Market Commentary
During the first quarter of 2024, the Easterly Long/Short Opportunity Fund (SNOIX) rose 6.9% while the Russell 3000 Value Index rose by 8.6%. Our market hedge was the primary reason for the relative underperformance. Stock selection was a negative contributor, albeit modest, with Health Care and Information Technology detracting from relative performance, partially offset by contribution within Consumer Discretionary and Utilities sectors.
Strong equity performance was a continuation of the broadening market rally that began in November 2023. The outlook for economic growth has improved and with it, so have U.S. equity market valuations. The S&P 500 now trades at 21x forward earnings, above its 30-year average of 16.6x. The rise in market valuations has been driven by an increased concentration of the largest stocks. As of 3/31/2024, the weight of the top 10 stocks in the S&P 500 increased to 33.5% of total market capitalization. Across the market cap spectrum, growth stocks outpaced value stocks on relative terms. The valuation disparity between value and growth stocks widened, nearing levels last seen during the onset of the Covid-19 pandemic and continues to remain wide by historical standards.
Attribution
We are pleased with Q1 2024 performance in the Long/Short Opportunity Fund given the dichotomy present in current equity markets. Additionally, we are happy to report that once again, stock selection in the long portfolio continues to be a driver of overall performance.
During the quarter, our long portfolio returned 10.3%. Holdings in Energy, Financials, and Industrials sectors drove our performance. Relative to the benchmark, we remain overweight Energy, Materials, and Information Technology. Our exposure to Health Care and Financials sectors decreased as we rotated into new ideas in Consumer Staples, Communication Services and Utilities sectors; we remain underweight these sectors, and Real Estate, as earnings are particularly sensitive to rising interest rates.
During the quarter, our short portfolio detracted 330bps from overall performance. The majority of 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 contributed to underperformance, though our active shorts are primarily intended to reduce the sector exposure of our long portfolio.
During the quarter, our short portfolio detracted 300bps from overall performance. The majority of losses were associated with our market hedge position. While frustrating in a bull market, we believe this positioning is prescient given current valuations and uncertainty around the economic outlook.
Relative to the end of Q4 2023, our gross exposure at the end of Q1 increased, but our net exposure was relatively unchanged at 67%. Considering the lofty valuations of market indices, we increased our gross exposure to gain more concentration in our best ideas, as we believe returns will be increasingly driven by idiosyncratic catalysts. Option premiums on both short puts and short calls declined along with market volatility, giving us the opportunity to reduce exposure in selective names. We also added to our market hedge with more laddered option strategies to provide support at various strike prices and expiries, primarily on the S&P 500. Currently, the implied equity risk premium for the S&P 500 has dropped to its lowest level in more than 20 years, as higher-for-longer interest rates make bonds a viable alternative against broad equity market indices.
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.
Contributors and Detractors
Our top three contributors for the long portfolio came from different sectors and were Commercial Metals Co. (CMC), JP Morgan (JPM) and Vistra Corp (VST).
Shares of Commercial Metals Co. (CMC) contributed positively to performance as supply and demand dynamics in the steel market started to improve, leading to a run up in the stock before earnings were reported. CMC’s earnings report was strong, though the near-term outlook disappointed some investors. CMC demonstrated robust performance in North America and improvements in Europe. We continue to hold shares of CMC as we believe the company’s enhanced scale and clean balance sheet positions the company well for increasing infrastructure spend.
JPMorgan Chase (JPM) had strong performance in the first quarter of 2024 with an 18.5% stock return, outpacing the Financial sector’s growth. The strong performance was fueled by a strong Q4 report which topped street expectations. Additionally, JPMorgan’s pristine balance sheet, positions the bank to perform well in an environment with economic and regulatory uncertainty.
Vistra Corp (VST) returned 81.4% in the quarter. During the quarter, VST closed on their acquisition of Energy Harbor, expanding their nuclear exposure, and positioning the company with a favorable mix of non-fossil fuel energy generation. VST has heavy exposure to the Texas power market (ERCOT) which is expected to see an increase in energy demand as AI datacenter buildouts accelerate, given the significant amounts of energy they require. For reference, Texas is already the second largest datacenter market in the country. 3rd party forecasters assume a doubling of datacenter load in the U.S. by 2030 and Texas remains an attractive market for datacenter construction.
Our top three detractors from the long portfolio also came from different sectors and included Columbia Banking System Inc (COLB), B2Gold Corp (BTG), and NCR Voyix Corp (VYX).
Shares of Columbia Banking System (COLB) detracted from overall performance as the regional bank reported disappointing results, which were in stark contrast to what the company had announced on their previous earnings call. Net interest margin (NIM) and net interest income (NII) were significantly below guidance and expectations, as higher interest rates resulted in an unanticipated shift in deposits, pressuring margins. Additionally, higher-than-expected provision for credit losses underscored potential concerns in the regional economic environment where COLB operates. We chose to exit our COLB position and allocate proceeds to investments with more immediate catalysts.
Shares of B2Gold Corp (BTG) sold off during the quarter as the mid-cap gold producer announced disappointing 2024 production guidance as well as increased cost guidance associated with their recently acquired Back River Gold District Goose mine project. Despite higher than anticipated costs, we believe the project has been significantly derisked, with the company expecting a significant production and cash flow uplift in 2025 as the mine turns to production.
Shares of NCR Voyix Corp (VYX) detracted from performance as the company saw higher than expected dis-synergies associated with their split from NCR Atleos (NATL). While disappointing, VYX continues to successfully execute their margin expansion story, as more revenue is generated from software and services. Shares are trading at 7x forward earnings and offer a unique opportunity as VYX operates as a standalone entity.
Looking Ahead
With 2024 S&P 500 earnings estimates up 10% over the past twelve months, we expect markets to remain resilient despite contradicting signs of economic health. While we expect volatility in 2024 given monetary policy uncertainty, a full U.S. election cycle, and ongoing geopolitical instability, as active managers we look forward to opportunities where the share price is trading at levels disconnected from underlying fundamentals.
Our consistent application of our investment approach has led our Fund to outpace the broad-based indices over full market cycles. In turn, we continue to hold companies with compelling business fundamentals, skilled management teams, recurring cash flows and the flexibility to adapt to an inflationary environment. We believe the strong cash flow generation and capital flexibility of our businesses will provide meaningful protection if market fundamentals deteriorate. Thank you for your commitment and loyalty to Easterly Investment Partners.
Glossary
Long/Short Morningstar Category: Long-short portfolios hold sizeable stakes in both long and short positions in equities and related derivatives. Some funds that fall into this category will shift their exposure to long and short positions depending on their macro outlook or the opportunities they uncover through bottom-up research. Some funds may simply hedge long stock positions through exchange-traded funds or derivatives. At least 75% of the assets are in equity securities or derivatives.
| 3/31/2024 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | 10-YEAR | SINCE INCEPTION (4/8/2006) |
|---|---|---|---|---|---|---|---|
| I Shares | 6.86% | 6.86% | 18.11% | 7.29% | 10.36% | 5.62% | 6.36% |
| Morningstar Long/Short Equity Category | 7.15% | 7.15% | 16.52% | 5.38% | 7.31% | 4.67% | 2.83% |
| 70%/30% Blended Index | 6.40% | 6.40% | 15.77% | 6.47% | 8.09% | 6.84% | 5.98% |
| Russell 3000 Value | 8.62% | 8.62% | 20.18% | 7.73% | 10.17% | 8.86% | 7.56% |
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 invest directly into an index. For performance information current to the most recent month-end, please call 888-814-8180.
SOURCE: Morningstar Direct. 70%/30% Blended Index: 70% Russell 3000 Value TR and 30% ICE BofA 3 Month U.S. Treasury Bill Index. Prior to June 29, 2018, the Fund was named the Snow Capital Opportunity Fund.
The Fund’s management has contractually waived a portion of its management fees until June 30, 2024 for I, A, C and R6 Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.36%, 1.61%, 2.35%, and 1.36% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.36%, 1.61%, 2.35% and 1.13% respectively. 5.75% is the maximum sales charge on purchases of A shares.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least June 30, 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 1.30%, 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.
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 www.EasterlyAM.com.
Risks & Disclosures
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. Mutual funds involve risk, including possible loss of principal. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities, LLC. Easterly Investment Partners, LLC and EAB Risk Solutions, LLC are affiliates of Easterly Securities, LLC, member FINRA/SIPC. Orange Investment Advisors, LLC and Ranger Global Advisers are not affiliated with Easterly Securities, LLC. Certain associates of Easterly Securities, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
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.
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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