Tracking The Hotchkis & Wiley Value Opportunities Fund - Q3 2016 Update

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Includes: CFG, COF, DISCK, ERIC, GLW, GS, HUM, HWAAX, HWACX, HWAIX, IOC, MSFT, NPEGF, SNOW, STT, WFC
by: V is for Value

Summary

For the third quarter of 2016 the fund gained 8.33% versus a gain of 3.85% for the S&P 500.

Top 10 holdings (45.8% of the fund): InterOil, Bank of America, American International Group, Discovery Communications, Danieli, Microsoft, ARRIS Group, Rush Enterprises, Ericcson, and WorleyParsons.

The fund took a large stake in InterOil, making it the largest position in the portfolio.

Since its inception on 12/31/02 the Hotchkis & Wiley Value Opportunities Fund (MUTF:HWAAX) has returned 11.55% net of fees versus 8.99% for the S&P 500. This fund has class A, C (MUTF:HWACX) and I (MUTF:HWAIX) shares.

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

After a tough fiscal 2016 the fund started off on the right foot, beating the S&P by 4.48%.

The fund noted it has noticed a dichotomy in the market between businesses that have a low correlation to economic cycles and/or are high dividend paying companies, while shunning businesses with a cyclical tilt.

That has resulted in an opportunity for the bottoms up investor and the fund is overweight cyclical businesses with conservatively capitalized balance sheets and low valuations and low leverage.

Financials, energy, and technology were the fund's largest sector weighting and financials and technology were the best performing sectors in the third quarter.

The fund believe its portfolio is well positioned as it trades at 8.2x normal earnings versus 16.8x for the S&P 500 and 1.1x book value versus 2.8x for the S&P 500.

Here's the activity for the first quarter:

New Stakes:

InterOil Corp. (NYSE:IOC) is an oil and gas explorer with assets in Papua New Guinea. The company received merger interest from Oil Search in the first half of the year at $42 a share. Then Exxon Mobil came in with a $45 offer. Right now the two companies are still determining a path to close the transaction. IOC traded between $44.50 and $51.00 during the quarter.

Citizens Financial Group (NYSE:CFG) is a bank operating out of Pennsylvania. The company was formerly a subsidiary of the Royal Bank of Scotland. The fund acquired 409k shares in an IPO in late September of 2014. Prices ranged from $21.50 to $23.50. The fund sold its position in the second quarter of 2015 as prices ranged from $24 to $28.50. The fund took a new stake in CFG in the third quarter of 2016, picking up nearly 119k shares. The stock traded between $19 and $25. CFG is now trading above $34.

Nippon Electric Glass (OTCPK:NPEGF) is a Japanese glass manufacturer. The fund has owned this stock before. It was a nearly a 3% position in the fund at the end of 2014. The fund sold all throughout 2015 and closed out the position in the fourth quarter of 2015. It was back buying in the third quarter of 2016 picking up 558k shares.

Stake Disposals:

Intrawest Resorts Holdings (NYSE:SNOW) owns ski resorts and provides associated services. Key properties include Steamboat and Stratton. The fund established its position over the second and third quarters of 2015 as the stock traded between $8.50 and $12.00. It sold out of the position this past quarter as the stock traded between $12.50 and $18.00.

State Street Corp. (NYSE:STT) provides asset management services and has $2.2 trillion assets under management. It also provides institutional financial services such as safekeeping, back office support, and foreign exchange management. During the first quarter the fund picked up just under 118k shares for a 1.32% position in the portfolio. The stock traded between $51 and $64 during the quarter. The fund exited its position in State Street over the third quarter as the stock price traded between $52 and $72.

Humana (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. The fund exited its position in the third quarter as the stock traded between $150 and $183. Humana benefited from the Trump election and now trades at $213.

Stake Increases:

Discovery Communications (NASDAQ:DISCK) is a mass media entertainment company. It started with the Discovery Channel in 1985 and now has over 50 network brands. In the fourth quarter of 2015 the fund acquired just over 435k shares in DISCA as prices traded between $25 and $31.25. This quarter is bought 178k shares of DISCK as prices traded between $23.25 and $27.00. Combined Discovery is now a 4.31% position in the portfolio.

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. During the third quarter the fund nearly double its position picking up another 145k shares as prices traded between $44 and $51.

Capital One Financial (NYSE:COF) is a bank holding company and provides financial services including consumer banking, commercial banking, and credit cards. The fund acquired 80,500 shares in the third quarter 2015 for a 1% position in the portfolio. Prices ranged from $68 to $92. The stock got hit in late July of 2015 on a bad earnings report where the company saw a sharp jump in nonperforming commercial loans. The fund added 40k shares in the third quarter as Capital One traded between $60.00 and $72.50. The stock recently traded at $86.

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. The fund more than doubled its stake in the third quarter buying over 1.1 million shares. Prices traded between $6.75 and $7.75. ERIC now trades around $5.15 and sports a nearly 9% dividend.

Motors Liquidation Co. GUC Trust (MTLQU), Office Depot (ODP), and EnPro Industries (NPO) saw position increases of more than a third during the quarter.

Stake Decreases:

Corning (NYSE:GLW) manufactures and sells specialty glass, ceramic, and related materials worldwide. This is a long-term holding of the fund. It owned 760k shares as of the end of the second quarter 2014 for a 3.46% stake in the portfolio. It trimmed about 80k shares during the third quarter of 2014 between prices of $19.50 and $22.50. In the first quarter of 2015 the fund sold another 436k shares, or 64% of its remaining stake. Prices ranged from $22 to $25. The fund significantly boosted the position in the second quarter of 2015, adding 900k shares. Prices traded between $19.50 and $23. In the third quarter of 2015 the fund added another 1.4 million shares. Prices ranged from $15.50 to $19.50. During the third quarter of 2016 the fund sold nearly 773k shares, or 59% of its position in Corning. The stock traded between $19.75 and $23.75.

Microsoft (NASDAQ:MSFT) is a business and consumer software and services company. The company is a long-term holding of the fund but there's been a lot of buying and selling within the position. At the end of the third quarter 2014 the fund held just over 313k shares and MSFT was a top ten position. In the fourth quarter of 2014 it sold over 80% of the position at prices between $42 and $50. In the first quarter of 2015 the fund bought back the shares and then some as prices ranged from $40 to $48. In the third quarter of 2016 it sold 37% of its position, just over 173k shares. Microsoft traded between $50.50 and $58.50.

KSB AG (KSBBF) and Hewlett-Packard Enterprise (HPE) had their positions cut 42% and 68% respectively. These are less than 1.5% positions in the portfolio.

WorleyParsons Ltd. (WYGPY), Cairn Energy (CRNCY), Citigroup (C), American International Group (AIG), Zurich Insurance Group (ZURVY), Goldman Sachs (NYSE:GS), Anthem (ANTM), Sanofi (SNY), Rush Enterprises (RUSH.A) and ARRIS Group (ARRS) saw position decreases of less than a third during the quarter.

Kept Steady:

Discovery Communications (DISCA), JG Boswell (BWEL), Vantage Drilling Intl. (VTGDF), Ophir Energy (OPGYF), Rockhopper Exploration (RCKHF), Bank of America (BAC), JPMorgan Chase (JPM), Global Indemnity Public (GBLI), Hanger Inc. (HGR), Royal Mail (ROYMY), Danieli & C. Meccaniche (DNIYY), Hudson Global (HSON), and Oracle (ORCL) saw no changes in their positions during the quarter.

Here's a snapshot of the fund activity for the quarter:

HWAAX Q3 2016

Disclosure: I am/we are long MSFT.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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