<PAGE> 1
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
Dear Shareholder:
The Equity Fund for Insurance Companies returned 13.7% for the six months ended
December 31, 1995. The U.S. equity market ascended to new highs, as one of the
great years for financial assets came to a close. Solid growth, high capacity
utilization, relatively low inflation combined with a government verbally
committed to spending restraint resulted in the second best bond market in
history. Good growth in corporate earnings in this lower interest rate
environment was a powerful stimulus for equity valuations. The Fund's
performance has come from positive returns in all sectors, with financials the
standout winners, followed by utilities, healthcare and capital spending. We
maintained our maximum allocation in financials for most of the six month
period, and the Fund benefited significantly from this overweighting because of
the out-performance within the sector. Our current positioning represents an
effort on our part to concentrate assets in issues and industries where we
believe there is sustainable free cash-flow, reasonable valuation, and the
prospect of continued dividend growth in 1996.
The Fund's investment characteristics at December 31, 1995 provide a lower risk
profile than the general market as measured by the S&P 500 Index. The Fund's
dividend yield is 3.5% versus 2.3% for the market and the projected
price/earnings ratio is 11.4x versus 15.8x. Looking ahead, we believe high
dividend-yielding, low P/E stocks of companies with strong balance sheets will
provide superior return for the lower risk. We will continue to manage the
portfolio by adherence to our investment disciplines which emphasize these lower
risk characteristics.
<TABLE>
<S> <C>
George Wiley Gail Bardin
Managing Director, Hotchkis and Wiley Managing Director, Hotchkis and Wiley
Portfolio Manager Portfolio Manager
</TABLE>
<PAGE> 2
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED)
December 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS--92.5% SHARES VALUE*
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
AEROSPACE--1.8%
Lockheed Martin Corporation...................................... 1,800 $ 142,200
Rockwell International Corporation............................... 5,100 269,663
-----------
411,863
-----------
AUTO PARTS--0.7%
Arvin Industries, Incorporated................................... 9,400 155,100
-----------
AUTO-RELATED--1.3%
Dana Corporation................................................. 10,000 292,500
-----------
AUTOS & TRUCKS--5.3%
Ford Motor Company............................................... 23,300 657,700
General Motors Corporation....................................... 10,200 539,325
-----------
1,215,025
-----------
BANKS--8.2%
BankAmerica Corporation.......................................... 3,600 233,100
The Chase Manhattan Corporation.................................. 4,600 278,875
Comerica Inc..................................................... 8,100 325,013
First Chicago NBD Corporation.................................... 9,700 383,150
First of America Bank Corporation................................ 4,700 208,563
KeyCorp.......................................................... 5,800 210,250
NationsBank Corporation.......................................... 3,200 222,800
-----------
1,861,751
-----------
BUILDING & FOREST PRODUCTS--2.0%
Weyerhaeuser Company............................................. 10,600 458,450
-----------
CHEMICALS--2.4%
Dow Chemical Company............................................. 4,700 330,763
Dupont (E.I.) De Nemours & Company............................... 3,000 209,625
-----------
540,388
-----------
COAL & GAS--2.0%
Eastern Enterprises.............................................. 13,000 458,250
-----------
</TABLE>
1
<PAGE> 3
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED), CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE*
------ -----------
<S> <C> <C>
DIVERSIFIED--5.3%
Hanson PLC, ADR.................................................. 22,000 $ 335,500
Ogden Corporation................................................ 11,500 245,813
Olin Corporation................................................. 2,700 200,475
Tenneco, Incorporated............................................ 8,500 421,813
-----------
1,203,601
-----------
DRUGS--3.6%
American Home Products Corporation............................... 3,000 291,000
Baxter International, Incorporated............................... 7,200 301,500
Merck & Company, Incorporated.................................... 3,500 230,125
-----------
822,625
-----------
FINANCIAL SERVICES--5.9%
Great Western Financial Corporation.............................. 15,300 390,150
H.F. Ahmanson & Company.......................................... 13,200 349,800
Household International, Incorporated............................ 6,100 360,663
Transamerica Corporation......................................... 3,300 240,488
-----------
1,341,101
-----------
FOOD--1.5%
Anheuser-Busch Companies, Incorporated........................... 5,200 347,750
-----------
INSURANCE--5.8%
Aetna Life & Casualty Company.................................... 4,400 304,700
Allstate Corporation............................................. 5,005 205,831
Aon Corporation.................................................. 7,000 349,125
Lincoln National Corporation..................................... 4,300 231,125
SAFECO Corporation............................................... 6,000 207,000
USLIFE Corporation............................................... 1,000 29,875
-----------
1,327,656
-----------
MACHINERY--2.7%
Deere & Company.................................................. 11,400 401,850
Harsco Corporation............................................... 3,700 215,063
-----------
616,913
-----------
</TABLE>
2
<PAGE> 4
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED), CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE*
------ -----------
<S> <C> <C>
METALS & MINING--3.6%
Aluminum Company of America...................................... 9,000 $ 475,875
Reynolds Metals Company.......................................... 6,200 351,075
-----------
826,950
-----------
OIL--DOMESTIC--3.6%
Ashland Inc...................................................... 7,200 252,900
Atlantic Richfield Company....................................... 1,000 110,750
Sun Company...................................................... 6,710 183,686
USX-Marathon Group............................................... 13,900 271,050
-----------
818,386
-----------
OIL--INTERNATIONAL--0.9%
Chevron Corporation.............................................. 4,000 210,000
-----------
PAPER--3.5%
International Paper Company...................................... 9,400 356,025
Union Camp Corporation........................................... 4,000 190,500
Westvaco Corporation............................................. 9,000 249,750
-----------
796,275
-----------
PHOTOGRAPHY & OPTICAL--1.8%
Eastman Kodak Company............................................ 6,000 402,000
-----------
PROFESSIONAL SERVICES--0.6%
PHH Group........................................................ 3,200 149,600
-----------
RAILROADS--2.5%
Conrail, Incorporated............................................ 4,000 280,000
Norfolk Southern Corporation..................................... 3,600 285,750
-----------
565,750
-----------
RETAIL--GENERAL--7.4%
J.C. Penney Co., Incorporated.................................... 9,800 466,725
Kmart Corporation................................................ 25,100 181,975
May Department Stores Company.................................... 10,600 447,850
Melville Corporation............................................. 6,100 187,575
Sears, Roebuck & Company......................................... 7,400 288,600
Woolworth Corporation............................................ 8,300 107,900
-----------
1,680,625
-----------
</TABLE>
3
<PAGE> 5
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED), CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
SHARES VALUE*
------ -----------
<S> <C> <C>
SAVINGS & LOANS--1.0%
Federal National Mortgage Corporation............................ 1,900 $ 235,838
-----------
STEEL--1.4%
USX-U.S. Steel Group............................................. 10,200 313,650
-----------
TELECOMMUNICATIONS--0.8%
Harris Corporation............................................... 3,500 191,188
-----------
TOBACCO--4.3%
American Brands, Incorporated.................................... 9,200 410,550
Philip Morris Companies, Incorporated............................ 6,300 570,150
-----------
980,700
-----------
TRUCKING--0.9%
Ryder System, Incorporated....................................... 8,000 198,000
-----------
UTILITY--ELECTRIC--7.8%
CMS Energy Corporation........................................... 12,000 358,500
The Detroit Edison Company....................................... 4,000 138,000
Entergy Corporation.............................................. 5,500 160,875
Illinova Corporation............................................. 6,500 195,000
New York State Electric & Gas Corporation........................ 5,300 137,138
Peco Energy Company.............................................. 11,300 340,413
Public Service Enterprises Group................................. 11,000 336,875
SCEcorp.......................................................... 6,000 106,500
-----------
1,773,301
-----------
UTILITY--GAS PIPELINE--0.9%
British Gas PLC, ADR............................................. 2,053 209,663
-----------
UTILITY--TELEPHONE--3.0%
NYNEX Corporation................................................ 4,900 264,600
Pacific Telesis Group............................................ 11,000 369,875
US West Incorporated............................................. 1,400 50,050
-----------
684,525
-----------
Total common stocks (cost $17,680,834)........................... 21,089,424
-----------
</TABLE>
4
<PAGE> 6
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED), CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
SHORT-TERM INVESTMENTS--7.3% AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES+--7.3%
Eli Lilly & Company, 5.3155%, due 12/31/2031................... 500,000 $ 500,000
General Mills, Inc., 5.49%, 12/31/2031......................... 156,095 156,095
Sara Lee Corporation, 5.4671%, due 12/31/2031.................. 500,000 500,000
Warner Lambert, Inc., 5.458%, due 12/31/2031................... 500,000 500,000
-----------
Total demand notes (cost $1,656,095)........................... 1,656,095
-----------
Total investments--99.8% (cost $17,680,834)**....................... 22,745,512
Other assets in excess of liabilities--(0.2%)....................... 48,190
-----------
TOTAL NET ASSETS--100.0%....................................... $22,793,709
===========
</TABLE>
- ---------------
*See Note 1 of Notes to Financial Statements
**Cost for federal income tax purposes is the same.
+Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates.
The rate listed is as of December 31, 1995.
ADR--American Depository Receipts
5
<PAGE> 7
HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
December 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $19,336,930)................................... $22,745,513
Dividends and interest receivable.......................................... 57,098
Receivable from Advisor.................................................... 14,313
-----------
Total assets.......................................................... 22,816,924
-----------
LIABILITIES:
Accrued expenses and other liabilities..................................... 23,221
-----------
Net assets............................................................ $22,793,703
===========
NET ASSETS CONSIST OF:
Paid in capital............................................................ 19,023,165
Undistributed net investment income........................................ 77,051
Undistributed net realized gains on investments............................ 284,904
Net unrealized appreciation on investments................................. 3,408,583
-----------
Net assets............................................................ $22,793,703
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value authorized)........... 1,798,281
Net asset value per share............................................. $ 12.68
===========
</TABLE>
See Notes to the Financial Statements.
6
<PAGE> 8
HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
Six months ended December 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends*.................................................................. $ 340,853
Interest.................................................................... 10,431
----------
Total Income........................................................... 351,284
----------
EXPENSES:
Advisory fee................................................................ 50,961
Legal and auditing fees..................................................... 4,619
Custodian fees and expenses................................................. 10,201
Transfer agent fees and expenses............................................ 3,554
Trustees' fees and expenses................................................. 1,237
Reports to shareholders..................................................... 50
Registration fees........................................................... 2,534
Other expenses.............................................................. 1,026
----------
Total expenses......................................................... 74,182
Less: expense reimbursement................................................. (23,221)
----------
Net expenses........................................................... 50,961
----------
NET INVESTMENT INCOME............................................................ 300,323
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................................ 658,274
Net change in unrealized appreciation on investments........................ 1,453,153
----------
Net gain on investments................................................ 2,111,427
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................... $2,411,750
==========
- ---------------
*net of Foreign Taxes withheld................................................... $ 1,693
==========
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,1995 YEAR ENDED
(UNAUDITED) JUNE 30, 1995
----------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 300,323 $ 515,636
Net realized gain on securities transactions......... 658,274 53,938
Net change in unrealized appreciation of
securities......................................... 1,453,153 2,320,505
----------- -----------
Net increase in net assets resulting from
operations.................................... 2,411,750 2,890,079
----------- -----------
NET EQUALIZATION CREDITS.................................. 0 48,905
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................ (329,594) (458,833)
Net realized gain on securities transactions......... (378,446) (37,220)
----------- -----------
Total dividends and distributions............... (708,040) (496,053)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................ 3,000,000 3,960,772
Shares issued in connection with payment of
dividends.......................................... 708,040 496,053
Cost of shares redeemed.............................. (7,500) (59,677)
----------- -----------
Net increase in net assets from Fund share
transactions.................................. 3,700,540 4,397,148
----------- -----------
TOTAL INCREASE IN NET ASSETS.............................. 5,404,250 6,840,079
NET ASSETS:
Beginning of period.................................. 17,389,453 10,549,374
----------- -----------
End of period*....................................... $22,793,703 $17,389,453
=========== ===========
*Including undistributed net investment income of:........ $ 77,051 $ 54,604
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold.......................................... 234,558 400,117
Shares issued in connection with payment of
dividends.......................................... 56,581 46,972
Shares redeemed...................................... (603) (5,704)
----------- -----------
Net increase.................................... 290,536 441,385
=========== ===========
</TABLE>
See Notes to the Financial Statements.
8
<PAGE> 10
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1995
NOTE 1. ACCOUNTING POLICIES. The Equity Fund for Insurance Companies (the
"Fund") is a series of Hotchkis and Wiley Funds (the "Trust"), an
open-end, management investment company organized as a Massachusetts
business trust on August 22, 1984 and registered under the Investment
Company Act of 1940. The Fund commenced operations on January 29,
1993. In addition to the Fund, the Trust also offers the Balanced
Income Fund, the Small Cap Fund, the Equity Income Fund, the
International Fund, the Low Duration Fund, the Short-Term Investment
Fund, and the Total Return Bond Fund. The assets of each series are
invested in separate, independently managed portfolios. The following
is a summary of significant accounting policies followed by the Fund
in the preparation of the financial statements.
SECURITY VALUATION: Portfolio securities that are listed on a
securities exchange (whether domestic or foreign) or the NASDAQ
National Market System ("System") are valued at the last sale price
as of 4:00 p.m., Eastern time, or, in the absence of recorded sales,
at the mean of readily available closing bid and asked prices on such
exchange or such System. Unlisted securities that are not included in
such System are valued at the mean of the quoted bid and asked price
in the over-the-counter market. Securities for which market
quotations are not readily available are valued at fair value as
determined in good faith by Hotchkis and Wiley (the "Advisor") under
procedures established by and under the general supervision and
responsibility of the Board of Trustees. Short-term investments which
mature in less than 60 days are valued at amortized cost (unless the
Board of Trustees determines that this method does not represent fair
value), if their original maturity was 60 days or less, or by
amortizing the values as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days. Investments quoted in
foreign currency are valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time of valuation.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase
agreements with banks or broker-dealers that meet credit guidelines
established by the Board of Trustees. The Fund will always receive
and maintain as collateral securities having a market value,
including accrued interest, at least equal to 100% of the amount of
the repurchase agreement, and the Fund will make payment for such
securities only upon delivery or evidence of book entry transfer of
the collateral to the Fund's custodian.
OTHER: Security and shareholder transactions are recorded no
later than the first business day after the trade date. Realized
gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and
distributions to shareholders are recorded on the ex-dividend date.
Interest income is recognized on the accrual basis. Generally
accepted accounting principles require that permanent financial
reporting and tax differences be reclassified to common stock.
9
<PAGE> 11
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
December 31, 1995
FEDERAL INCOME TAXES: It is the Fund's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is
required.
EQUALIZATION: The Fund follows the accounting practice known as
equalization, by which a portion of the proceeds from sales and costs
of redemptions of capital shares, equivalent on a per share basis to
the amount of undistributed net investment income on the date of the
transaction, is credited or charged to undistributed net investment
income. As a result, undistributed net investment income per share is
unaffected by sales or redemptions of the Fund's shares. Effective
July 1, 1995, the Fund discontinued the practice of equalization.
NOTE 2. INVESTMENT ADVISORY AGREEMENT. The Fund has an investment advisory
agreement with the Advisor. The Advisor receives a fee, computed
daily and payable monthly, at an annual rate of 0.60% of the first
$10 million of the Fund's average net assets, and 0.50% of average
net assets in excess of $10 million.
The Advisor provides continuous supervision of the investment
portfolio and pays all of the operating expenses relating to the Fund
other than the Advisory fee. For the six months ended December 31,
1995, the Advisor paid $23,221 of operating expenses on behalf of the
Fund.
NOTE 3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of investment
securities, other than short-term investments, for the six months
ended December 31, 1995 were $5,089,562 and $3,067,137, respectively.
At December 31, 1995 (for financial reporting and federal income
tax purposes), net unrealized appreciation aggregated $3,408,598, of
which $4,018,179 related to appreciated securities and $609,596
related to depreciated securities.
10
<PAGE> 12
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JANUARY 29, 1993+
SIX MONTHS ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1995 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
----------------- ------------- ------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 11.53 $ 9.89 $ 10.31 $ 10.00
------- ------- ------- -------
Income from Investment
Operations:
Net investment income......... 0.19 0.41 0.40 0.16
Net realized and unrealized
gain (loss) on
investments................. 1.38 1.59 (0.24) 0.30
------- ------- ------- -------
Total from investment
operations.................. 1.57 2.00 0.16 0.46
------- ------- ------- -------
Less Distributions:
Dividends (from net investment
income)..................... (0.19) (0.34) (0.38) (0.15)
Dividends in excess of net
investment income........... (0.01) -- -- --
Distributions (from capital
gains)...................... (0.22) (0.02) (0.20) (0.00)
------- ------- ------- -------
Total Distributions........... (0.42) (0.36) (0.58) (0.15)
------- ------- ------- -------
Net Asset Value, End of Period..... $ 12.68 $ 11.53 $ 9.89 $ 10.31
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Total Return....................... 13.71%## 20.62% 1.38% 11.45%#
Net assets, end of period
(millions)....................... $22.8 $17.4 $10.5 $7.1
Ratio of expenses to average net
assets:
Before expense
reimbursement............... 0.78# 1.05% 1.20% 1.45%#
After expense reimbursement... 0.54%# 0.58% 0.60% 0.60%#
Ratio of net income to average net
assets:
Before expense
reimbursement............... 2.93%# 3.58% 3.32% 2.81%#
After expense reimbursement... 3.17%# 4.03% 3.91% 3.66%#
Portfolio turnover............ 17% 29% 26% 2%
</TABLE>
- ---------------
+ Commencement of operations.
# Annualized.
## Not Annualized.
See Notes to Financial Statements.
11
