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Snow Long/Short Opportunity Q4 2022 Commentary

Market Commentary

The fourth quarter began with a two-month rally followed by a correction in December. In the end, the Russell 3000 Value rose 12% in the fourth quarter and was down 8% for the year.

The fourth quarter presents a fine example of how market consensus can conflict with market performance. An increasingly pessimistic consensus view of 2023 has been notable for its wide adoption, and yet the S&P 500 Index’s (SPX) forward valuation remains stubbornly stuck at 16.7x, above its 20-year average of 15.5x. A premium valuation is typically reserved for periods of above-average earnings growth, but 2023 EPS is currently expected to grow just 4.6%. Based on a survey of 58 economists, Bloomberg projects that the United States real GDP growth will be negative in both the third and fourth quarters of 2023. CPI is expected to moderate to the 3-4% range, and unemployment is projected to rise to 4.8% by year-end. Any benefit from China’s economic re-opening is expected to be offset by higher interest rates, lower profit margins, and a more cautious U.S. consumer.

Between economic headwinds, geopolitical issues, and evolving changes in market leadership, we expect 2023 to be another volatile year. As we manage through the market’s ups and downs, we will remain focused on protecting our portfolio through our focus on quality companies with strong cash flow and through opportunistic hedges. We will also pay close attention to market drivers that aren’t on most investors’ radars, a few of which we outline below.

Not All Sectors Are Poised For a Correction

Moderating inflation is being touted as a positive catalyst for financial markets in 2023, but the true impact may be more mixed. As a potential recession begins to hit top lines, companies that aggressively raised prices in 2022 may hit an air pocket of demand. Companies that have already faced the dual pressures of lower demand and higher costs may finally find margin relief this year after several years of higher raw material costs, a rising U.S. dollar, and transportation bottlenecks. Any sign of margin stability will be a powerful catalyst for these stocks, many of which are in the consumer discretionary sector. The unwind of high-cost inventory has been particularly painful for retailers, but we do expect the balancing of inventory and demand to occur by mid-2023. Finally, strength in the U.S. dollar is easing, helping international markets and companies with global exposure. Our portfolio remains overweight the consumer discretionary sector.

After years of underperformance, energy was the best performing sector in 2022. We believe the table may be set for another year of share price appreciation. Supply is tight, demand is stable, and the sector remains under-owned. U.S. oil & gas producers and their investors remain scarred by the lingering memory of over-spending and widespread bankruptcies in 2016-2017. Management teams have steadfastly directed excess capital to shore up balance sheets, pay dividends, and repurchase stock instead of drilling additional wells. Supply and demand were relatively balanced before the pandemic and returned to an equilibrium in 2022. We may see more volatility in 2023: OPEC is not meeting its production quotas; the Ukraine war and sanctions on Russian oils have resulted in continued lost barrels of supply; the Strategic Petroleum Reserve is near record low levels with only 19 days of supply and no real effort to replenish reserves; and Chinese demand is finally coming back online after two years of government mandated shutdowns. While some investors have avoided energy positions due to Environmental, Social, and Governance (ESG) initiatives, we believe that transformative investments in the energy sector may be necessary to achieve climate goals. Absent large shifts in demand dynamics and supply, the energy sector offers earnings growth at discount. We hold a slight overweight to the sector.

Health care is considered a defensive safe haven by most investors, but fundamentals may be more volatile in 2023. We are looking for large shifts in insurance coverage as unemployment rises and as an estimated 5-14 million Americans lose Medicaid coverage when we formally end the COVID-19 public health emergency on April 1, 2023. Utilization may be higher than expected as the long arc of an aging population intersects with an exceptionally bad year for influenza and viruses and a severe mental health crisis. Longer-term, we wonder how the healthcare system will manage the burden of a new class of Alzheimer’s drugs, as well as the coming baby boom related to the end of Roe v. Wade and 2022’s record number of weddings.

In many ways, the current upheaval in technology stocks reminds us of the energy sector in 2016-2017. Investors spent years rewarding companies for growth at any price, willfully ignoring fundamentals. The unwind has been unsparing and could take years to play out. We believe investors will increasingly favor companies with high earnings quality, positive cash flow and sound capital allocation. 2023 may offer some opportunistic investments in washed out areas of technology, especially where inventories have remained stubbornly below demand. Our strategy will focus on a diverse group of small positions as we watch and wait for the second and third derivative investor reactions to subside.

Geopolitics May Turn into a Tailwind

In addition to a weaker U.S. dollar and subdued supply chain costs, we expect geopolitical events will continue to affect financial markets. Although the war rages on in Ukraine, any intimation of détente could spark a market rally and subsequently send oil and gas prices lower in anticipation of a resumption of Russian exports. China has already re-opened faster than expected. Newfound mobility for consumers and increased industrial production are sure to help global economic growth, not to mention pent-up consumer spending on goods and services that we saw in the U.S. in late 2021. Domestically, a divided House and Senate in the U.S. Congress could cause a stalemate in terms of spending and policy for the next two years. Although a do-nothing government may not be productive for its citizens, the market tends to favor political gridlock.

The Flow of Funds May Favor Active Equity Investing

2022 proved that diversification is lacking across most portfolios, and we expect investors to rebalance highly concentrated growth portfolios over the course of 2023. A shift in market leadership could feel like quicksand to investors who rely on passive allocations, but it offers an exceptional opportunity for thoughtful stock selection. Market cycles are quite common over time, and the transition out of growth is long overdue. We would expect this period to be marked by a rising dispersion of returns by sector and by issuer, frictional investor resistance followed by capitulation, and a wider variety of smaller allocations at the top of the S&P 500 Index. Interest-rate sensitivity will play a part in 2023, just as it did in 2022 when the Russell 3000 Value’s 21% allocation to financials drove 1000 basis points of outperformance versus the S&P 500.

Q4 Fund Attribution

In the fourth quarter, the Long/Short Opportunity Fund portfolio benefitted from stock selection and favorable sector allocation, offset by our market hedges.

In the long portfolio, strong stock selection across materials, heath care, financials and consumer discretionary sectors was partially offset by a pullback in several energy investments. By sector, we remain overweight financials, materials, and consumer discretionary. We have been consistently underweight utilities, communication services and real estate, where earnings are particularly sensitive to rising interest rates.

Net exposure was 74% at the end of the fourth quarter. Despite the widely discussed possibility of recession, option premiums on short puts were generally unimpressive during the quarter. We chose to instead preserve cash and wait for more attractive entry points. We used the lull in the options market to reposition our market hedge, deploying a laddered option strategy to provide support at various strike prices and expiries.

Contributors and Detractors

PVH Corp (PVH) shares boosted performance after reporting a resilient Q3 result, with particularly impressive sales momentum in Asia and Europe. While PVH is not immune to the weakening macro backdrop, the company outperformed in the quarter from several company specific initiatives and a weakening U.S. Dollar.

Freeport-McMoRan Inc. (FCX) shares benefitted from a recovery of global copper prices and continued strong performance from the company’s operating copper and gold mines. FCX offers investors a stable production profile from favorable jurisdictions, with an asset base that can increase production when prices support investment.

Shares of Commercial Metals Company (CMC) contributed positively to performance as the market began to appreciate the company’s longer-term earnings power. The company also provided an upbeat outlook, bucking recessionary concerns, reporting that despite slowing residential demand, commercial and industrial indicators remain strong.

WESCO International (WCC) shares appreciated in the quarter but ultimately detracted from performance. The stock was impacted as the company had a large working capital build in the quarter, although we expect this will unwind in the short-term.

Shares of Hasbro Inc. (HAS) negatively impacted performance in the quarter despite reporting results consistent with a company-provided outlook at an analyst day. The stock was also downgraded by the sell-side, and more broadly, sentiment for consumer discretionary stocks weakened during the quarter.

Lumentum (LITE) shares declined following a disappointing quarterly report. The management team also provided an unfavorable outlook which indicated the company’s customers may have over-ordered product in recent quarters. With several catalysts pushed further out, we liquidated our position in LITE.

2023 Outlook

We believe markets will likely be choppy going forward. Clarity on interest rates, the possibility of a recession, and the direction of inflation could be catalysts for investors to wade back into the market, but gains could reverse without improving company fundamentals. Eventful times can be simultaneously surprising and rewarding as idiosyncratic stories with asymmetrical risk and reward payoffs often generate significant excess returns.

More importantly, we are starting to see a reallocation to value stocks for the first time in over a decade. Value – specifically financials, energy, materials, and consumer discretionary sectors – tends to outpace growth investing in periods of rising rates and moderate inflation. We remain equal or overweight to each of these sectors and may add to positions where recession is already priced in.

We remain dedicated to delivering strong long-term performance and transparent communications to our investors. Thank you for your commitment to Easterly Investment Partners.

12/31/2022QTD1-Year3-Year5-Year10-YearSince Inception
I Shares12.35%-3.15%7.43%6.14%8.11%5.78%
Morningstar Long/Short Equity Category5.10%-8.26%2.85%2.61%4.01%2.41%
70%/30% Blended Index8.82%-4.81%4.84%5.31%7.53%5.45%
Russell 3000 Value12.18%-7.98%5.87%6.50%10.16%6.91%

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. 70%/30% Blended Index: 70% Russell 3000 Value TR and 30% ICE BofA 3 Month U.S. Treasury Bill Index. Prior to June 29, 2018, the Fund was named the Snow Capital Opportunity Fund.

The Fund’s management has contractually waived a portion of its management fees until November 5, 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 1.29%, 1.51%, 2.28% and 1.29% respectively; total annual operating expenses after the expense reduction/ reimbursement are 1.29%, 1.51%, 2.28% and 1.23% 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 November 5, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.30%, 1.55%, 2.30% and 1.00%, respectively, subject to possible recoupment from the Fund in future years.

About Easterly Investment Partners

Easterly Investment Partners (EIP) is the advisor of the Easterly Long/Short Opportunity Fund. EIP is the traditional, fundamental based investment arm of Easterly Asset Management’s multiaffiliate 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 2022, EIP had approximately $1.8 billion in AUM.

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

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 Orange Investment Advisors, 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.

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.


16348540-UFD 01/31/2023

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