While much of the optimism around Fed policy moving towards a dovish bias was removed in Q1 2024, there was further uncertainty in the interplay between the inflation data and Chair Powell’s messaging. Ultimately, economic data did not clearly signal the weakening of the economy, labor, or inflation. Still, the market decided to pivot away from a stance dependent on the easing narrative to embracing the momentum and AI tech narrative. While small and mid-cap stocks performed a bit better in Q1, the divergence between the equally weighted S&P 500 Index and the market cap weighted (mega-cap influenced) S&P 500 Index (“Index”) grew once again in Q2. So, while the second quarter provided solid returns, there remains some unease about the high valuation and earnings dependency the Index has developed on the very largest tech names rather than a contribution to earnings growth from a broader group of securities. With the Index up 4.28% for the quarter, the Easterly Hedged Equity Fund (JDIEX) (“Fund”) solidly gained 3.65% for the quarter (85% upside capture to the benchmark) within a relatively calm volatility environment (VIX opened at 13 and closed at 12.4). It achieved this performance while maintaining lower volatility and relatively consistent defensive characteristics. With significantly less volatility, the Fund has returned 9.46% YTD vs. 15.29% for the Index (62% capture).
Investors have been encouraged by earnings improvement and broadening small and mid-cap company earnings expectations. However, we remain concerned that avoiding an index correction relies on a few mega-cap stocks continuing to meet ever-growing earnings expectations. We saw some of this in action with Nvidia’s post-split performance and think relying on these large momentum names could be problematic if the market isn’t willing to recognize smaller and mid-cap performance more tangibly. However, without some support from Fed easing, investors will remain unwilling to commit to those sectors. The narrative from the Fed and its speakers supports the idea that easing will be gradual and limited in scope. While no one would complain about the Index’s 4.28% return in Q2, its tighter trading ranges and negative equal-weighted S&P 500 return (in contrast to the 10.5% first quarter and positive equal-weighted S&P return) highlight this rally’s unusual nature.
Investors have been encouraged by earnings improvement and broadening small and mid-cap company earnings expectations. However, we remain concerned that avoiding an index correction relies on a few mega-cap stocks continuing to meet ever-growing earnings expectations. We saw some of this in action with Nvidia’s post-split performance and think relying on these large momentum names could be problematic if the market isn’t willing to recognize smaller and mid-cap performance more tangibly. However, without some support from Fed easing, investors will remain unwilling to commit to those sectors. The narrative from the Fed and its speakers supports the idea that easing will be gradual and limited in scope. While no one would complain about the Index’s 4.28% return in Q2, its tighter trading ranges and negative equal-weighted S&P 500 return (in contrast to the 10.5% first quarter and positive equal-weighted S&P return) highlight this rally’s unusual nature.
As we look at the risks in the market, we find the opportunities to participate in gains but still defend with our established structure, giving us confidence that our investors are being well served. This is because the low levels of volatility and the bullishness in the options market provide affordable and efficient positioning. When we look at various risk metrics such as stock-bond correlations, intra-S&P 500 stock correlations, and credit spreads, we see a good measure of complacency that justifies a strong allocation to the Fund as a core position for investors. Intra stock correlations are at decade lows, implying that macro risks are nearly non-existent. From global conflicts and Fed policy to the approaching highly contested US Presidential (as well as global) elections, we believe systematic or macro risks are actually elevated and worthy of prudence. We remind investors that fixed income is typically more volatile than expected at these elevated yields. As we said last quarter, 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 has not offered 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 inherent risk to the traditional asset allocation. And, of course, if fears of an economic slowdown gain credibility, the credit cycle may worsen and increase levels of market volatility. We expect to perform well during those moments as we are always hedged and positioned for drawdown protection with attractive capture. In that kind of environment, the Fund’s ability to drop its correlation to equities and benefit from rises in volatility could make it a good 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.
| 6/30/2024 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | SINCE INCEPTION (8/3/2015) |
|---|---|---|---|---|---|---|
| I Shares | 3.65% | 9.46% | 15.16% | 8.55% | 8.63% | 6.67% |
| A Shares w/ load* | 1.57% | 7.16% | 12.63% | 6.19% | 7.12% | 5.64% |
| A Shares w/o load | 3.63% | 9.36% | 14.95% | 8.31% | 8.39% | 6.34% |
| C Shares w/ load* | 2.39% | 7.88% | 13.06% | 7.48% | 7.51% | 5.52% |
| C Shares w/o load | 3.39% | 8.88% | 14.06% | 7.48% | 7.51% | 5.52% |
| R6 Shares | 3.69% | 9.59% | 15.53% | 8.83% | 9.00% | 8.63% |
| S&P 500 TR Index | 4.28% | 15.29% | 24.56% | 10.01% | 15.05% | 14.48% |
*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 year 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.
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 December 31, 2024 for I, A, C and R6 Shares to ensure that net annual operating expenses will not exceed 1.44%, 1.69%, 2.44% and 1.18%, 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 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.
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.
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.
S&P 500 Index: An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
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
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.
There is no assurance that the Fund will achieve its investment objective. The Fund share price will fluctuate with changes in the market value of its Fund investments. Mutual Funds involve risk including possible loss of principal. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity. Derivatives may be volatile and some derivatives have the potential for loss that is greater than the Fund’s initial investment. If the Fund sells a put option, there is risk that the Fund may be required to buy the underlying investment at a disadvantageous price. If the Fund sells a call option, there is risk that the Fund may be required to sell the underlying investment at a disadvantageous price. Shares of ETF share many of the same risks as direct investments in common stocks or bonds. Because a large percentage of the Fund’s assets may be invested in a limited number of issuers, a change in the value of one or a few issuers’ securities will affect the value of the Fund more than would occur in a diversified fund.
There is no assurance that the Fund 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.
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.
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.
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