The third quarter of 2024 (Q3 2024) marked a significant, yet anticipated change to the Federal Reserve’s (the Fed) monetary policy outlook. In September, the U.S. central bank cut its benchmark interest rate by half a percentage point and signaled that more reductions would follow, marking the start of an easing cycle. The cut signified the Fed’s confidence that inflation was on a path to its 2% goal, with a recalibration in focus toward ensuring that restrictive monetary policy wouldn’t cause an increase in unemployment. The bond market had largely priced-in the policy shift over the course of the quarter, which saw the U.S. two-year note’s yield dip below the 10-year note’s yield for only the second time since 2022.
There are many read-throughs relative to the Fed’s actions and the market’s subsequent reaction, and from our perspective, there are positives and negatives. On the positive side, we view the steepening of the yield curve as a good sign for our underlying banks and insurance companies who will benefit from higher rates on the long end of the curve. It also increases the expectation that the market will experience a soft landing. The National Bureau of Economic Research (NBER) uses four variables to determine whether the U.S. economy is in recession: Personal Consumption Expenditures (PCE), payrolls, industrial production, and real personal income net of transfer payments. None of these key factors are decreasing, indicating less risk for a possible recession. Additionally, as inflation has decreased, central banks around the world have started to lower their own benchmark interest rates to help prevent excess damage to their own economies. Coordinated global monetary easing has allowed for increased excess liquidity within financial markets and is very favorable for U.S. and global economic growth.
On the negative side, we’re often finding that Fed statements and actions are in stark contrast to what we’re seeing, reading, and expecting during periods where we’d anticipate elevated volatility driven by several factors. Inflation continues to be a significant problem, remaining structurally high even though it has come down on a rate-of-change basis. We don’t think the Fed had justification to cut rates in September, as equity markets and housing prices were at, or near, all-time-highs, and we’re extremely skeptical the market will receive the interest rate cuts that are being priced in over the next year. In Q4 2023, more speculative stocks that would’ve benefited from a lower discount rate rallied materially as upwards of seven cuts were priced in over the course of 2024. There’s been just one so far, and we’ve now seen the same excitement in Q3 2024 from the more speculative pockets of the market that continue to yearn for lower rates, which drove outperformance across equity benchmarks during the quarter. We think the market is too optimistic surrounding the magnitude and overall impact of interest rate cuts in general, and we question the viability of the Fed’s 2% inflation target, given the exploding, runaway federal deficits. For example, while stocks initially rallied on the news of a 50 basis points (bps) rate cut, they’d also go on to rally on the notion that the Fed may not cut too aggressively. Developments like this—where negative situations lead to positive outcomes for equity markets, quickly followed by good news also leading to positive outcomes while the market remains at all-time highs—do not give us great confidence.
Typically, periods when the macroeconomic backdrop is layered with an uncertain U.S. election cycle, war in multiple regions of the world, and curious behavior from the Fed, would lead to significant market volatility. However, what the market has given us is broad-based complacency. So far, the market seems apathetic towards the result of the U.S. election, where the two candidates have signaled their intent to implement vastly different tax policies that will materially impact corporate earnings. While there are certain outcomes of the upcoming election that could usher in a long bull market, a continued political stalemate with an inability to rein in deficits will lead to reaccelerated inflation, no matter who wins the U.S. election in November. This doesn’t appear to be priced in yet, given elevated correlations and limited volatility. Active war in the Middle East and Eastern Europe will tangibly impact economic growth and overall confidence, but the market remains unphased. However, this doesn’t even begin to touch on the simmering geopolitical tensions in Southeast Asia, where most of the global semiconductor capacity is located.
This easing cycle is set to look much different than prior cycles, due to the sticky inflationary backdrop and the fact that the Fed can’t risk a reacceleration in inflation after working for years to bring the year-over-year rate of change down towards more normalized levels. As active managers, this will give us ample opportunity to find stocks trading at prices dislocated from their fundamental values. The investment portfolio that excelled during past easing cycles will not be replicated, although the markets are attempting to price that in for at least the short term.
Performance Highlights
The Fund delivered a solid positive return of 5.27% during Q3 2024, though it lagged the benchmark Russell 2000 Value Index, which returned 10.15%. The underperformance was largely driven by a negative allocation effect, particularly in sectors with higher weightings compared to the benchmark, despite a positive selection effect overall.
At the sector level, Financials made the strongest contribution to the Fund’s performance, benefiting from both selection and allocation, as stocks within the sector outperformed their peers. Consumer Staples also contributed positively, though the selection effect detracted slightly. However, the Fund’s overweight in Consumer Discretionary, Information Technology, and Health Care negatively impacted returns, with weak stock selection and allocation dragging performance down in these areas. Cash had limited upside in this positive market, as the overall benchmark posted strong returns.
In summary, the Fund’s underperformance was mainly due to sector allocation driven by bottom-up stock selection, despite positive results from several strong stock picks.
Portfolio Attribution
Top 5 Performance Contributors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| COLUMBIA BANKING | 3.57 | 1.00 |
| JACKSON FINANCIAL INC-A | 4.21 | 0.95 |
| CINEMARK HOLDING | 3.13 | 0.95 |
| CNO FINANCIAL GR | 3.98 | 0.94 |
| HIGHWOODS PROP | 3.32 | 0.88 |
Columbia Banking System, Inc. (COLB) Quarterly Summary
In Q3 2024, COLB reported a strong performance. Performance was driven by improving fundamentals, as earnings of $0.67/share came in $0.10 ahead of analyst expectations, highlighting the successes around small-business relationship initiatives as well as cost-saving plans. Net Interest Income (NII) of $428 million exceeded estimates of $420.4 million, aided by accretion income and higher yields on loans. Continued execution around efficiency and strategic deposit growth initiatives supports improved profitability in the near-term. As regional banking industry fundamentals improve with the disinversion of the yield curve, we feel that COLB continues to represent an attractive opportunity within the financial sector.
Jackson Financial, Inc. (JXN) Quarterly Summary
In Q3 2024, JXN saw a strong stock return, supported by stronger-than-expected capital generation and favorable capital allocation. Adjusted earnings per share (EPS) of $5.32 exceeded estimates of $4.36, reflecting the impact of strong annuity sales. The newly structured hedges that were established in Q1 2024 continue to operate within expectations, allowing for more stable capital generation. This strong capital generation, along with dividend payout and efficient management of the annuity business, provide a solid foundation for continued growth.
JXN offers a compelling investment opportunity with robust growth in annuity sales and efficient capital management. The strong balance sheet and continued focus on operational improvement sets the company up for stable capital generation and consistent capital returns to shareholders. Recent growth in RILA sales provides a natural hedge for the traditional variable annuity business, mitigating market risk and reducing the costs of hedging. Given the company’s solid operational execution and ongoing capital returns, JXN is well positioned to deliver further value to shareholders.
Cinemark Holdings (CNK) Quarterly Summary
CNK shares positively contributed to performance following the company’s Q2 2024 earnings release, as results delivered a large beat relative to consensus expectations. CNK’s strong results are driven by sustained share gains and healthy ticket pricing levels. The company has solidified its balance sheet and is well positioned for continued earnings expansion as the film release slate normalizes following disruption from the Writers Guild of America strike in 2023.
CNK remains an attractive investment with effective cost management, a recovering box office environment, and expansion of premium offerings. Given the stock’s rise, we have cautiously trimmed our position.
Top 5 Performance Detractors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| DELEK US HOLDING | 3.12 | -0.93 |
| INTEGRA LIFESCIE | 1.48 | -0.07 |
| SILICON MOTI-ADR | 2.56 | -0.67 |
| ADVANCE AUTO PAR | 1.25 | -0.59 |
| VEREN INC | 2.03 | -0.46 |
Delek US Holdings, Inc. (DK) Quarterly Summary
DK had a negative impact on performance this quarter. While the company’s refining operations ran well during the quarter, realized margins were weak and the outlook deteriorated as crack spreads compressed during the quarter, primarily due to concerns about lower oil demand in 2025. DK shares were further pressured as the company announced the divestiture of its retail business for a reasonable multiple, but the company didn’t provide an update to investors on the intended use of proceeds from the transaction when the announcement was made in early August. In September, DK announced the Board of Directors approved a substantial increase to its share repurchase authorization.
We maintain an optimistic outlook for DK and have added to our position, reflecting our confidence in the company’s recovery potential despite the recent negative performance. While DK’s refineries have historically posted volatile results, the company recently exceeded cost reduction targets and is expected to detail a new margin improvement plan for its refining operation. DK is taking steps in the right direction by divesting non-core assets, such as the retail business, and enhancing operational efficiency. The current valuation appears favorable, with the company’s market cap trading near the value of DK’s interest in Delek Logistics Partners LP (DKL), suggesting DK’s refining operations are ascribed minimal value. Given the strategic moves towards deconsolidation, DK should be able to return more capital to shareholders, highlighting this disconnect.
Integra LifeSciences (IART) Quarterly Summary
Integra LifeSciences (IART) detracted during the quarter after resetting guidance lower, partially due to additional compliance spending coupled with a labeling issue that delayed shipment of certain products. The result was an EPS guide that came down nearly $0.50 along with contracting margins. This was a disappointing quarter for IART, as investors were looking for signs indicating the company had moved beyond self-inflicted issues that have dropped shares down towards 10-year lows.
The Fund exited the position early in Q3 given the deterioration in the balance sheet and continued self-inflicted setbacks. Capital was rotated into ideas with a better risk/reward profile.
Silicon Motion Technology (SIMO) Quarterly Summary
Silicon Motion Technology (SIMO) pulled back during the quarter as investors digested higher go-forward research and development spending in support of future growth, which narrowed near-term EPS estimates, along with broad based pullbacks in smaller-cap Information Technology stocks following a strong first half of the year.
SIMO remains well positioned on a niche part of the semiconductor supply chain and will continue to benefit from long-term growth drivers across data centers, PCs, smartphones, and other devices as customers anticipate the need to support growth that requires higher performance. The company is backed by a clean balance sheet that includes $349 million in cash, no debt, and a dividend yielding 3.3%.
Source: SEI Global Services.
Securities shown represent the highest contributors and detractors to the portfolio’s performance for the period and do not represent all holdings within the portfolio. There is no guarantee that such holdings currently or will remain in the portfolio. For a complete list of holdings and an explanation of the methodology employed to determine this information, please contact Easterly. This information is not to be construed as an offer to buy or sell any financial instrument nor does it constitute an offer or invitation to invest in any fund managed by Easterly and has not been prepared in connection with any such offer.
Positioning
| Stock | Portfolio Weight (%) | Sector |
|---|---|---|
| CNO Financial Group, Inc. | 4.22 | Financials |
| Jackson Financial, Inc. | 4.19 | Financials |
| Columbia Banking System, Inc. | 4.14 | Financials |
| Photronics, Inc. | 3.79 | Information Technology |
| Delek US Holdings, Inc. | 3.73 | Energy |
| FMC Corp | 3.58 | Materials |
| Old National Bancorp/IN | 3.58 | Financials |
| Lincoln National Corp | 3.57 | Financials |
| Comerica, Inc. | 3.44 | Financials |
| Highwoods Properties, Inc. | 3.32 | Real Estate |
| Total | 37.56 |
The Fund’s largest sector overweights are in Consumer Discretionary and Materials, driven by bottom-up stock selection rather than macro views. Additionally, a conservative high-cash allocation is present. The largest underweights are in Real Estate, Utilities, and Health Care, reflecting minimal exposure to these sectors due to stock selection choices.
Within the Fund, Financials is the largest sector, consisting of multiple holdings, followed by Consumer Discretionary and Materials. Financials maintains a high allocation with several significant positions, while sectors like Real Estate and Health Care are notably underrepresented. The Fund’s allocation reflects the focus on stock picking rather than targeting specific sectors based on macro trends.
Significant stock positions include CNO Financial Group, Inc., Jackson Financial, Inc., Columbia Banking System, Inc., and Old National Bancorp within the Financials sector. Other prominent names are Photronics, Inc., from Information Technology, Delek US Holdings, Inc., in Energy, and FMC Corporation in Materials. The top 10 holdings comprise 37.56% of the total Fund, illustrating a concentrated approach in key stocks.
In summary, the sector exposure results from the bottom-up stock picking strategy and doesn’t reflect any particular macroeconomic view. The Fund remains diversified across selected sectors with targeted stock positions driving overall allocation.
Outlook
Looking ahead to Q4 2024, we see continued opportunities to populate our Fund with great companies and to identify stocks trading at discounted levels, especially as correlations remain high across the equity market universe. The valuation gap between large-cap and small-cap stocks remains at historically elevated levels, with the Snow Small Cap Value Fund trading at 9x forward earnings and the Russell 2000 Value index trading at 11x forward earnings compared to 20x for the S&P 500, signaling a significant discount.
We remain confident in the stocks we’re buying and continue to find great value and opportunities while populating our Fund, but would welcome a pullback in more frothy pockets of the market to better align with investor expectations. We have a positive outlook on the Energy sector, as current world events are threatening oil supplies and as the U.S. works to refill strategic petroleum reserves that are near historical lows. We’re also optimistic about the banks and insurance companies in the Fund that would stand to benefit from a steepening yield curve. Declining recessionary risks as well as global monetary easing lay the groundwork for what could be an improved earnings trajectory for areas of the market that haven’t seen the same multiple expansion as mega-cap tech or perceived artificial intelligence (AI) beneficiaries.
Our positioning is solely a function of stock selection, as valuation levels for these stocks continue to discount a perceived recession. As a soft landing has become the collective expectation, we feel the Fund will see considerable mean-reversion. Mean-reversions are often fast, but can have long-lasting implications for relative performance. An example of this happened this past July after the release of the June consumer price index (CPI) report. On that day, the NASDAQ fell by 2% and the Russell 2000 Small Cap Index rose by 3.6%—representing the largest single-day outperformance by small cap in over 40 years. While this was only one day, it highlights how quickly markets can adjust to even the slightest change in perceived economic trajectory, and exemplifies the differentiated return stream that small caps can have relative to larger cap, growth-oriented peers.
In managing the Easterly Snow Small Cap Value Fund, we remain laser-focused on populating our Fund with companies featuring great balance sheets, real free-cash-flows, stock-specific catalysts, and a path towards a normalized earnings recovery—which will ultimately lead to a price-to-earnings (P/E) re-rating. While the visible uncertainties today seem to stand in contrast to the market’s steady climb, Snow’s research team remains agile and eager to continue being an effective steward of capital no matter the macroeconomic or geopolitical backdrop.
Investment Performance – 9/30/2024
| QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | 10-YEAR | SINCE INCEPTION (4/8/2006) |
|
|---|---|---|---|---|---|---|---|
| I Shares | 5.27 | 13.60 | 27.87 | 9.28 | 16.64 | 7.54 | 10.34 |
| A Shares w/ load* | -0.88 | 6.83 | 20.16 | 6.86 | 14.97 | 6.63 | 9.59 |
| A Shares w/o load | 5.16 | 13.35 | 27.50 | 8.99 | 16.34 | 7.27 | 10.06 |
| C Shares w/ load* | 3.95 | 11.71 | 25.53 | 8.19 | 15.47 | 6.47 | 9.24 |
| C Shares w/o load | 4.95 | 12.71 | 26.53 | 8.19 | 15.47 | 6.47 | 9.24 |
| R6 shares | 5.27 | 13.60 | 27.87 | N/A | N/A | N/A | 8.26 |
| Russell 2000 Value Index | 10.15 | 9.22 | 25.88 | 3.77 | 9.29 | 8.22 | 9.28 |
*5.75% is the maximum sales charge on purchase of A Shares. Class C charges a maximum contingent deferred sales charge of 1.00% if you redeem Class C shares within 18-months after purchase. Class C shares convert to Class A shares after 8 years from the last day of the month in which the shares were purchased.
Source: Morningstar Direct. Performance data quoted above is historical.
The past performance shown here reflects reinvested distributions and the beneficial effect of any expense reductions and does not guarantee future results. Returns for periods less than one year are cumulative, and results for other share classes will vary. Shares will fluctuate in value and, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance cited. Investors cannot invest directly into an index. All classes of shares may not be available to all investors or through all distribution channels. For the most recent month-end performance, visit funds.easterlyam.com or call 888-814-8180.
The Fund’s investment manager has contractually agreed to waive all or a portion of its advisory fee and/or pay expenses of the Fund to limit total annual Fund operating expenses (excluding front-end and contingent deferred sales loads, leverage, interest and tax expenses, dividends and interest on short positions, brokerage commissions, expenses incurred in connection with any merger, reorganization or liquidation, extraordinary or non-routine expenses and the indirect costs of investing in other investment companies) until at least August 1, 2025 for I, A, C and R6 Shares to ensure that net annual operating expenses will not exceed 1.25%, 1.50%, 2.25%, and 0.85%, respectively. The fee waiver and/or expense reimbursement are subject to possible recoupment from the Fund in future years. For more information, please refer to the Fund’s summary prospectus and prospectus. Performance shown would have been lower without the fee waiver and/or expense reimbursement effect.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least August 1, 2025 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the Fund (excluding front-end and contingent deferred sales loads, leverage, interest and tax expenses, dividends and interest on short positions, brokerage commissions, expenses incurred in connection with any merger, reorganization or liquidation, extraordinary or non-routine expenses and the indirect costs of investing in other investment companies) will not exceed 0.95%, 1.50%, 2.25%, and 0.85%, respectively, subject to possible recoupment from the Fund in future years. For more information, please refer to the Fund’s summary prospectus and prospectus.
The Fund has adopted the performance of the Snow Capital Small Cap Value Fund, a series of the Trust for Professional Managers (the “Predecessor Portfolio”) as the result of a reorganization of the Predecessor Portfolio into the Fund, which was consummated after the close of business on November 5, 2021 (the “Reorganization”). Prior to the Reorganization, the Fund had not yet commenced. The returns shown for periods ending on or prior to March 19, 2021 are those of the Class A, Class C, Class I, and Class S shares of the Predecessor Portfolio, which were reorganized into Class A, Class C, Class I, and Class S shares of the Fund, respectively, after the Reorganization. Class A, Class C, Class I, and Class R6 shares’ returns of the Fund will be different from the returns of the Predecessor Portfolio as they have different expenses.
Returns greater than one year are annualized. Returns for the Fund’s first year are since fund inception. Calendar year returns do not reflect the maximum sales charge; otherwise, returns would vary.
Risks & Disclosures
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other important information about the Fund is contained in the prospectus which should be read carefully before investing, and can be obtained by visiting funds.easterlyam.com or by calling 888-814-8180.
Easterly Investment Partners LLC is an SEC registered investment adviser; see Form ADV at www.sec.gov. Registration does not imply and should not be interpreted to imply any particular level of skill or expertise.
The Easterly funds are distributed by Easterly Securities LLC, member FINRA/SIPC. Easterly Investment Partners and Easterly EAB Risk Solutions are affiliates of Easterly Securities LLC. Orange Investment Advisers, LLC, Ranger Global Advisers, LLC and EAB Investment Group are not affiliated with Easterly Securities LLC.
IMPORTANT FUND RISK
Short sales involve unlimited loss potential since the market price of securities sold short may continuously increase. Diversification does not assure a profit nor protect against loss in a declining market. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Mutual fund investing involves risk; principal loss is possible. Investments in smaller companies involve additional risks such as limited liquidity and greater volatility. Investments in foreign securities involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater in emerging markets. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The fund may invest in lower-rated and non-rated securities which present a greater risk of loss to principal and interest than higher-rated securities. The fund may invest in other investment companies, and the cost of investing in the Fund will generally be higher than the cost of investing directly in the shares of the mutual funds in which it invests. By investing in the Fund, you will indirectly bear your share of any fees and expenses charged by the underlying funds, in addition to indirectly bearing the principal risks of the funds. The fund also invests in ETFs. They are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a discount to its net asset value (“NAV”), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact the Fund’s ability to sell its shares. The Fund may use options and futures contracts which have the risks of unlimited losses of the underlying holdings due to unanticipated market movements and failure to correctly predict the direction of the securities prices, interest rates and currency exchange rates. This investment may not be suitable for all investors. Small- and Medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Performance over one year is annualized.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.
There can be no assurance that the portfolio will achieve its investment objective.
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