The Easterly Hedged Equity Fund (JDIEX) in Q2 generated a 4.3% return bringing the year-to-date return to 8.9%. The year’s market narrative continues to be expectations of a less hawkish Fed fueled by evidence that headline inflation is moderating. Some voters on the Federal Open Market Committee (FOMC) were leaning to at least pause and reconsider continued rate hikes. This expectation proved true as the Fed finally stood pat at 5.00-5.25% with what has been deemed a hawkish pause because of the unchanged dot plots and Chair Powell’s reiterations that rate hikes may still be necessary. Not to be ignored though, was the well contested temporary extension of the debt ceiling, which further stoked short term sentiment and led the VIX to drop from 18.7 to 13.5 in the quarter. While economic data provided some evidence that inflation is improving, the strong divergence of spending toward services away from goods is impacting manufacturing. In the context of lower industrial production without a meaningful recovery in China or Europe to improve expectations, there remains the potential for the US and Europe to slip into a recession or at least an earnings slowdown that is not given much credence by bullish strategists.
The US 2yr-10yr Treasury yield curve ended the quarter inverted by 1.07%, which, while not a short-term market catalyst, it has historically signaled that a slowdown is on the way. One point recently that has not escaped commentators is the overreliance of equity markets on the very largest mega-cap tech companies to generate much of the performance. In fact, year-to-date, the equal weighted S&P 500 index returned 7.0% vs the market cap weighted index’s 16.9%. This unusually divergent performance may imply the market is in a bear market rally rather than a new bullish phase. As a result, we continue to see prudence in remaining invested but maintaining downside protection as the potential of a Fed, earnings recession and/or geopolitical surprise remains in play. As the quarter ended, the full year S&P 500 earnings growth expectations stood at approximately -0.37% and 10.6% for 2024. We see earnings for Q2 as materially important. If these optimistic forecasts are downgraded, we think it would be reasonable to expect a decline in equity markets. We still expect those figures to bottom closer to -7 to -10% earnings growth as recession reality coalesces. Similarly, volatility (VIX) should recover somewhat as investors revert from some of the most bullish options skew we have seen in years toward a more risk averse stance.
While volatility has been dropping of late, the fact that bullishness and call skew has remained elevated has given the Fund the ability to collect attractive premiums (income), a hallmark of the strategy. This provides additional support to our historically solid risk adjusted returns as our systematic approach delivers a consistently low level of volatility versus the market. As we approach the next quarter, we see signs that the Fed’s recent pause could be short-lived and that both the July and September meetings may be accompanied by rate hikes. We remain concerned that “higher for longer” rates could be a challenge to credit conditions and volatility in general. The fact that the VIX futures curve remains steep out to March of 2024 gives us a sense that prognostications of market stability are premature. With that and realizing elevated volatility can often disrupt diversifying correlations across asset classes, we continue to suggest investors avail themselves of the stability and predictability of the Fund’s strong diversification characteristics. Our returns vs the benchmark make clear why drawdown minimization is so important to portfolio returns.
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.
| 6/30/2023 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | SINCE INCEPTION (8/3/2015) |
|---|---|---|---|---|---|---|
| I Shares | 4.31% | 8.91% | 13.12% | 7.98% | 6.95% | 5.65% |
| Morningstar Options Trading Category | 5.41% | 11.37% | 13.56% | 6.88% | 5.40% | 3.97% |
| S&P 500 TR | 8.74% | 16.89% | 19.59% | 14.61% | 12.31% | 12.01% |
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.
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.
The Fund’s management has contractually waived a portion of its management fees until December 31, 2023 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 1.85%, 2.10%, 2.85% and 1.85% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.36%, 1.61%, 2.36% and 1.10% 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 December 31, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.25%, 1.50%, 2.25% and 0.99%, respectively, subject to possible recoupment from the Fund in future years.
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 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. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC and EAB Investment Group, LLC are not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
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.
MBS and ABS may be more sensitive to changes in interest rates and may result in prepayments which can include the possibility that securities with stated interest rates may have the principal prepaid earlier than expected, which may occur when interest rates decline. Rates of prepayment faster or slower than expected could reduce the Fund’s yield, increase the volatility of the Fund and/or cause a decline in NAV. With respect to the tranches, which are part of CLOs, CBOs, and CLOs, each tranche has an inverse risk- return relationship and varies in risk and yield that depending on economic factors such as changes interest rates can adversely affect the Fund.
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 OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.