The equity market exhibited strong performance during the quarter, with most major indices posting double-digit gains. This positive momentum was largely attributable to robust corporate earnings, continued economic recovery, and expectations of accommodative monetary policies by the Federal Reserve. Small Cap Value stocks had a strong quarter, outperforming both their larger cap peers and growth stocks of all cap sizes. However, concerns about rising inflation and the potential for tapering of asset purchases by the Fed tempered some of the optimism. Additionally, supply chain disruptions and geopolitical tensions created pockets of volatility in the market.
2023 will go down as a unique year where broad equity returns, and the health of the underlying economy, were not perfectly correlated. Equity market performance was dominated by the “Magnificent Seven,”* which account for approximately 30% of the S&P 500 and 40% of the Nasdaq 100 and have driven well over half of the total return for both indexes. This startling lack of breadth stands in stark contrast to historically healthy bull markets where a thriving economy benefits many companies to a similar degree. In the S&P 500 in 2023, the “Magnificent Seven” accounted for just under 16% of the total performance while the other 493 stocks accounted for approximately 10%.
Commentary from companies, industry regulators, and a wide array of economic data support the concept that all is not well in the economy. Consumers are struggling in the face of continued high inflation, and while slowing on a rate-of-change basis, it remains positive and structurally higher relative to pre-pandemic levels. This has taken time to show as savings had been elevated post-pandemic (peaking at about $2.3T) but have pulled back to about $0.7T. With consumer spending representing approximately 70% of US GDP, the cumulative pressure of persistent inflation is slowing the economy. Student loan payments have resumed and access to credit has become both more difficult and burdensome as rates remain high relative to the zero-interest-rate policy of the preceding decade. Certain asset classes such as bonds, oil, and the US dollar have been pricing in a recession throughout much of the year, while others, such as large-cap equity indexes and cryptocurrencies, were pricing in a risk-on environment.
While the Federal Reserve opened the door in mid-December to potential rate cuts in 2024, the market is reacting as if we are returning to near-zero interest rates, quantitative easing, helicopter money, and a stimulus payment environment, perhaps all at once! All of which are entirely unrealistic given the inflation backdrop and federal deficits. While the Fed’s comments resulted in a “dove-ish” risk-on rally, the rate cuts that are being extrapolated by the market are taking place over a shorter period than we envision. The timing of rate cuts is highly uncertain, seemingly changing with every piece of economic data. What is certain is that generationally tighter monetary policy conditions will have a lagged effect across the economy. These effects have started to show their signs yet and are not reflected in broad equity valuations.
The Snow Small Cap Value Fund (SNWIX) trailed the benchmark during the quarter, returning 12.56% while the Russell 2000 Value index gained 15.26%. For the calendar year, the Fund outpaced the index, returning 22.55% compared to the benchmark returning 14.65%. The trailing three- and five-year numbers continue to be exceptional, with the Fund outperforming by 452 basis points on an annualized basis over the past three years and 551 basis point on an annualized basis over the last five years.
For the quarter, the Snow Small Cap Value Fund’s relative underperformance was driven by negative stock selection, but sector positioning detracted slightly as well. Stock selection in Health Care and Communication Services were the largest detractors and stocks in those sectors accounted for four of the five largest detractors in the portfolio. On the positive side, selection within Information Technology was strong. While the impact of sector positioning was fairly muted, the portfolio benefited from an underweight in Utilities, but was negatively impacted by an overweight allocation in both Consumer Staples and Communication Services.
*The Magnificent 7 stocks include: Amazon.com (AMZN), Apple (AAPL), Google parent Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA). Not to be construed as an offer or solicitation of an offer to buy or sell specific securities. Past performance is not an indication of future results.
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.
Contributors and Detractors
Shares of PLAB added to performance as the company reported strong results and an upbeat forecast with growth rates ahead of the broader industry. The company is a niche player in the semiconductor supply chain, with a great balance sheet and seasoned management team that stands to gain both in share and pricing power as their end markets grow. PLAB shows potential, with its solid Q4 beat and guidance, to double earnings in Q1 2024, leveraging its unique position in the semiconductor space and strategic partnerships.
Brinker International (EAT)
EAT shares continued to perform well as robust earnings and expanding margins led to results that outperformed forecasts. Increased customer traffic, strategic pricing, beneficial commodity markets, and efficient labor cost management were key to performance. The company’s Chili’s brand drove positive year-over-year comparisons as effective advertising strategies contributed to the company’s strong results.
Jackson Financial (JXN)
JXN shares appreciated during the quarter as the company posted a robust adjusted EPS of $3.80, surpassing estimates, and gains from hedge operations. Efficient capital management, including significant shareholder returns through buybacks and dividends, coupled with updates on potential favorable regulatory changes, contributed to this strong performance. With improving RBC ratios, high liquidity, and effective capital return via buybacks and dividends, JXN is well-positioned for future growth.
Shares of CNK underperformed as investors questioned the outlook for the 2024 film slate, as strikes from writers and actors added uncertainty to the timing of film releases. While these concerns are valid, CNK successfully navigated through periods of weak box office results during the pandemic. CNK has generated strong cash flows in recent quarters and reached targeted debt levels. We believe CNK is well positioned to withstand a short-term industry-wide issue.
Cross Country Healthcare (CCRN)
CCRN shares detracted as the company cut its full-year guidance for the third time, citing pressures of travel nurse staffing demand, a significant revenue driver. Challenges in bill rate competitiveness continue as health care systems are managing financial stress. CCRN remains focused on reducing SG&A spend, generating cash flows, and diversifying its business.
AMN Healthcare Services (AMN)
AMN detracted from performance as their Q4 guidance fell below consensus by ~15% on EBITDA and bill rate declines. Despite these challenges, AMN’s diverse service offerings and strong demand in locum tenens position the company well for future recovery and growth in the evolving healthcare industry.
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.
We view the economy as much weaker than what the market is pricing in and we question whether investors will be willing to continue to pay 20x earnings for the S&P 500 going forward. This is considering a softening environment where the implied equity risk premium is at-or-near zero when compared to available bond yields. Fortunately, as active managers, the lack of breadth leads to a wide valuation dispersion, meaning that there are areas of opportunity where stocks are priced attractively. We continue to find stocks with idiosyncratic catalysts and asymmetric payouts, with great balance sheets, and ample free-cash-flow with which to populate our portfolio.
Over the past eleven recessions, small cap equities have outperformed mid-and-large caps by mid-double-digits when emerging from those recessionary periods. As profits begin to recover, we expect small caps to lead given the breadth and outsized cyclicality of small cap stocks relative to their larger peers. We are not adding to cyclical names at current market valuation levels but are instead finding stocks with lower correlations to GDP and more “self-help” type catalysts. Our cyclical holdings have performed very well, especially following the recent Fed announcement that rate cuts should be expected in 2024.
We continue to question the reverberation of higher interest rates throughout the economy. We do not believe the market has priced in some items, such as the $1T in corporate debt that will expire each year from 2025 – 2028, where businesses will have to either roll the debt at higher rates, shrink to the point where their cash flows are aligned with higher borrowing costs, or declare bankruptcy and wipe out equity holders. The Fed Funds rate going down to 4% does not save all of these companies, as recent market behavior is implying. We also question the impact of higher rates on 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. With US Debt/GDP having risen from 35% in 2007 to greater than 90% now, higher spending on structurally higher debt levels will come with a higher cost to service. Yields will also likely need to move higher to attract buyers, given the Fed’s attempt to reduce their own balance sheet (let alone being an active purchaser) and less purchasing activity from foreign entities. We view this as a long-term structural headwind that will continue to suppress the equity market risk premium, specifically for indexes where valuations are near historical highs.
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 December 31, 2023 EIP had approximately $1.73 billion in AUM.
|SINCE INCEPTION (4/8/2006)
|Morningstar Small Value Category
|Russell 2000 Value
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. 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.
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.
Easterly Funds, LLC serves as the Adviser to the Easterly Fund family of mutual funds and related portfolios. Easterly Funds, LLC is registered as investment advisers with the SEC. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities, LLC. Although Easterly Funds, LLC is a registered investment adviser, registration itself does not imply and should not be interpreted to imply any particular level of skill or training.