Excerpt from Hotchkiss and Wiley's Annual Shareholder's letter

The boldface has been added by me.



D E A R S H A R E H O L D E R :

The following investment review and semi-annual report relates to
the activities of the Hotchkis and Wiley Funds for the six months
ended December 31, 2007.

O V E R V I E W

Turmoil in the US mortgage and credit markets continued to create a
volatile environment for US equities during the last six months of 2007.
Several banks and capital market firms took write-downs tied to
mortgage-backed securities and loans to fund leveraged buyout
transactions that were delayed or canceled. Changes in top management
personnel often ensued. Indeed, some financial institutions
posted the first quarterly losses ever endured in their long histories,
and raised capital from outside (usually foreign) sources. With the
lending climate nearly frozen, the housing sector worsened still further.
Worries about a 2008 recession became prominent in investors’
minds. Financial and consumer stocks took the brunt of this, falling
sharply. Meanwhile, hope remained that global economic growth,
combined with a very weak US dollar, would pull forward industries
and companies with such exposure. Gold hit a 27-year high, and
crude oil prices set an all-time record. Stocks in the energy, commodity
and global industrial areas finished up a remarkable year.

In our opinion, many consumer and financial stocks are now grossly
undervalued while many commodity-based companies have poor
valuation support. As price momentum carries the performance of
these sectors further apart, distortions in valuation measures may
grow. History indicates that this type of emotional/irrational environment
invariably reverts to a market supported by fundamental valuation.
We believe it is this shift in the market that should ultimately
provide the patient investor with sizable return opportunities.
Recognizing the stress in the financial and housing markets, and the
potential impact on employment and consumer welfare, both fiscal
and monetary authorities acted to reverse negative trends. The White
House and Congress began discussions on aiding homeowners with
mortgages due to reset or become delinquent. The Federal Reserve
injected liquidity into the financial markets several times, and cut
federal funds rates further, from 4.75% to 4.25%. The fixed income
yield curve has now steepened meaningfully. The profitability of
lending has thus improved for strong credits. This is a very positive
development for well capitalized banks. However, the stock market
appears focused solely on the problem areas of loan delinquency, the
write-downs booked and the potential for more. We believe the stock
price downdrafts in banks have generally been far too severe, and are
comforted that over past periods bank stocks have recovered long
before the cycle of credit losses ends.

We believe that value opportunities arise as the market takes the
current state of affairs and extrapolates these trends too far into the
future. However, over longer periods of time, the laws of economics
should come into play. Expectations can be influenced by short-term
headline news and emotion, and prices can become inefficient. Over
the longer run, stock prices are driven by long-term earnings power
and risk. As a manager, it is our objective to improve the valuation of
the portfolios during periods of irrational pricing. Over the past
months we have shifted the portfolios out of areas that have benefited
from price momentum and reinvested into areas that are out of
favor. Based on these actions, we feel the Hotchkis and Wiley portfolios
currently represent exceptional value. The majority of our portfolio
holdings are reflecting valuations we have rarely seen in the past
20 years.We believe the valuation spread between the stocks we own
and others outside the portfolio are in many cases extremely wide.
For cyclical stocks with global exposure it is typical to see operating
margins at historically high levels. Thus the market seems bifurcated
with some stocks trading at higher multiples on peak earnings than
many stocks in our portfolios trade at on trough earnings.