Hotchkis & Wiley Capital Management, a global investment manager founded in 1980, plans to offer its first ETF, a recent filing with the Securities and Exchange Commission shows.
The H&W SMID Cap Diversified Value Fund will be an actively managed ETF, according to the Jan. 7 filing. The fund typically will invest at least 80% of its net assets in equity securities of small- to mid-capitalization companies that Hotchkis & Wiley deems to be undervalued, the filing said.
A spokesman for Hotchkis & Wiley declined to comment on the proposed ETF beyond what was in the filing, though he did confirm that it would be the firm’s first ETF.
“The Fund seeks to invest in companies whose future prospects are misunderstood or not fully recognized by the market,” according to the filing, which said the ETF will use a fundamental value investing approach that “seeks to exploit market inefficiencies created by irrational investor behavior.”
To uncover such investment opportunities, the fund will use “a disciplined, bottom-up investment process based on a proprietary model that is augmented with internally generated fundamental research,” the filing said. The fund is expected to hold “approximately 150 to 200 portfolio securities,” according to the filing.
As part of the investment process, the investment team will evaluate the general and industry-specific environmental, social and governance factors that Hotchkis & Wiley “believes to be the most financially material to a company's short-, medium-, and long-term enterprise value,” the filing said.
“The advisor believes this evaluation contributes to its overall analysis of a company’s value creation for shareholders and future financial performance,” the filing said.
In addition to the filing for the ETF, a separate Jan. 7 filing shows that Hotchkis & Wiley is seeking exemptive relief from the SEC. The firm is seeking an order that would allow a mutual fund to offer an ETF share class and an ETF to offer one or more mutual fund share classes, the filing shows.
“Many retirement or 401(k) plans do not offer ETFs to their plan participants because retirement plan administrators are often unable to accommodate investments with intra-day trading and so such retirement plan investors often invest in mutual funds,” the filing said.
If the relief Hotchkis & Wiley is seeking were to be granted, mutual fund shares offered by an ETF could be made available to retirement plan participants on retirement plan platforms, which could benefit the ETF class and mutual fund class shareholders of a fund, the filing said.
“All fund shareholders would benefit from the potentially significant asset growth and economies of scale that could result from the addition of an ETF class offering to the retirement plan distribution channel,” the filing said.
With its application, Hotchkis & Wiley joins a long list of firms seeking exemptive relief relating to a multiclass structure. Like others before it, Hotchkis & Wiley’s application cited an exemptive order the SEC granted to Vanguard Group in 2000. The order allowed Vanguard “to offer certain index-based open-end management investment companies with mutual fund classes and exchange-traded classes,” the filing said.
Relying on that order and subsequent ones, “Vanguard has become one of the major sponsors of index-based ETFs, representing a significant portion of all ETF assets in the United States,” the filing said.
The spokesman for Hotchkis & Wiley also declined to comment on the exemptive relief application beyond what was in the filing.
Los Angeles-based Hotchkis & Wiley offers “value equity strategies across the capitalization spectrum as well as expertise in high-yield credit,” according to its website.
The firm, which serves institutional and individual investors, had about $33 billion in assets under management as of Sept. 30, the spokesman said.