Market Commentary
During the second quarter of 2024, the Easterly Long/Short Opportunity Fund (SNOIX) (the “Fund”) declined by 3.7%, while the Russell 3000 Value Index (the “Index”) fell by 2.3%. An increasingly narrow market subsection drove equity market performance in the second quarter. The increasing market breadth we experienced in the first three months of 2024 slowed sharply, with the Magnificent 7 (Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla) contributing over 100% of the S&P 500’s total return during the second quarter. Year-to-date, these stocks have contributed 61% of the S&P 500’s 15.3% total return. This outperformance results from strong year-over-year earnings growth, which for the Magnificent 7 was up 28% in Q2 2024. The strong performance and the increasing investor appetite for companies seen as beneficiaries of artificial intelligence have caused market indices to become increasingly expensive (with elevated price/earnings multiples) and undiversified. As of June 30th, the weight of the top-10 stocks, as defined by market capitalization, has risen to 37%, with their forward P/E multiples rising to 30.3X. This is up from 28.4X at the end of the first quarter and up from 26.9X at the beginning of the year. Investors should view increased index concentration and elevated valuation levels with caution as they have now become concentrated bets on the continued outperformance of this narrow leadership.
Performance Review
In Q2, stock selection negatively impacted the long portfolio’s performance by 69 basis points (“bps”) relative to the benchmark. This reversed from previous quarters, and while disappointing, we feel it is more of a reflection of the market environment.
Our long portfolio declined 2.72% during the quarter. Information technology, energy, and consumer discretionary holdings detracted most from absolute performance. Offsetting these declines were our financials, materials, and health care holdings. Our exposure to energy, utilities, and information technology decreased as we rotated into new ideas in the industrials, health care, and financials sectors. We remain underweight in the real estate, industrials, and consumer staples sectors.
During the quarter, our short portfolio detracted 60bps from overall performance. Most of the losses were associated with our market hedge position. While disappointing, we believe this positioning is prescient given current valuations and uncertainty around the economic outlook. Our active shorts also detracted from performance, though they are primarily intended to reduce the sector exposure of our long portfolio. Offsetting these losses was the positive contribution from our active option writing, which added 40bps to the Fund’s total return.
Relative to the end of Q1 2024, our gross and net exposure increased, ending Q2 at 162% and 75%, respectively. Our gross exposure increased as we added new names to the Fund and selectively added exposure to our best ideas. We used attractive option premiums on covered calls to reduce exposure to selective names. Our market hedge position was relatively unchanged compared to the end of Q1. With the implied equity risk premium for the S&P 500 remaining near its lowest level in more than 20 years, as higher-for-longer interest rates make bonds a viable alternative against broad equity market indices, we feel our market hedge offers safety in the event of deteriorating economic news or any sudden dislocation in equity markets.
Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. For performance information current to the most recent month-end, please call 888-814-8180 or visit Funds.Easterlyam.com.
Q2 Contributors and Detractors
Our top three contributors to the long portfolio came from different sectors. Shares of NCR Atleos contributed positively to performance, with Q1 2024 representing the first earnings report as a standalone entity. Segment-level performance indicators demonstrated solid underlying business fundamentals across its two main segments, Self-Service Banking and Network, setting the stage for improved top- and bottom-line performance in 2024. Even with its strong performance in the quarter, shares remain attractively priced at 6X 2025 earnings estimates. In the near term, management plans to detail their shareholder return policy, which could be a further catalyst for the stock.
Shares of Netapp Inc. continued to perform well this quarter, driven by strong earnings. They benefitted from the increased need for storage and solutions as technology spending builds for workloads associated with AI. Given the strong performance and the security nearing our price target, we are actively managing this position through covered call options.
Finally, Amgen Inc. shares contributed to overall performance as investors began to focus on the company’s weight-loss drug, Maritide. Maritide will not have Phase 2 read-outs until late 2024, but additional pipeline readouts over the course of the year and a robust legacy portfolio of commercial therapies continue to make Amgen an attractive investment opportunity.
Our top three detractors included two holdings from the information technology sector and one from the consumer discretionary sector. Shares of Open Text Corporation detracted from overall performance as the company issued a weaker-than-expected forward-year outlook, as sales of the company’s software solutions are ramping at a slower-than-expected pace. Positively, the company is seeing increased contract sizes and an increasing shift towards favorable recurring license revenues. We used the pullback in the stock to add to our position. With shares trading for less than 9x earnings, Open Text remains an attractive investment as it reduces debt, repurchases shares, and executes on its backlog.
Shares of Advanced Auto Parts hindered performance after the company implemented pricing actions to clear elevated inventory levels, which is expected to pressure margins this year. We believe Advance Auto Parts shares remain attractive as the company looks to enhance its earnings power via a supply chain optimization plan. The company is expected to divest its WorldPac assets, which would help it quickly reduce debt. The stock trades for ~10x our normalized earnings estimate.
Shares of Intel Corporation underperformed in Q2 after unveiling a new reporting structure and setting long-term margin targets that will take longer to develop than investors were hoping for, driving some investors to exit the stock. While we expect the turnaround at Intel to take time, we view the company as uniquely positioned to benefit from tailwinds associated with diversifying the global semiconductor manufacturing supply chain, which has historically been heavily concentrated in Southeast Asia.
Outlook
The most frustrating times of being an equity manager usually sow the seeds of what can become the most rewarding. As focused as we are on the fundamentals of our investments, overarching macroeconomic sentiment and investment trends can negatively impact our overall performance on a short-term basis. When markets disregard fundamentals or over-extrapolate macroeconomic concerns on our holdings, we view the environment as supportive of our process, remaining steadfast that our work will be rewarded when market sentiment shifts.
While year-to-date performance is below our expectations, we remain excited about the opportunities within the Fund, particularly if market breadth broadens, which we believe is a realistic scenario. For the remaining quarters of 2024, S&P 500 earnings, excluding the Magnificent 7, are expected to increase by 4%, 5%, and 17%, respectively. At the same time, Magnificent 7 earnings are set to decelerate from 50% growth in the first quarter to 28%, 16% and 17%, respectively. Earnings growth is expected to be highest in the financials, health care, and materials sectors, where our portfolio is near or above market weighting. This environment, where index concentration remains alarmingly elevated, should prove highly advantageous to active managers. We continue to exercise patience, populating our portfolio with stocks on the cusp of earnings acceleration at relatively low valuation levels. Thank you for your commitment and loyalty to Easterly Investment Partners.
Fund Performance
| as of 6/30/2024 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | 10-YEAR | SINCE INCEPTION |
|---|---|---|---|---|---|---|---|
| I Shares | -3.74% | 2.86% | 9.51% | 4.64% | 9.25% | 4.73% | 6.05% |
| A Shares w/ load* | -9.35% | -3.16% | 2.94% | 2.34% | 7.70% | 3.85% | 5.45% |
| A Shares w/o load | -3.81% | 2.74% | 9.23% | 4.38% | 8.98% | 4.47% | 5.79% |
| C Shares w/ load* | -4.95% | 1.36% | 7.42% | 3.62% | 8.18% | 3.70% | 5.02% |
| C Shares w/o load | -3.99% | 2.36% | 8.42% | 3.62% | 8.18% | 3.70% | 5.02% |
| R6 Shares | -3.74% | 2.86% | 9.51% | N/A | N/A | N/A | 4.19% |
| Russell 3000 Value Index | -2.25% | 6.18% | 12.93% | 5.14% | 8.89% | 8.10% | N/A |
| 70%/30% Blended Index | -1.16% | 5.17% | 10.82% | 4.80% | 7.24% | 6.37% | N/A |
*2% 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 (effective 8/1/2024). 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. See Glossary for index definitions.
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 June 30, 2025 for I, A, C and R6 Shares to ensure that net annual operating expenses will not exceed 1.36%, 1.61%, 2.36% and 1.36%, 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 June 30, 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 1.30%, 1.55%, 2.30%, and 1.00%, respectively, subject to possible recoupment from the Fund in future years. For more information, please refer to the Fund’s summary prospectus and prospectus.
Prior to June 29, 2018, the Fund was named the Snow Capital Opportunity Fund.
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.
There is no assurance that the portfolio will achieve its investment objective.
Risks & Disclosures
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting Funds.Easterlyam.com or by calling 888-814-8180.
Easterly Investment Partners LLC is the investment adviser to the Easterly family of mutual funds. Easterly Investments 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.
Not FDIC Insured–No Bank Guarantee–May Lose Value
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.
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.
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.
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