Market Summary
In Q2 2024, capital market participants continued to sift through various economic indicators looking for any signal that the Federal Reserve (the “Fed”) would begin to cut interest rates. The market’s yearning for rate cuts began in earnest in Q4 2023 and has driven outperformance in pockets of the market, where companies may benefit from a lower discount rate and borrowing costs. With the market this year, at one point pricing in upwards of seven rate cuts this year, the Fed funds rate remains at 5.25% – 5.50% following a series of rapid increases initiated in March 2022. The persistence of higher-for-longer inflation is the primary culprit for the lack of Fed action so far this year, as they cannot risk a reacceleration of inflation should they decide to cut rates too soon. While their stated inflation target is 2%, there still may be room for rate cuts if the long-term inflation rate settles around 3%, but not as much as more speculative investment vehicles that benefitted to a greater degree from near zero-percent interest rates during the 2010s are hoping for, and pricing in.
The narrow breadth and leadership of large-cap indexes continue to signal caution. As of this writing, six stocks comprise 31% of the S&P 500 and have accounted for about 65% of the index’s total return this year. There are some striking similarities to the “tech bubble” that peaked in early 2000, where the top ten stocks in the S&P 500 accounted for 27% of the index. The lack of breadth today is even more extreme. Interestingly, we note that Cisco’s 5-year annualized return of 105% from March 31, 1995, through March 31, 2000, is astonishingly like that of Nvidia’s 5-year total annualized return of 98% through June 30, 2024. As the tech bubble started to deflate late in 2000, Cisco would go on to fall (87%) over the next 30 months. This ushered in a difficult decade for growth stocks, where from 2000 to 2010, large-cap domestic growth stocks fell (33%) while other investments like bonds, small-cap stocks, and emerging markets outperformed.
While we don’t necessarily foresee a similar “crash” in technology stocks forthcoming, we question the impact that items such as the advent of passive investing and more quantitative-based trading models have had on the narrow breadth and leadership we currently see. These tools have led to higher correlations and lower dispersion in stocks with higher market capitalizations as broad-based flows move into and out of those names daily for little fundamental reason related to the specific group of stocks. Many investors who partake in this investing style may have little idea of the concentration risk they are taking, especially given that the benefits of such styles are pitched as diversification and risk mitigation tools. When combined with historical Fed intervention over the last fifteen years, we are unsure if the long-term effects and reverberations have yet to be fully realized.
The S&P 500 gained 4.3% in Q2 and 15.3% in the year’s first half, driven primarily by technology and AI narratives. While there certainly will be some long-term AI winners, for the market to be pricing in every large-cap stock that mentions AI in their press release as an emphatic AI winner seems disingenuous. When combined with a lack of breadth in the major indexes and compounding factors over time that drive runaway momentum, such as passive and quant-based investing, the result is the market we see today, where large-cap stocks are rising at an unabated rate with no concern for price discovery.
Performance Review
While broad mid-and small-cap stocks faced overall losses, the Easterly Snow Small Cap Value Fund, although also down in the second quarter, managed still to outperform its benchmark, the Russell 2000 Value Index. Selection and allocation effects positively drove the Fund’s relative performance, highlighting our bottom-up fundamental approach, which focuses on idiosyncratic, stock-specific catalysts backed by strong balance sheets and ample free cash flow.
At the sector level, the Financials, Communication Services, and Consumer Staples sectors significantly contributed to the Fund’s outperformance due to strong stock selection within these sectors. Conversely, the Energy, Health Care, and Materials sectors detracted from the overall performance, primarily due to negative stock returns in these areas. Cash again provided protection during this period of overall negative benchmark returns.
Portfolio Attribution
Top 5 Performance Contributors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| BRINKER INTERNATIONAL INC | 4.31 | 1.73 |
| JACKSON FINANCIAL INC-A | 4.56 | 0.6 |
| CINEMARK HOLDINGS INC | 2.97 | 0.63 |
| PILGRIM’S PRIDE CORP | 4.06 | 0.48 |
| ABM INDUSTRIES INC | 1.86 | 0.24 |
Brinker International (EAT)
Brinker International was the largest contributor to performance during the quarter, outperforming the Consumer Discretionary sector. Several key financial and operational successes drove this strong performance. The company reported an EPS of $1.24 on total revenue of $1.12 billion, reflecting solid revenue growth and effective cost management. Restaurant-level operating margin improved quarter-over-quarter, driven by favorable food and beverage expenses and labor expense management. These results and effective marketing strategies, such as the 3-for-me advertising campaign, which saw an increase in higher-tier orders, highlight the company’s strong operational momentum.
Jackson Financial (JXN)
Jackson Financial delivered a strong performance in the second quarter of 2024, outpacing the broader Financials sector. Key drivers included an adjusted EPS of $4.23, surpassing street estimates of $3.75, and significant sales growth in registered index-linked annuities, which surged by 117% year-over-year to $1.2 billion. The company’s total annuity sales reached $3.7 billion, an 18% year-over-year increase.
Cinemark Holdings (CNK)
Cinemark Holdings continued to perform well in the second quarter of 2024, significantly outperforming the broader Communication Services sector. This robust performance can be attributed to better-than-expected financial performance despite continued choppiness in box office results. CNK posted first-quarter revenue of $579 million, surpassing estimates by 3.8%, and an adjusted EBITDA of $70.7 million, exceeding projections by 28%. The company maintains market share gains, particularly in the U.S., where average ticket pricing and concession spending remain healthy.
Top 5 Performance Detractors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| BLOOMIN’ BRSNDS INC | 3.67 | -1.38 |
| DELEK US HOLDINGS INC | 3.61 | -0.76 |
| ADVANCE AUTO PARTS INC | 1.73 | -0.5 |
| PHOTOTRONICS INC | 3.65 | -0.49 |
| INTEGRA LIFESCIENCES HOLDING | 1.92 | -0.42 |
Bloomin’ Brands (BLMN)
Bloomin’ Brands underperformed this past quarter as the company reported EPS of $0.70 on total revenue of $1.20 billion, both slightly below expectations. U.S. same-store sales were down 1.6%, with Outback Steakhouse reporting a 1.2% decline. Traffic dropped by 430 basis points, and restaurant-level operating margin fell to 16.0%, down 190 basis points year-over-year. Key events affecting performance included CEO David Deno’s retirement announcement and the exploration of strategic alternatives for the Brazil business, which contributed to investor uncertainty. These factors, along with increased labor costs and higher operational expenses, negatively impacted the stock’s performance.
Delek US Holdings (DK)
Delek US Holdings underperformed in the first quarter of 2024, significantly trailing the Energy sector. Despite reporting an adjusted EBITDA of $159 million, which beat the consensus of $141 million, the company’s refining segment faced challenges. Refining adjusted EBITDA was $106 million, impacted by approximately $30 million due to weather issues in January at Big Spring and $10 million from planned maintenance at Krotz Springs. Additionally, despite healthy cash flow conversion and free cash flow of $126 million, investor concerns over the delayed strategic process to unlock value contributed to the stock’s decline.
Advanced Auto Parts (AAP)
Advance Auto Parts saw its stock decline by -25.32% in the first quarter of 2024, significantly underperforming the Consumer Discretionary sector. The company reported Q1 revenue of $3.4 billion and adjusted EPS of $0.67, slightly below street estimates of $3.43 billion and $0.66. Comparable store sales decreased by 0.2%, with Pro sales offsetting a low single-digit decline in DIY sales. Weakness in DIY sales was led by discretionary sales and deferred maintenance, as inflationary pressures impact consumer’s budgets. The company’s weak Q2 outlook also contributed to investor concerns. Despite these challenges, the full-year sales guidance was modestly raised to a high end of $11.5 billion.
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.
Outlook
As active managers, we look forward to environments like this, where correlations are elevated, and stocks trade in step. This enables us to identify price dislocations and populate our Fund with great companies whose stock price doesn’t reflect their underlying fundamental valuation, helping us drive positive returns over full cycles, not just on a day-to-day or quarter-to-quarter.
The valuation gap between large-cap and small-cap stocks remains at historically elevated levels. The Russell 2000 Value trades at 12x forward earnings, and the Easterly Snow Small Cap Value Fund at 10x forward earnings, relative to the S&P 500 at 21x, a 16% premium to its 10-year average.
The market continues to remain focused on the timing and magnitude of interest rate cuts from the Fed, which is looking more likely in the second half of the year even as they continue to reduce their own balance sheet (which stands in contrast to their balance sheet expansion during the 2010s, artificially suppressing yields). While certain pockets of the small-cap market may outperform (stocks with negative earnings and/or high debt levels) as rate cuts are initially priced in, we question how sustainable that outperformance may remain as the market prices in a normalized Fed Funds rate that may be higher than what those more speculative pockets of the market are hoping for.
As we work through a U.S. Presidential election cycle likely to bring volatility, items we’re paying heightened attention to include the U.S. jobs market, where unemployment has increased above 4%. The jobs market has shown impressive resilience, while other cracks in the U.S. economy have emerged over the last few quarters. Consumer spending, which is 70% of GDP, is declining as credit card balances continue to rise. Retail sales are slowing and, when factoring in inflation, have, in fact, turned negative. $1T in corporate debt annually continues to roll into issuances with much higher costs. We are unsure how this will impact more leveraged corporations, especially if cash flow falters. A housing market that looks increasingly unaffordable for many, especially younger people without familial financial assistance, may reshape how that younger cohort allocates their discretionary income. We are keeping a steady eye on the US fiscal deficit, the associated debt servicing costs, and the ramifications of legislators’ inability to rein in spending.
The Easterly Snow investment team’s core competency is to invest the same stylistically through all of this market noise. We remain focused on allocating capital to companies going through short-term difficulties with great balance sheets, material free cash flow, and a path to earnings recovery resulting in asymmetric upside/downside return profiles.
Investment Performance- 6/30/2024
| 3/31/2024 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | 10-YEAR | SINCE INCEPTION (4/8/2006) |
|---|---|---|---|---|---|---|---|
| I Shares | -2.58% | 7.91% | 19.31% | 6.48% | 13.79% | 6.31% | 10.12% |
| A Shares w/ load* | -8.26% | 1.58% | 12.15% | 4.13% | 12.17% | 5.42% | 9.37% |
| A Shares w/o load | -2.66% | 7.79% | 18.99% | 6.21% | 13.51% | 6.04% | 9.85% |
| C Shares w/ load* | -3.80% | 6.39% | 17.12% | 5.42% | 12.67% | 5.26% | 9.03% |
| C Shares w/o load | -2.83% | 7.39% | 18.12% | 5.42% | 12.67% | 5.26% | 9.03% |
| R6 shares | -2.58% | 7.91% | 19.31% | N/A | N/A | N/A | 6.98% |
| Russell 2000 Value Index | -3.64% | -0.85% | 10.90% | -0.53% | 7.07% | 6.23% | N/A |
*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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