2024 began with optimism due to market expectations of 6 Fed eases for the year. However, strong economic growth and labor data gave little indication a recession was a possibility. As December Fed minutes were analyzed and inflation readings came in, it became clear that the market was getting ahead of itself in terms of easing expectations. As the quarter ended, Fed Funds Futures had already downgraded the expectation to only 3 cuts. Nonetheless, the gradual improvement of corporate earnings, albeit against reduced expectations, and the continued fervor seen in anything AI related provided momentum for the S&P 500 (“S&P”) in the form of mega cap stock outperformance. The implications of the reduced easing expectations served to soften the attractiveness of smaller and mid-cap stocks, which had kept pace in the 4th quarter of 2023. For Q1 2024, the Easterly Hedged Equity Fund (JDIEX) provided a 5.6% return (a 53% capture against the index) with 55% less volatility than the S&P over the last trailing 3-years.
The Fed’s direction and the uncertain path to a normalization of rates would certainly be enough in most years to create volatility. The market, however, seems to be ignoring a contentious election, a geopolitically challenged environment and an uncertain Chinese recovery. We are concerned that the Chinese may seek to export their way out of their difficulties in an environment where the U.S. Dollar remains quite strong. To that point, the impact of other central banks looking to normalize their interest rate policies as well could have an impact on the U.S. Dollar and U.S. competitiveness. While Chair Powell seems to show confidence the FOMC will still be able to execute its 3 rate cuts for the year and that the U.S. economy can achieve a soft landing, we are skeptical this can be done seamlessly. Certainly, the volatility of treasury yields and the strong performance we have seen in gold, silver and crude give us the impression that investors continue to believe inflation protection serves a role in portfolios. We believe these trends also warrant protecting against equity drawdowns and the possibility of volatility spikes.
As we look ahead to this next quarter and the remainder of 2024, we think investors are increasingly more focused on earnings and becoming less convinced than they were that the Fed will aggressively ease policy. As the quarter ended, S&P 1-year analyst earnings growth expectations increased from about 8% to 9%. We are concerned that this will be difficult to achieve unless global growth fully recovers. Even domestically, consumer behavior is not showing quite the robustness of 2023 and there are concerns that elevated energy costs will mute consumption. Unless the Fed eases policy to help borrowers reduce costs, there is the risk that margins and earnings will struggle. We also believe the difference between the earnings growth of the top tier mega cap companies (in the mid-teens) and the smaller and mid-cap companies (in the very low single digits) are unsustainable without some correction. While the AI miracle and the sustained fiscal expansion is supportive of growth and equities in the near term, we think investors are well served to seek diversification. We continue to remind investors that fixed income is more volatile than one would expect at these elevated yields. That is because the Fed’s policy is laser focused on yields and whether inflation is at a sustainable target level yet. As the uncertainty remains, fixed income may not offer the traditional negative correlation to equities investors expect in times of crisis. With the market currently hoping for an outcome that would benefit both bonds and stocks, we see an inherent risk to traditional asset allocation. As we are always hedged and positioned for drawdown protection with solid upside capture, we expect to perform well during those periods. In that kind of environment, JDIEX’s ability to drop its correlation to equities and benefit from rises in volatility make it a very solid diversifier.
Diversification does not guarantee a profit nor protect against loss in any market.
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.
| 3/31/2023 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | SINCE INCEPTION (8/3/2015) |
|---|---|---|---|---|---|---|
| I Shares | 5.60% | 5.60% | 15.90% | 8.08% | 8.15% | 6.43% |
| Morningstar Options Trading Category | 4.36% | 4.36% | 16.22% | 6.02% | 6.78% | 4.36% |
| S&P 500 TR | 10.56% | 10.56% | 29.88% | 11.49% | 15.04% | 13.21% |
Performance data quoted above is historical. 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. Investors cannot directly invest in an index, and unmanaged index returns do not reflect any fees, expense, or sales charges. For performance information current to the most recent month-end, please call 888-814-8180 or visit Funds.Easterlyam.com.
Source: Morningstar Direct.
Total return for all periods less than one year is an aggregate number (not annualized) and is based on the change in net asset value plus the reinvestment of all income dividends and capital gains distributions.
Total return for all periods less than one year is an aggregate number (not annualized) and is based on the change in net asset value plus the reinvestment of all income dividends and capital gains distributions.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least December 31, 2024 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 1.25%, 1.50%, 2.25% and 0.99% respectively, subject to possible recoupment from the Fund in future years. For more information, please refer to the Fund’s summary prospectus and prospectus.
Glossary
VIX: The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near- term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility.
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.
Risks & Disclosures
IMPORTANT FUND RISK
Mutual funds involve risk, including possible loss of principal. Options involve risk and are not suitable for all investors. Writing a covered call option allows the Fund to receive a premium (income) for giving the right to a third party to purchase shares that the Fund owns in a given company at a set price for a certain period of time. There is no guarantee of success for any options strategy. Increased portfolio turnover may result in higher brokerage commissions, dealer mark- ups and other transaction costs and may result in taxable capital gains. Investments in lesser-known, small and medium capitalization companies may be more vulnerable to these and other risks than larger, more established organizations.
Structured investments are formed by combining two or more financial instruments, including one or more derivatives. Structured investments may carry a high degree of risk and may not be suitable for many members of the public, as the risks associated with the financial instruments may be interconnected. As such, the extent of loss due to market movements can be substantial. Prior to engaging in structured investment transactions, you should understand the inherent risks involved. In particular, the various risks associated with each financial instrument should be evaluated separately as well as taking the structured investment as a whole. Each structured investment has its own risk profile and given the unlimited number of possible combinations, it is not possible to detail in this Risk Disclosure Statement all the risks which may arise in any particular case.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. The Easterly Funds are distributed by Easterly Securities LLC, member FINRA, SIPC. Easterly Investment Partners LLC and EAB Investment Group LLC are affiliates of Easterly Securities LLC. Orange Investment Advisers, LLC and Ranger Global Advisers, LLC are not affiliated with Easterly Securities LLC.
Easterly Investment Partners LLC serves as the investment adviser to the Easterly family of mutual funds and related portfolios. Easterly Investment Partners LLC is an SEC registered investment adviser; see Easterly Investment Partners’ Form ADV at www.sec.gov. Registration does not imply and should not be interpreted to imply any particular level of skill or expertise.
There is no assurance that the portfolio will achieve its investment objective. A CLO is a trust typically collateralized by a pool of loans. A CBO is a trust which is often backed by a diversified pool of high risk, below investment grade fixed income securities. A CDO is a trust backed by other types of assets representing obligations of various parties. For CLOs, CBOs and other CDOs, the cash flows from the trust are split into two or more portions, called tranches. MBS and ABS have different risk characteristics than traditional debt securities. Although certain principals of the Sub-Adviser have managed U.S. registered mutual funds, the Sub-Adviser has not previously managed a U.S. registered mutual fund and has only recently registered as an investment adviser with the SEC.
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