The first quarter was a macroeconomic rollercoaster, as growth optimism escalated early in the quarter on strong economic data, but was halted by the banking crisis that occurred late in the quarter. The S&P 500 gained 7.5% during the quarter but lagged Large Cap Growth indexes, as the Russell 1000 Growth index returned 14.4%. In general, Growth indexes outperformed Value during the quarter, while Large Cap indexes outperformed Small Cap.
In mid-March, Silicon Valley Bank (SIVB) imploded with spectacular speed, making it the largest lender to collapse since the Great Financial Crisis of 2007-2009. The majority of the bank’s depositors were technology startups with accounts holding in excess of the $250,000 insured by the federal government. SIVB failed because it funded a portfolio of long-term bonds and loans with run-prone uninsured deposits and few fail safes. As interest rates rose sharply, the market value of SIVB’s assets fell below the value of deposits. When depositors requested their money back, the bank would have to sell at low prices. As soon as news of the issue broke, depositors ran to SIVB to be the first to get their money out.
In addition, Signature Bank of New York (SBNY) was shut down to prevent a spread of the banking crisis, as investors were concerned with the bank’s exposure to cryptocurrencies. As government officials and regulators witnessed bank stocks hemorrhaging in value, fear that depositors were losing faith in other banks emerged.
Several days later, in a coordinated action, the Treasury, the Fed and the Federal Deposit Insurance Corporation (FDIC) stepped in to protect depositors at both companies and set up a facility that allows banks to tap emergency funds.
The Snow Focused Value strategy outperformed the benchmark by 10 basis points during the quarter, returning 1.11% gross of fees (0.88% net of fees), while the Russell 1000 Value index gained 1.01%. The strategy has now outperformed the benchmark by 542 basis points over the prior one-year period, returning -0.50% gross of fees (-1.43% net of fees), while the Russell 1000 Value declined -5.91%.
The Snow Focused Value strategy’s relative performance was driven by stock selection, as sector positioning detracted from performance. Stock selection in Information Technology, Industrials, and Health Care were the largest contributors, while selection within Financials was the largest detractor from relative performance. The portfolio was negatively impacted by its underweight to Communication Services and overweight to Financials.
Top 5 Performance Contributors
|Stock||Avg Weight %||Contribution %|
|Super Micro Computer||4.22||1.13|
|Advanced Micro Devices||2.51||0.65|
PVH shares boosted performance after reporting a resilient fourth quarter result, with impressive sales momentum continuing 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. The company has a large share repurchase authorization, a clean balance sheet and is trading for approximately 8.6x our normalized estimate.
Super Micro Computer (SMCI)
Shares of SMCI appreciated during the quarter as the company’s earnings report showed strong top line growth, sustained margin performance and improved cash flow generation. The company continues to execute on growth initiatives and recently announced that a new manufacturing facility will be constructed to meet future demand, suggesting the company continues to gain share. SMCI has a net cash position, and shares trade for 12.5x forward estimates.
Wesco International (WCC)
WCC shares added to performance after issuing a stronger than expected quarterly report along with upbeat guidance. Following a period of accretive M&A, WCC has successfully reached its leverage target and is shifting more capital towards shareholder return. Shares remain attractively valued, trading for less than 8x forward earnings estimates.
Top 5 Performance Detractors
|Stock||Avg Weight %||Contribution %|
|Lincoln National Corp||3.68||-1.01|
|Truist Financial Corp||3.41||-0.67|
Shares of CNC underperformed in the quarter as investors grew cautious leading up to the long-awaited expiry of the Public Health Emergency for COVID-19 that inflated Medicaid membership rolls. The company has long been transparent in their expectation for lower revenues in 2023, and their plans for improved margins and returns longer-term. CNC has restructured the business to drive meaningful cost savings, and its government-centered business model should be relatively stable and sustainable over time. Trading at approximately 9.4x our normalized earnings estimate, we believe shares warrant a higher earnings multiple despite the short-term noise.
Lincoln National (LCN)
LNC underperformed during the quarter as weakness across the banking sector carried over to insurance companies. While there is some exposure through LNC’s corporate bond holdings, our analysis concludes that the risks related to banking exposure is less than what is implied in LNC’s stock price.
Shares of MET underperformed during the quarter as sentiment for financial stocks deteriorated following the collapse of Silicon Valley Bank. We remain positive on the Financials sector, favoring banks and insurers with strong fundamentals, diversified business models, and ample liquidity.
Source: Bloomberg. 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.
as of March 31, 2023
|QTD||1 Yr||3 Yr||5 Yr||7 Yr||10 Yr||Since Inception* *|
|Russell 1000 Value||1.01%||-5.91%||17.93%||7.49%||9.02%||9.12%||11.06%|
Calendar Year Performance
|Russell 1000 Value||-7.54%||25.16%||2.80%||26.54%||-8.27%||13.66%||17.34%||-3.83%||13.45%||32.53%|
Source: SEI Global Services
* Returns for periods greater than a year are annualized. Past performance is not indicative of future results.
** Inception: 12/31/08
Performance shown is the Easterly Investment Partners Focused Value composite in USD. Past performance is not indicative of future results. Gross performance results do not include advisory fees and other expenses an investor may incur, which when deducted will reduce returns. Changes in exchange rates may have adverse effects. Net performance results reflect the application of a model investment management fee that represents the highest fee that could be charged to any account in the composite applied to gross performance results. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Investment management fees are available in the Firm’s Form ADV on “http://www.sec.gov” www.sec.gov. Easterly Investment Partners LLC claims compliance with the GIPS® standards; this information is supplemental to the GIPS® report provided at the end of the presentation. Returns greater than one year are annualized.
Top 10 Holdings
|JPMorgan Chase & Co||5.06%|
|Molson Coors Beverge||4.86%|
|Zimmer Biomet Holdings||4.53%|
|Super Micro Computer||4.46%|
|Advanced Micro Devices||4.45%|
Excludes cash and cash equivalents.
References to securities, transactions or holdings should not be considered a recommendation to purchase or sell a particular security and there is no assurance that, as of the date of publication, the securities remain in the portfolio. Additionally, it is noted that the securities or transactions referenced do not represent all of the securities purchased, sold or recommended during the period referenced and there is no guarantee as to the future profitability of the securities identified and discussed herein. Top ten holdings information shown combines share listings from the same issuer, and related depositary receipts, into a singular holding to accurately present aggregate economic interest in the referenced company.
Total Effect Attribution vs Russell 1000 Value
Representative portfolio characteristics — Holdings, sector weightings, market capitalization and portfolio characteristics are subject to change at any time and are based on a representative portfolio, and may differ, sometimes significantly, from individual client portfolios. Top ten holdings information shown combines share listings from the same issuer, and related depositary receipts, into a singular holding to accurately present aggregate economic interest in the Representative portfolio characteristics — Holdings, sector weightings, market capitalization and portfolio characteristics are subject to change at any time and are based on a representative portfolio, and may differ, sometimes significantly, from individual client portfolios.
While these recent events set the table for another volatile quarter, they do not wildly shift our big picture views. We believe the recent closure of these institutions is not a systemic event, but rather, an idiosyncratic one, and we do not see any large established banks in a similar situation. However, the failures of SIVB and SBNY, as well as the forced merger of Credit Suisse (CS), have rattled financial markets and do increase the likelihood of a recession. Additionally, these events add to the case of selection and differentiation among banks. The Fed has a dual mandate of maximizing employment and stabilizing prices. While the battle against inflation is not over, the Fed must ensure that it maintains the safety and soundness of the banking system.
All told, the stress in regional banks seems to have largely been contained thanks to the additional liquidity provided by the Fed and the quick action by the FDIC. We believe these events will lead to tighter lending standards for banks. At the same time, we expect regulators to initiate stringent changes to policy mandates, which will likely lead to a contraction in credit across all sectors and industries.
Looking forward, given the array of macroeconomic headwinds, the direction of equity prices will be more modest and driven by companies with favorable valuations and solid fundamentals. The environment is complex due to dramatic changes in interest rates and inflation. That paired with sectors experiencing different parts of the economic cycle means that security selection is paramount. The consistent application of our investment approach benefits us over market cycles. We continue to hold companies with compelling business fundamentals, skilled management teams, recurring cash flows and the flexibility to adapt to an inflationary environment. We believe the strong cash flow generation and capital flexibility of our businesses will provide meaningful protection if market fundamentals deteriorate. As always, we welcome your comments and questions. Thank you for your commitment to Easterly Investment Partners.
Easterly Investment Partners (EIP) is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training. This composite has been assigned to Easterly Investment Partners (EIP) effective July 1, 2021. Performance presented prior to July 1, 2021, occurred while the Portfolio Manager(s) and the research team were affiliated with a prior firm (Snow Capital Management, L.P.). EIP claims compliance with the Global Investment Performance Standards (GIPS®). A fully compliant GIPS presentation along with a complete list and description of all composites is available upon request. The Focused Value composite contains fully discretionary accounts consisting of an equity portfolio of less than 25 stocks that invests at least 80% of assets in companies with market capitalizations greater than $1 billion and dates back to December 31, 2008. This composite has no minimum requirement and for comparison purposes is measured against the Russell 1000 Value. The U.S. Dollar is the currency used to express performance. Leverage is not used in this composite. Investing involves risk; clients may experience a profit or a loss. Past performance is not indicative of future results. Performance is preliminary. Composite returns are shown gross of fees and do not reflect the deduction of advisory fees. Actual returns are shown gross of fees and do not reflect the deduction of advisory fees. Actual returns will be reduced by advisory fees and other expenses incurred in the management of the account. EIP’s advisory fees are outlined in our Form ADV Part 2A (Brochure), which is available upon request. The effect of an advisory fee compounded over a period of years, on the total value of a client’s portfolio is represented by the following example. Assuming an initial portfolio of $1 million earning a 10% return each year which incurs an annual advisory fee of 1.0% payable quarterly in advance, the portfolio would be worth $1.53 million net of fees and $1.61 million gross of fees after 5 years, $2.37 million net of fees and $2.59 million gross of fees after 10 years and $3.58 million net of fees and $4.15 million gross of fees after 15 years. Past performance is not guarantee of future results. The performance of any individual portfolio may vary from the Composite’s performance.
The performance figures are based on a composite of many accounts and not all accounts owned the securities mentioned in this commentary. Holdings and sector allocations are subject to change. The latest copy of our Form ADV Part 2A (Brochure) and a complete list and description of EIP’s composites and/or a presentation that adheres to the Global Investment Performance Standards (GIPS®) is available upon request.
The views expressed herein are solely the opinions of EIP. We make no representations as to their accuracy. This communication is intended for informational purposes only and does not constitute a solicitation to invest money nor a recommendation to buy or sell certain securities.
Russell 1000® Value Index
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Indexes are unmanaged. It is not possible to invest directly in an index.