Market Commentary
The U.S. economy exhibited resilience in the first quarter of 2024, exceeding expectations and contributing to signs of global economic stabilization. Reported inflation figures declined from 9% to 3% on a year-over-year basis, in part due to the Federal Reserve’s series of rate hikes that brought the Fed Funds rate from 0.25% to 5.50% in about fifteen months. While inflation has come down on a rate-of-change basis, it remains structurally high as the market focuses on inflation’s directionality and subsequent Federal Reserve monetary policy decisions.
The Fed’s implied transition to an easing stance after rapid tightening has notably relaxed financial conditions and boosted investor confidence, particularly revitalizing cyclical sectors through the second half of 2023 and into 2024. Large cap stocks outperformed during Q1 on these rate cut expectations, while our view is that stubbornly high inflation will make it difficult to cut rates in the near-term despite any political pressure the Fed may be feeling during an election cycle. Inflation remains high globally, not just here in the U.S. The Fed’s balance sheet expanded from $1 trillion to $9 trillion during the zero-interest-rate environment of the 2010s and through the Covid-19 Pandemic, and while they have reduced it to about $7.5 trillion today, we cannot ignore the contrast between what the equity market is yearning for (rate cuts) and what the Federal Reserve is doing (reducing their balance sheet by up to $95B per month). In reducing its balance sheet, the Fed can either allow securities to mature or in some instances sell securities back into the market. Neither situation is conducive to moving toward a lower interest rate environment relative to when the Fed was actively purchasing these securities, artificially driving yields lower. While the Fed has publicly signaled that they may be done shrinking their balance sheet soon, and they don’t expect a return to a sub-$4 trillion balance sheet, it is unrealistic to expect them to become an active purchaser once again in the near-term given the inflation backdrop. This is an area the market does not seem to be focused on as it searches for clues concerning the timing of when the Fed will begin to cut interest rates.
Despite certain positive signs such as strong reported jobs figures and a low unemployment rate, concerns linger, and cracks are showing amidst an otherwise optimistic 2024 economic outlook. Consumer behavior remains a critical economic driver, with broad wage gains supporting spending despite increasing inflation pressures. Notably, there’s a growing reliance on credit, particularly among lower-income households, with credit card debt reaching greater than $1.1 trillion, an all-time-high. Spending patterns are changing with younger demographics choosing to spend more freely on discretionary items as they view the concept of home ownership unrealistic for them in the near future. The rising delinquency rates in various debt types, excluding student loans, underscore emerging financial stresses as non-mortgage debt interest payments now parallel mortgage interest burdens.
We are also watching corporate debt levels closely, as more highly levered companies who had access to cheap debt are now finding themselves having to roll that debt at much higher (and costly) rates. Rate cuts don’t bail out companies in this situation either, given we are not returning to near 0% rates of the 2010s. We also question the impact of higher rates on exploding federal deficits. With an annual deficit of more than $2T, as a percentage of GDP (about 8%) the deficit is larger than any fiscal year in history where the country did not face a war, recession or other major emergency. The path to fiscal deficit reduction looks arduous given congressional polarization. Simultaneously, interest payments on the fiscal debt was up nearly 40% in 2023 to about $660B and will only continue to rapidly accumulate. How these deficits will reverberate through the general economy remains to be seen.
U.S. equities experienced a robust Q1 2024, with the S&P 500 achieving a 10.2% gain and surpassing the 5,200 mark for the first time. This performance builds on the momentum from 2023, with back-to-back quarterly gains yielding a cumulative increase of 22.5%. The quarter’s strong equity performance was underpinned by resilient job creation, solid wage growth, and consumer spending, alongside better-than-expected corporate earnings.
S&P 500 companies surpassed earnings expectations by 4% for Q4 2023, with projections indicating a 12% earnings growth in 2024. Historical data suggests a favorable outlook when equities exhibit such growth patterns, although we question if investors will continue to be willing to pay a historically high 20x earnings for the narrow breadth of the S&P 500 where the “Magnificent 7” constitute 28% of the index.
Sector-wise, Communication Services, Energy, and Information Technology led the market, with Financials and Industrials also outperforming the broader index. Over 80% of S&P 500 constituents were above their 200-day moving average by the end of Q1, signaling broad market strength. Small-caps, although trailing behind large-caps, are poised for potential growth, especially with the Russell 2000 expected to see larger earnings growth rebound compared to the S&P 500.
Performance Highlights
The Easterly Snow Small Cap Value Fund (SNWIX) had strong positive performance of 10.78% in the first quarter of 2024, significantly outperforming its Russell 2000 Value Index of 2.90%. The Fund’s success was predominantly driven by stock selection, which significantly contributed to its overall outperformance, while the allocation effect played a minor role.
On a sector level, Information Technology and Consumer Discretionary sectors were standout performers, contributing positively to the Fund’s excess return over the benchmark. Financials also added value despite a negative benchmark return in this sector. However, Health Care and Industrials detracted from performance, with Health Care showing a notable negative selection effect. The allocation to cash limited the upside potential given the overall positive benchmark return.
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.
Portfolio Attribution
Top 5 Performance Contributors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| SUPER MICRO COMPUTER INC | 1.76 | 2.74 |
| JACKSON FINANCIAL INC-A | 4.04 | 1.19 |
| PILGRIM'S PRIDE CORP | 4.20 | 0.98 |
| SILICON MOTION TECHNOL-ADR | 3.92 | 0.97 |
| DELEK US HOLDINGS INC | 3.75 | 0.75 |
Super Micro Computer (SMCI)
Super Micro Computer Inc. (SMCI) showed remarkable performance in the first quarter of 2024, with a stock return of 255.3%, vastly outperforming the Information Technology sector. SMCI’s explosive growth over the last year relates to the aggressive push in AI infrastructure development which the company’s products are highly efficient and quick to market. Strategic developments, such as the expansion of the Malaysia facility and a strong market response to the company’s S&P 500 inclusion, contributed to the stock’s momentum in the quarter. We continue to hold shares of SMCI as the company’s backlog growth and margin expansion opportunities remain compelling, though we have reduced our position as shares have surged.
Jackson Financial (JXN)
Jackson Financial Inc (JXN) posted impressive performance in the first quarter of 2024, with a stock return of 30.7%, significantly outperforming the Financials sector, which experienced a downturn. With a risk-based capital ratio well above the industry standard, Jackson Financial is poised for robust capital generation, expecting to return $550 to $650 million to shareholders in 2024. The company’s dividend increase to $0.70 per share reflects confidence in its financial health and future prospects.
Pilgrim’s Pride Corp (PPC)
Pilgrim’s Pride Corp (PPC) demonstrated a strong first quarter in 2024 with a stock return of 24.1%, significantly outperforming the Consumer Staples sector. Noteworthy developments included a rise in U.S. revenue by 9.5% year-over-year and improved operational margins in Europe, attributed to strategic plant network consolidation and positive pricing dynamics. PPC’s adept handling of supply chain efficiencies and favorable commodity pricing, particularly in corn and soybean stocks, bolstered its financial standing.
Top 5 Performance Detractors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| COLUMBIA BANKING SYSTEM INC | 2.91 | -1.04 |
| INTEGRA LIFESCIENCES HOLDING | 2.76 | -0.59 |
| AMN HEALTHCARE SERVICES INC | 2.05 | -0.58 |
| PHOTRONICS INC | 4.44 | -0.53 |
| FIRST COMMONWEALTH FINL CORP | 1.94 | -0.21 |
Columbia Banking System (COLB)
Columbia Banking System Inc (COLB) encountered a challenging quarter, with a significant shortfall in its financial performance, particularly in net interest margin (NIM) and net interest income (NII). The adjusted earnings per share stood at $0.44, markedly below the anticipated $0.79, primarily due to a 13 basis point sequential drop in NIM to 3.78%. This decline was unexpected, given previous guidance suggesting stability if deposit flows remained positive. However, a shift in deposit composition and an increased cost of interest-bearing deposits, which rose to 2.54% for Q4 and 2.71% for December, exerted pressure on margins. Additionally, a higher-than-expected provision for credit losses at $54.9 million underscored potential concerns in the regional economic environment where COLB operates. Given the quarter’s results and the lack of clear trajectory for margin improvement, we reduced our position.
Integra Life Sciences (IART)
Integra LifeSciences Holdings (IART) faced a notable underperformance in the quarter, with its EPS of $0.83 on total revenue of $397 million falling short of expectations. Gross margin decreased to 64.7%, affected by supply constraints in the Skin business and the Boston manufacturing facility’s downtime. The guidance for FY 2024 indicates a cautious outlook, with projected revenue and EPS below previous expectations, largely due to ongoing challenges in product supply and the gradual reintegration of the Boston facility’s portfolio. The stock remains cheap on a P/E basis with stable, growing end markets and a path towards higher normalized EPS.
AMN Healthcare Services Inc (AMN)
AMN Healthcare Services Inc shares underperformed this quarter, with shares falling by approximately 17%. Despite reporting better-than-expected fourth-quarter results with adjusted EPS of $1.32 and revenues of $818 million, the company’s first-quarter guidance for 2024 fell short of expectations due to a continued downturn in travel nurse assignments. Bill rates, while stable, are impacted by weaker-than-expected winter order volumes. AMN Healthcare’s recent performance reflects ongoing sector-specific challenges, particularly in its travel nurse and allied staffing segments. AMN’s proactive strategies and recent growth of the backlog indicate potential for recovery in the latter half of 2024. AMN’s recent track record of lowering guidance has negatively impacted sentiment, though we believe the strong cash flow generation and balance sheet support shares during near-term uncertainty.
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.
Looking Ahead
Looking ahead for the rest of 2024, the Easterly Snow Small Cap Value Fund remains strategically positioned to navigate the complexities of the economic landscape. While we expect volatility in 2024 given monetary policy uncertainty, a full U.S. election cycle, and ongoing geopolitical instability as just a few of the potential overhangs, as active managers we look forward to opportunities to find and populate our portfolio with stocks where the share price is trading at levels disconnected from underlying fundamentals. The emphasis on small-cap value stocks offers a robust value proposition, especially if the Federal Reserve’s actions deviate from the anticipated rate cuts, which could adversely affect high-valuation mega-cap stocks where a higher-for-longer discount rate is applied to their future cash flows.
The Fund’s approach, grounded in fundamental analysis and active management, is designed to deliver consistent performance, balancing the pursuit of alpha with robust risk mitigation strategies. The Fund continues to seek out companies with idiosyncratic, stock-specific catalysts that drive excess returns over full market cycles. Our investment team are no strangers to successfully navigating volatility over full market cycles as our core philosophy and process has been in place for over 30 years with no style drift. In closing, we remain dedicated to delivering strong long-term performance and transparent communications to our investors. Thank you for your confidence and commitment in Easterly Investment Partners. As always, we welcome your comments and questions.
About Easterly Investment Partners
Easterly Investment Partners (EIP) is the advisor of the Easterly Snow Small Cap Value Fund. EIP is the traditional, fundamental based investment arm of Easterly Asset Management’s multi-affiliate platform. EIP’s current investment line-up spans the entire value equity market cap spectrum. Guided by a consistent contrarian investment philosophy, our value strategies are led by industry veterans and experts that have refined their craft and delivered strong performance through multiple market cycles. As of March 31, 2024 EIP had approximately $1.86 billion in AUM.
| 3/31/2024 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | 10-YEAR | SINCE INCEPTION (4/8/2006) |
|---|---|---|---|---|---|---|---|
| I Shares | 10.78% | 10.78% | 35.91% | 8.64% | 14.34% | 7.21% | 10.54% |
| Morningstar Small Value Category | 4.66% | 4.66% | 20.14% | 5.90% | 10.28% | 7.23% | 9.20% |
| Russell 2000 Value | 2.90% | 2.90% | 18.75% | 2.22% | 8.16% | 6.87% | 9.16% |
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. Performance data quoted above is historical. Fund Holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.
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 2.20%, 2.45%, 3.20%, and 2.20% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.25%, 1.50%, 2.25% and 1.00% 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 1.25%, 1.50%, 2.25%, 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.Funds.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.
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.
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.
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.
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