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Perspective

Q3 2024 Long/Short Opportunity Fund Commentary

During the third quarter of 2024 (Q3 2024), the Easterly Snow Long/Short Opportunity I (SNOIX) rose 2.7% while the Russell 3000 Value Index (RAV) rose by 9.5%. Relative underperformance during the quarter was primarily attributed to our market hedge, which detracted from overall and relative performance. Additionally, stock selection within the long equity portfolio also detracted from relative performance with Health Care, Energy, and Industrials weighing on results. This underperformance was partially offset by contribution from Materials, Information Technology, and Consumer Staple sectors. Year-to-date equity market performance continues to be led by the Information Technology sector which is responsible for 40% of the S&P 500’s total return. Despite outsized contribution, the broadening of overall sector performance has seen both cyclical and rate-sensitive sectors, including Utilities, Financials, and Industrials, producing year-to-date returns of over 20%. The expansion of the equity rally is healthy and aligns with an improved earnings outlook, which is forecast to see notable improvement within Materials, Health Care, and Financials through year-end.

Within financial markets, Q3 2024 marked a significant, yet anticipated change to the Federal Reserve’s (the Fed) monetary policy outlook. In September, the U.S. central bank cut their benchmark interest rate by half a percentage point and signaled that more reductions would follow, marking the start of an easing cycle. The cut signified the Fed’s confidence that inflation was on a path to their 2% goal, with a recalibration in focus toward ensuring that restrictive monetary policy wouldn’t cause an increase in unemployment. The bond market had largely priced-in the policy shift over the course of the quarter, which saw the U.S. two-year note’s yield dip below the 10-year note’s yield for only the second time since 2022.

As fundamental bottoms-up equity investors, we’re not overly focused on the bond market. However, we keep a close eye on how these changes impact the economy, and as a result, our investments. Oftentimes a steepening of the yield curve (such as the one we experienced in Q3 2024) is a sign that a recession could happen within the next three to six months. This isn’t always the case, and while there are a variety of macro risks that could tilt the U.S. into recession, we see the current steepening as a sign of increased expectations for a soft landing. The National Bureau of Economic Research (NBER) uses four variables to determine whether the U.S. economy is in recession: Personal Consumption Expenditures (PCE), payrolls, industrial production, and real personal income net of transfer payments. None of these key factors are decreasing, indicating less risk for a possible recession. Additionally, as inflation has decreased, central banks around the world have started to lower their own benchmark interest rates to help prevent excess damage to their own economies. Coordinated global monetary easing has allowed for increased excess liquidity within financial markets and is very favorable for U.S. and global economic growth.

Attribution

During this past quarter, our long portfolio returned 5.1%. Contribution was driven by our holdings in Financials, Materials, and Consumer Staples sectors. Relative to the value benchmark, our long equity portfolio remains focused on overweight Energy, Materials, and Information Technology sectors as well as underweight Health Care, Consumer Staples, and Industrials.

Our long equity exposure to Health Care, Energy, and Information Technology sectors decreased as we rotated into new ideas and increased position sizes within Materials, Consumer Discretionary, and Utility sectors. Relative to the benchmark, our long equity exposure increased within the Materials, Financials, and Utilities sectors, while exposure to Health Care, Consumer Staples, and Information Technology declined.

As mentioned, the short portfolio was the primary detractor of overall and relative performance, detracting 3.1% from our total return and 3.3% relative to the benchmark. Most of these losses were associated with our market hedge position. While disappointing, we believe this positioning continues to be prescient given current valuations and the abundance of macro risks that don’t currently concern the market. Our active shorts also detracted from performance, but these are intended to reduce the sector exposure of our long portfolio. This was evident this quarter, as our active shorts within the energy portfolio partially offset the decline within our long energy holdings. Our active option writing detracted 23 basis points (bps) from the Fund’s total return. During the quarter, option premiums on short puts and short calls declined with overall market volatility.

Relative to the end Q2 2024, our gross exposure increased slightly to 163%, while our net exposure declined from 75% to 70%. Our gross exposure increased as we took advantage of attractive option premiums on covered calls to reduce exposure in select names that are nearing their target prices, as well as opportunistically increasing the exposure to our best ideas.

Our market hedge position was slightly higher compared to the end of Q2 2024, due to the strong performance of equity markets. With the implied equity risk premium for S&P 500 remaining near its lowest level in more than 20 years (as higher-for-longer interest rates make bonds a viable alternative against broad equity market indices), we feel our market hedge offers safety in the event of deteriorating economic news or any sudden dislocation in equity markets.

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.

Q3 Contributors and Detractors

Our top three contributors from the long portfolio came from different sectors. Shares of gold miner, Alamos Gold Inc. (AGI), positively contributed to performance following impressive results, driven by strong mining rates and disciplined expense control across its operations in Canada and Mexico. While AGI and its peers have garnered increased attention from investors due to the rise in gold prices, AGI is uniquely positioned for growth from recent exploration success and the closing of an acquisition during the quarter. The company has a clean balance sheet, a seasoned management team, and operates in favorable jurisdictions.

Utility company, Vistra Corp. (VST) outperformed during Q3 2024, benefitting from strong earnings and fueled by several corporate announcements, which suggest strong future earnings growth. In addition to a battery contract win and long-term power purchase agreements with Microsoft Corporation and Amazon, VST announced its plans to acquire the remaining minority interest of Vistra Vision LLC, its green energy subsidiary. This will provide more upside to VST shareholders as the company continues to execute long-term contracts to power datacenters owned by large technology companies. Additionally, the Microsoft deal with Constellation Energy and the announcement around restarting Three Mile Island (the nuclear powerplant) showed the upside to earnings that VST could possibly see with similar deals that the company has been winning. VST owns a unique mix of power generation assets which allow for clean and stable power generation, attractively positioning the company for continued growth.

Our third largest contributor to overall performance was consumer health company Kenvue Inc. (KVUE). We started buying KVUE following their spin-out from Johnson & Johnson. We felt as a pure-play consumer-health company, KVUE would be better positioned to manage their brands and more nimbly address reinvestment needs as some of their product-lines had come under pressure, specifically in their Skin-Health and Beauty segment (SH&B). Performance in SH&B started to return to volume growth in Q2 2024, with volumes up 300bps. Management expects volumes to improve sequentially in the back half of the year and continue to provide an execution catalyst for shares. We continue to like the stock, which trades at a discount relative to peers, at 17.6x earnings, relative to the industry at >20x. KVUE has a strong balance sheet, with net leverage below 2x, allowing for ample capacity to raise the dividend and buy back shares.

Our largest detractors from overall performance also came from three different sectors. Shares of the pharmaceutical company, Pacira Biosciences Inc. (PCRX) were our single largest detractor from absolute and relative performance during the quarter. PCRX shares declined 47%, after the company received a negative patent ruling around their primary marketed therapy, EXPAREL®, which is a non-opioid pain-reliever used in the post-surgical setting. Despite the negative ruling, we feel Wall Street has extrapolated a scenario where multiple generic launches negatively impact EXPAREL’s revenue and pricing in the very near-term. We feel this scenario is highly unlikely.

Shares of Advance Auto Parts (AAP) underperformed in the quarter primarily due to broader pricing concessions than originally expected, which resulted in lower full-year guidance. This negative event masked the favorable actions taken to turn around the business and improve their supply chain. The company also announced the sale of their wholesale distributor, Worldpac, Inc., for $1.5 billion. This is expected to close by year-end and will simplify the business while reducing leverage. AAP remains a major player in the automotive aftermarket, benefiting from its extensive distribution network and customer base across North America. Despite recent setbacks, the ongoing effort to remediate financial controls and restructure its operations could help strengthen their balance sheet while expanding margins and ultimately driving accelerated earnings growth. Trading at a discount relative to peers on what are likely trough earnings, we feel the current valuation reflects the known challenges that the company faces, but also provides significant upside if the company successfully implements its turnaround strategy.

Shares of semiconductor manufacturer Intel Corporation (INTC) underperformed in Q3 2024 following disappointing results with the company’s outlook suggesting continued share loss at a deeper rate than investors were anticipating. INTC also discontinued its dividend while slashing capital expenditure and operating expenses to preserve liquidity. While we expect the turnaround at INTC to take time, the cash flow deterioration negatively impacted the risk/reward profile in the near-term. We liquidated our position in INTC during the quarter to reallocate towards names with more meaningful near-term catalysts.

Looking Ahead

We continue to be very excited about the opportunities for active equity managers as we approach the end of the year and into 2025. Declining recessionary risks, as well as global monetary easing, lay the groundwork for what could be an improved earnings trajectory for areas of the market that haven’t seen the same multiple expansion as mega-cap tech or perceived artificial intelligence (AI) beneficiaries.

Relative to the RAV benchmark, our equity portfolio trades below 12x forward earnings, compared to 17x of the index. The equity portfolio is weighted toward small and mid-cap companies (<$10 billion), as these companies have become severely discounted relative to their large-caps peers. Our positioning is solely a function of stock selection, as valuation levels for these stocks continue to discount a perceived recession. As the soft-landing narrative becomes consensus expectations, we feel the portfolio will see considerable mean-reversion. Mean-reversions are often fast, but can have long-lasting implications for relative performance. An example of this happened this past July after the release of the June CPI report. That day, the NASDAQ fell by 2% while the Russell 2000 Small Cap Index rose by 3.6%, the largest single day outperformance by small cap in over 40 years. While this was only one day, it highlights how quickly markets can adjust to even the slightest change in perceived economic trajectory. Through the co-management of both the long and short portfolios, we believe we’ve positioned the Long/Short Opportunity Fund to benefit from the anticipated earnings recovery for the companies that we own, while minimizing volatility that can arise from unforeseen risks. As confident as we feel about the opportunities that exist for our portfolio, we feel we’re appropriately positioned to benefit from the upside that exists within our long-equity portfolio, while maintaining our net exposure at 70%. Thank you for your commitment and loyalty to Easterly.

Fund Performance (%)

as of 9/30/2024QTDYTD1-YEAR3-YEAR5-YEAR10-YEARSINCE INCEPTION
I Shares2.695.6313.626.299.535.086.12
A Shares w/ load*-3.28-0.626.823.957.974.205.52
A Shares w/o load2.635.4413.366.029.264.825.86
C Shares w/ load*1.403.8211.475.228.454.045.09
C Shares w/o load2.404.8212.475.228.454.045.09
R6 Shares2.695.6313.62N/AN/AN/A4.78
Russell 3000 Value Index9.4716.2327.658.7010.619.17N/A
70%/30% Blended Index7.0012.5420.787.438.477.15N/A

*2% 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 after purchase (effective 8/1/2024). Class C shares convert to Class A shares after 8 years from the last day of the month in which the shares were purchased. Source: Morningstar Direct. See Glossary for index definitions.

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 June 30, 2025 for I, A, C and R6 Shares to ensure that net annual operating expenses will not exceed 1.36%, 1.61%, 2.36% and 1.36%, 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 June 30, 2025 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.

Prior to June 29, 2018, the Fund was named the Snow Capital Opportunity Fund.

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.

There is no assurance that the portfolio will achieve its investment objective.

Risks & Disclosures

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 or by calling 888-814-8180.

Easterly Investment Partners LLC is the investment adviser to the Easterly family of mutual funds. Easterly Investments 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.

The Easterly funds are distributed by Easterly Securities LLC, member FINRA/SIPC. Easterly Investment Partners and Easterly EAB Risk Solutions are affiliates of Easterly Securities LLC. Orange Investment Advisers, LLC, Ranger Global Advisers, LLC and EAB Investment Group are not affiliated with Easterly Securities LLC.

Not FDIC Insured–No Bank Guarantee–May Lose Value

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.

IMPORTANT FUND RISK

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.

20241021-3947215

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