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 $25 billion
Scott McBride, CFA Portfolio Manager and President
Scott McBride is President of Hotchkis & Wiley and serves as a portfolio manager on the Large Cap Fundamental Value, Large Cap Diversified Value and Global Value portfolios. He covers technology companies and is a member of the consumer, technology, healthcare and financial sector teams. Prior to joining the firm in 2002, Mr. McBride was an associate consultant with Deloitte Consulting and worked as an investment marketing analyst with Fidelity Investments. Mr. McBride, a CFA charterholder, received his BA in Economics from Georgetown University and MBA from Columbia University
Patrick Meegan, CPA Portfolio Manager
Patrick Meegan serves as a portfolio manager on the High Yield portfolios. He is a member of the financials and healthcare sector teams. 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 from California State University, Fullerton and his MBA from the Anderson School of Management at the University of California, Los Angeles.
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 AUM
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Top 10 Position Details
Investment Manager's Commentaryas of 29/05/2020
Market Review and Outlook
The MSCI World Index returned +7.9% in the third quarter of 2020 and is now in positive territory year-to-date (+1.7%). More than 60% of MSCI World companies beat consensus revenue expectations and nearly 75% exceeded earnings expectations. A strong corporate showing trumped continued worries about the prevalence of COVID-19. Meanwhile, the largest central banks continue to signal easy monetary policy for the foreseeable future, maintaining a subdued economic outlook. COVID-19 cases reaccelerated for the first time in months, but hospitalizations and deaths remained downward trending—there was a large jump in tests administered which could explain the mixed developments.
Growth outperformed value across geographies and across market capitalizations. Based on information from the Kenneth French/Dartmouth data library, value has underperformed growth over the last 10 years by the largest magnitude on record. Also, for the first time in the nearly 100-year old dataset, growth has outperformed value over a 20-year period. This has led to a colossal divergence in valuations. Apple, for example, is a very good business, with a great balance sheet, an iconic brand, and a loyal customer base. For half the price of Apple, however, you could buy all 18 banks in the S&P 500. The bank group (again, at half the price) generated more than twice the revenue and twice the earnings of Apple. For the price of Tesla, you could buy the next four largest global auto manufacturers (Toyota, Daimler, Honda, GM) and have money left over. Tesla generated revenue last year of $25 billion and the other four autos generated revenue of $743 billion; Tesla’s earnings were negative while the other four autos generated $38 billion in earnings. $38 billion in earnings compared to $25 billion in revenue seems like a better option at the same price, let alone a discount (all numbers were quoted in US Dollars).
Perhaps more important to our client base than the value-growth dichotomy is the equally noteworthy divergence within value, both in terms of trailing performance and future opportunity. The strongest performers within global value have been concentrated in market segments with low correlations to economic growth, like healthcare and consumer staples. The weakest performers within value have been concentrated in market segments where near-term forward earnings estimates have declined meaningfully, in some cases by 30% or more. Financials, energy, and cyclical industrials comprise a disproportionate share of these examples. The positions we have in these areas have underperformed, though we view the forthcoming earnings declines as temporary. A year or two of depressed earnings reduces our intrinsic value estimate, but this impairment of value is certainly not commensurate with actual share price declines. We are unwilling to take meaningful balance sheet risk because a weak balance sheet can significantly impair capital via shareholder dilution or worse. This steadfast risk aversion allows us to tolerate temporary earnings volatility and take advantage when market values decline more than intrinsic values. We remain selective, however, and recognize that certain market segments and/or individual companies may not recover—we look to avoid businesses with uncertain long-term outlooks or insurmountable secular pressures.
Financials represent the portfolio’s largest absolute weight, largest relative weight, and largest detractor to relative performance. Banks represent the portfolio’s largest exposure within financials. Earnings estimates have declined due to the combination of increased loan loss provisions, a ban on share repurchases, slower asset growth, and lower interest rates. Accounting rules typically require banks to estimate loan losses upfront based on prevailing economic conditions. The substantial provisions taken during the first half of 2020 could end up being too high considering the severity of the economic outlook at the time. Banks’ balance sheets were quite healthy entering 2020, as substantial capital had been built in the previous decade. The provisions already taken combined with the excess capital—not to mention the pre-provision income being generated—provides a meaningful cushion to absorb elevated credit losses. Further, banks’ business models are less interest rate sensitive than generally believed. The large money center banks have diverse revenue streams, some of which have little/no interest rate sensitivity. For less-diversified banks, the net interest margin is more closely tied to the yield spread earned on loans than it is from the rate sensitive benefit they get from funding a portion of their earning assets with non-interest bearing liabilities. The banks’ benefit of free funding dissipates as rates decline, but the yield spread on loans exhibits countercyclical traits (i.e. the yield spread often widens when rates decline as banks tighten lending standards). This has resulted in relatively stable net interest margins over the past decade despite persistently falling interest rates over that period.
The dichotomy between growth and value is significant and pervasive, but so too are the opportunities within global value. The portfolio’s valuation discount to the benchmark is near record levels, reflecting our view that select opportunities are exceptionally attractive. The recent environment has not been conducive to our approach, but we are confident that patient investors will be rewarded by the rarely observed risk-adjusted potential of the current portfolio.
Attribution: 3Q 2020
The portfolio underperformed the MSCI World Index in the third quarter of 2020. The portfolio’s value-focused approach hurt relative performance as the most deeply discounted stocks underperformed. For example, index stocks trading at a discount to book value lagged the overall index by about 12 percentage points in the quarter; the portfolio had about 40% of the portfolio invested in such stocks compared to just 10% for the MSCI World Index. The overweight position and stock selection in both financials and energy, along with stock selection in consumer discretionary detracted from performance. The overweight position in industrials along with stock selection in real estate helped relative performance. The largest detractors to relative performance in the quarter were AIG, General Electric, National Oilwell Varco, Vodafone, and Citigroup; the largest positive contributors were Royal Mail, News Corp, Corning, TE Connectivity, and Navistar International.
Largest New Purchases: 3Q 2020
Compass (CPG LN) is the world’s largest contract catering company. There is ample growth opportunity given over 50% of the £200B market is highly fragmented, either managed in-house or by small local operators. The business is generally very stable with mostly recurring revenue, a diverse customer mix, and multi-year contracts with 95%+ client retention rates. The COVID-19 mandatory business closures, coupled with the concern of increased work-from-home arrangements, has led to a large share price decline. Although the visibility of the recovery is low, CPG should be able to weather the uncertainty given its strong balance sheet and robust liquidity position. We believe the stock is trading at an attractive valuation given the quality of the business and post-COVID growth opportunities.
Pebblebrook Hotels (PEB) was created in 2009 to acquire distressed hotels at significant discounts to replacement cost. The company’s strategy has been to acquire underperforming hotels in well located markets and invest to reposition the assets. Today, PEB has an impressive portfolio of high-quality properties that we expect to perform well in a post-COVID operating environment. PEB stock has lagged the market recovery year-to-date, has an extremely attractive valuation, and has an excellent management team with a strong capital allocation history.
Facts & Documents
Fund Domicile: Luxembourg
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