Tracking The Hotchkis & Wiley Value Opportunities Fund - Q2 2016 Update

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Includes: AIG, ARRS, CMI, DOOR, ERIC, GSK, GXP, HUM, HWAAX, HWACX, HWAIX, MRO, NPO, ODP, ROYMY, RSNAY, TPH, VSLR, WFC, ZURVY
by: V is for Value

Summary

For the second quarter of 2016 the fund lost 1.93% versus a gain of 1.35% for the S&P 500.

Top 10 holdings (43.5% of the fund): Bank of America, Corning, Microsoft, American International Group, Goldman Sachs, Danieli, Rush Enterprises, Oracle, WorleyParsons and Zurich Insurance.

During the second quarter the fund was buying Wells Fargo, Zurich Insurance and Ericsson. It also sold out of 8 positions.

Since its inception on 12/31/02 the Hotchkis & Wiley Value Opportunities Fund (MUTF:HWAAX) has returned 12.67% net of fees versus 8.70% for the S&P 500. This fund has class A, C (MUTF:HWACX) and I (MUTF:HWAIX) shares.

For the year the fund is lost 10.48% net of fees versus a 3.99% gain in the S&P 500. The fund's fiscal year ends June 30.

For more background on the fund please see my earlier article.

In its second quarter commentary the fund noted that the most attractive individual opportunities reside within financials and energy. It believes when the current cycle inevitably normalizes, its portfolio is well-positioned to benefit.

Here's the fund's comment on the financial sector:

"Interest rates declined during the quarter, largely influenced by investors' flight to US Treasuries in the aftermath of Brexit. The low rate environment has been a stubbornly persistent macroeconomic headwind for most financials, with banks disproportionately affected because their net interest margins are pressured. From a bottom-up fundamental perspective, however, the strengthening posture of US banks has been quite encouraging. Profitability has been solid and capital ratios are at/near all-time highs. All companies subjected to the Fed's stress test have passed, which improves the potential for increased returns of capital to shareholders. Buying back shares at/below book value can be highly accretive and this group's payout yield (dividends + share repurchases) currently stands at 8%1. Financials represent the portfolio's largest sector-we are overweight banks and insurance but underweight REITs."

Compelling argument. And from what I've read the financials are second only to energy as the most under-owned sector.

Here's the activity for the first quarter:

New Stakes:

Wells Fargo (NYSE:WFC) is the second largest bank in the U.S. with over $1 trillion in assets. During the second quarter of 2016 the fund picked up just over 152k shares for 1.58% position in the portfolio. Prices ranged from $44.50 to $51.

Zurich Insurance Group (OTCQX:ZURVY) is headquartered in Zurich, Switzerland and provides a variety of insurance products around the world. During the second quarter the fund picked up just over 58k shares for 3.15% position in the portfolio. Prices ranged from $20.50 to $25.

Ericsson (NASDAQ:ERIC) provides networking products and services. During the second quarter the fund picked up just over 1 million shares for 1.79% position in the portfolio. Prices ranged from $7 to $10.25.

Stake Disposals:

TRI Pointe Homes (NYSE:TPH) is an US homebuilder. It was acquired by Weyerhaeuser Real Estate in a reverse merger in July. It owns land inventory of 31,000 lots, including 19,000 lots in entitlement-constrained California. The fund acquired 92k shares, for a small 0.23% position, in the third quarter of 2014. Prices ranged from $13.50 to $17.00. The fund added another 111k shares in the fourth quarter of 2014 when prices ranged from $12.75 to $15.25. The fund continued acquiring in the first quarter of 2015 buying another 660k shares. Prices ranged from $13.50 to $16.50. The fund continued adding in the second quarter of 2015, boosting the position by 33% when prices ranged from $13.95 to $16.10. The fund reduced its position by 70% in the fourth quarter of 2015 selling 630k shares. Prices ranged from $12.50 to $14.50. It finished the job last quarter. TRI Pointe's stock traded between $10.50 and $12.75.

Marathon Oil (NYSE:MRO) is an oil exploration and production company. It also produces oil from oil sands. During the first quarter of 2016 the fund bought just over 311k shares for a smallish 0.66% position. MRO traded between $6.50 and $12.50. This was a quick trade for the fund. It exited in the second quarter as prices traded between $10.50 and $16.

RSA Insurance Group (OTCPK:RSNAY) is a commercial insurer out of the UK. The fund sold a lot of its Direct Line Insurance Group position and put some of the proceeds into RSA. The fund acquired over 1.9 million shares in the third quarter of 2014 for a 2.87% position. Prices ranged from $7.24 to $8.32. In the fourth quarter of 2014 the fund added another 518k shares, as prices ranged from $6.25 to $7.75. In the first quarter of 2015 the fund boosted its position by 28%, buying another 692k shares. Prices ranged between $6.25 and $7.25. In the first quarter of 2016 the fund sold nearly 1.9 million shares, or just over 87% of its position, as prices traded between $5.50 and $7. It finished the job in the second quarter as the stock traded between $5.85 and $7.30.

GlaskoSmithKline (NYSE:GSK) is a drug manufacturing and health care product conglomerate out of the UK. The company currently sports a hefty 5.3% dividend. The fund acquired 204k shares in the third quarter of 2014 for a 1.78% position. Prices ranged from $45.97 to $54.52. The fund sold 40% of its position in the third quarter of 2015 when the stock traded between $37.25 and $45.50. It sold its remaining shares last quarter as prices ranged from $39.50 to $43.50.

Masonite International (NYSE:DOOR) is one of the world's leading door manufacturers. The fund picked up 23k shares in the last quarter of 2015 for a small 0.23% position. Prices ranged from $59 to $67. The fund exited the position last quarter as prices traded between $62 and $72.

Cummins Inc. (NYSE:CMI) designs, manufactures, and distributes engines, filtration and power generation products. The fund acquired just over 64k shares in the fourth quarter of 2015 as prices traded between $85 and $115. It's made a 1.01% position in the portfolio. The fund sold 40% of its position in the first quarter and sold the rest in the second. Prices traded between $80 and $110 in the first quarter and $105 and $120 in the second.

Great Plains Energy (NYSE:GXP) is an electric utility in the U.S. serving over 800k customers in Kansas and Missouri. The fund picked up 250k shares over the second and third quarters 2014. Prices ranged from $24 to $27.50. During the first quarter of 2015 the fund sold 56% of its position as prices traded between $25.50 and $30. The fund reversed course in the second quarter of 2015, boosting the position by over 600% as prices traded between $24 and $27.50. The fund kept adding in the third quarter, boosting the position to just over a million shares. Prices ranged from $24 to $27.50. The fund has been selling off the position since then, selling roughly a quarter of the position in Q4 2015 and Q1 2016. It sold its remaining shares in the second quarter. During this time the stock traded between $25.50 and $32.

Vivint Solar (NYSE:VSLR) was a very small position, 0.08%, the fund cut in the second quarter.

Stake Increases:

Office Depot (NYSE:ODP) is an office products and supplies company with worldwide operations. Staples agreed to purchase the company in February for $6.3 billion which valued Office Depot at $11 per share. In the second half of 2015 both companies agreed with the Federal Trade Commission to extend the review period of the acquisition and a decision was supposed to be made by December 8th. The fund acquired 1.25 million shares during the third quarter of 2015 for a 1.35% stake in the portfolio. Prices ranged from $6.25 to $9.00. In the first quarter of 2016 the fund doubled its position, picking up another 1.4 million shares as prices traded between $4.75 and $7.50. The fund bought another 1.2 million shares in the second quarter. In May a Federal judge blocked its potential merger with Staples. The stock was trading around $7.50 prior to the announcement. Post announcement it has traded in the $3.25 to $3.75 range.

Humana Inc. (NYSE:HUM) is a large managed-care provider with nearly 75% of membership related to government programs. During the first quarter of 2016 the fund picked up over 14k shares for a small 0.51% position. Humana traded between $155 and $187. The fund boosted its position over 100% in the second quarter. The stock was more volatile in the second quarter, trading between $150 and $192. With a recent price near $177 this one is in play if you want to emulate the fund.

EnPro Industries (NYSE:NPO) designs, develops, manufactures, markets engineered industrial products worldwide. It operates three segments: sealing products, engineered products, and power systems. The stock fell nearly by half from May to October 2015, falling from $68 to a low of $38. The fund bought 91,000 shares in the third quarter of 2015 for a small 0.59% stake in the portfolio. Prices ranged from $38 to $58. It then sold 37% in the fourth quarter as prices rebounded to $52. The fund was back buying in the second quarter boosting its position by 25%. Prices traded between $43 and $60.

ARRIS Group (NASDAQ:ARRS) is a communication equipment company. It operates two segments, customer premises equipment and network and cloud. In Q2 2015 fund picked up just over 112k shares as prices ranged from $24.50 to $32 during the quarter. The fund turned around and sold the position in Q4 2015 as prices traded between $26.50 and $33. They were buying again in the first quarter of 2016 picking up just under 400k share for a 1.74% position in the portfolio. The stock traded between $21 and $31. It increased the position by 55% last quarter as the stock traded between $20 and $25.

Hewlett-Packard Enterprises (HPE) saw position increases of more than 20% during the second quarter.

Motors Liquidation Co. GUC Trust (MTLQU) and Discovery Communications (DISCA) saw position increases of less than 20% during the second quarter.

Stake Decreases:

Royal Mail (OTCPK:ROYMY) is provides postal services to the UK and other part of Europe. The fund built up a 3 million share position by Q2 2015, mostly at prices under $13. It sold roughly 43% during the second quarter as prices ranged from $12.50 to $16.25.

American International Group (NYSE:AIG) is a property and casualty insurer. The fund started buying AIG in the first quarter of 2012, acquiring 133k shares. By the end of 2012 the fund had 420k shares and it was the largest position on the portfolio. Prices fluctuated between $23 and $37 during 2012. The fund continued to accumulate over 2013 and 2014 and owned 788k shares as of the second quarter of 2014. In the third quarter of 2014 the fund bought another 388k shares when prices ranged from $52 to $56, making it the biggest position on the portfolio at 11.72%. During the second quarter of 2015 the fund sold nearly 44% of its position as prices ranged from $54 to $63.50. In the second quarter of 2016 the fund cut its position by another 28%. Prices ranged from $48.50 to $58.50.

Cairn Energy (CRNCY), JPMorgan Chase (JPM) Microsoft (MSFT) and Oracle (ORCL) saw position decreases of more than 20% during the second quarter.

WorleyParsons Ltd. (WYGPY), Bank of America (BAC), Citigroup (C), Danieli & C. Meccaniche (DNIYY), Rush Enterprises (RUSH.A), and Corning (GLW) saw position decreases of less than 20% during the second quarter.

Kept Steady:

Intrawest Resorts Holdings (SNOW), JG Boswell (BWEL), Vantage Drilling Intl. (VTGDF), Ophir Energy (OPGYF), Rockhopper Exploration (RCKHF), Goldman Sachs (GS), State Street Corp. (STT), Capital One Financial (COF), Global Indemnity Public (GBLI), Anthem (ANTM), Hanger Inc. (HGR), Sanofi (SNY), KSB AG (KSBBF), Hudson Global (HSON) and Real Industry (RELY) saw no changes in their positions during the second quarter.

Here's a snapshot of the fund activity:

HWAAX Q2 2016

Disclosure: I am/we are long GSK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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