Technology||3.36|
|GENERAL MOTORS CO||Consumer Discretionary||3.08|
|HEWLETT PACKARD ENTERPRISE||Information Technology||3.00|
|COMCAST CORP-CLASS A||Communication Services||2.54|
Investment Manager's Commentaryas of 31/10/2019
Market Review and Outlook
The S&P 500 Index returned +1.7% in the third quarter of 2019, and is now up more than +20% since the beginning of the year. 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). With inflation benign and economic growth modest, albeit positive, the rate cut was widely expected and triggered little reaction from equity markets. The price of crude oil spiked following the drone attacks on Saudi refineries, but this was short-lived and WTI crude finished the quarter down -8%. Energy was the S&P 500’s worst-performing sector, declining -6% in the quarter. It has been the index’s worst-performing sector over the past year returning -19% (WTI has declined -27% over the past year), and has been the worst-performing sector in three of the past four calendar quarters. Utilities +9%, real estate +8%, and consumer staples +6% were the best-performing sectors in the quarter. These are also the top three sectors, by far, over the past year. The S&P 500 is up 4% over the past 12 months but these three sectors are up considerably more: utilities +27%, real estate +25%, and consumer staples +17%.
Concerns about slowing economic growth and a possible recession have become increasingly pervasive amid erratic trade negotiations and geopolitical uncertainty (e.g. Brexit in the UK, potential impeachment proceedings in the US). As a result, 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 caught investors’ attention because contemporary 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 economic slowdown and/or recession is unclear but it is certainly possible in the near to intermediate term, and we acknowledge this as a legitimate risk. In periods leading into economic slowdowns, intuition would suggest that equity investors should gravitate toward stocks with less economic sensitivity. For the most part, this was a winning strategy during the early 2000s recession. During that period, richly valued internet, telecom, and media stocks cratered and many less cyclical stocks outperformed. In today’s market, however, the richly valued stocks are the non-cyclicals, which suggests that an economic slowdown is already priced in—perhaps overly priced in. As noted above, utilities, real estate, and consumer staples—non-cyclical sectors—have outperformed more cyclical areas significantly. Consequently, the valuation dispersion between certain market segments is uncommonly wide.
To illustrate our approach given the current state of affairs, consider the thesis behind our overweight position in banks and underweight position in utilities. The S&P 500 Bank Index trades at 10.9x consensus earnings, which is 9% below its long term average of 12.0x. The S&P 500 Utilities Index trades at 21.0x consensus earnings, which is 45% above its long term average of 14.5x. 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 about 1/3 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 8.4x normal earnings compared to 14.7x for the Russell 1000 Value Index and 25.7x for the Russell 1000 Growth Index. It trades at 1.4x book value compared to 2.0x and 7.6x for the value and growth indices, respectively. This valuation discount combined with healthy balance sheets and good underlying businesses has us confident about the portfolio’s prospects as we look forward.
The portfolio underperformed the Russell 1000 Value Index in the third quarter of 2019. Stock selection in industrials, technology, and communication services hurt relative performance, along with the underweight positions in REITs, staples, and utilities. Positive stock selection in healthcare and financials were the largest positive contributors in the quarter. The largest individual detractors to relative performance in the quarter were General Electric, Discovery, Corning, Marathon Oil, and Ericsson; the largest positive contributors were Vodafone, Wells Fargo, AIG, Medtronic, and State Street.
Largest New Purchases: 3Q 2019
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 well positioned in Medicaid as well, another growth opportunity. The company’s valuation is about in line with the value index, but this is a high quality business with above average growth prospects, it produces sticky and stable earnings, and it has a good balance sheet.
Facts & Documents
Fund Domicile: Luxembourg
Management Fee: 0.75% p.a. for I shares
Fund Type: UCITS SICAV
Fund Launch: 6 August 2014
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)
Fund Managers: George Davis, Scott McBride, Judd Peters, Patty Mckenna, Sheldon Lieberman, Patrick Meegan
Countries where the fund is registered:
France, Germany, Luxembourg, Switzerland, United Kingdom, Austria
Institutional USD Capitalisation share class
ISIN: LU0963547111 Ticker: ALDCPBI LX Launch: 6 Aug 2014
Retail USD Capitalisation share class
ISIN: LU0963547970 Ticker: ALDCBRU LX Launch: 21 Nov 2017
available upon request