The third quarter of 2024 (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 its 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 its 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.
There are many read-throughs relative to the Fed’s actions and the market’s subsequent reaction, and from our perspective, there are positives and negatives. On the positive side, we view the steepening of the yield curve as a good sign for our underlying banks and insurance companies who will benefit from higher rates on the long end of the curve. It also increases the expectation that the market will experience 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.
On the negative side, we’re often finding that Fed statements and actions are in stark contrast to what we’re seeing, reading, and expecting during periods where we’d anticipate elevated volatility driven by several factors. Inflation continues to be a significant problem, remaining structurally high even though it has come down on a rate-of-change basis. We don’t think the Fed had justification to cut rates in September, as equity markets and housing prices were at, or near, all-time highs, and we’re extremely skeptical the market will receive the interest rate cuts that are being priced in over the next year. In Q4 2023, more speculative stocks that would’ve benefited from a lower discount rate rallied materially as upwards of seven cuts were priced in over the course of 2024. There’s been just one so far, and we’ve now seen the same excitement in Q3 2024 from the more speculative pockets of the market that continue to yearn for lower rates, which drove outperformance across equity benchmarks during the quarter. We think the market is too optimistic surrounding the magnitude and overall impact of interest rate cuts in general, and we question the viability of the Fed’s 2% inflation target, given the exploding, runaway federal deficits. For example, while stocks initially rallied on the news of a 50 basis points (bps) rate cut, they’d also go on to rally on the notion that the Fed may not cut too aggressively. Developments like this—where negative situations lead to positive outcomes for equity markets, quickly followed by good news also leading to positive outcomes while the market remains at all-time highs—do not give us great confidence.
Typically, periods when the macroeconomic backdrop is layered with an uncertain U.S. election cycle, war in multiple regions of the world, and curious behavior from the Fed, would lead to significant market volatility. However, what the market has given us is broad-based complacency. So far, the market seems apathetic towards the result of the U.S. election, where the two candidates have signaled their intent to implement vastly different tax policies that will materially impact corporate earnings. While there are certain outcomes of the upcoming election that could usher in a long bull market, a continued political stalemate with an inability to rein in deficits will lead to reaccelerated inflation, no matter who wins the U.S. election in November. This doesn’t appear to be priced in yet, given elevated correlations and limited volatility. Active war in the Middle East and Eastern Europe will tangibly impact economic growth and overall confidence, but the market remains unphased. However, this doesn’t even begin to touch on the simmering geopolitical tensions in Southeast Asia, where most of the global semiconductor capacity is located.
This easing cycle is set to look much different than prior cycles, due to the sticky inflationary backdrop and the fact that the Fed can’t risk a reacceleration in inflation after working for years to bring the year-over-year rate of change down towards more normalized levels. As active managers, this will give us ample opportunity to find stocks trading at prices dislocated from their fundamental values. The investment strategy that excelled during past easing cycles will not be replicated, although the markets are attempting to price that in for at least the short term.
Performance Highlights
The Snow Focused Value Strategy delivered a positive return of 7.54 net% in Q3 2024, but underperformed in relation to the Russell 1000 Value Index, which returned 9.43%. This underperformance was driven by a negative allocation effect, partially offset by positive stock selection.
At the sector level, Consumer Staples, Materials, and Communication Services contributed positively to performance, with strong stock selection in Consumer Staples and Materials boosting returns. Conversely, underperformance in Industrials and Energy weighed on results due to both allocation and selection effects. The lack of exposure to Utilities, which performed well during the period, also detracted from returns.
Top contributors at the stock level included Kenvue Inc. in Consumer Staples and Columbia Banking System Inc. and Jackson Financial Inc. in Financials, both of which posted strong returns. FMC Corporation in Materials also contributed positively. On the downside, Silicon Motion Technology Corporation in Information Technology and Marathon Oil Corporation in Energy were significant detractors, along with Sensata Technologies in Industrials.
In summary, the strategy’s sector attribution reflects a bottom-up stock picking approach, with sector exposures driven by individual stock selection rather than macroeconomic views.
Performance Attribution
Top 5 Performance Contributors
| Stock | Avg Weight % | Contribution % |
|---|---|---|
| KENVUE INC | 3.98 | 1.05 |
| COLUMBIA BANKING SYSTEM INC | 3.60 | 1.03 |
| JACKSON FINANCIAL INC-A | 4.26 | 0.93 |
| FMC CORP | 4.66 | 0.68 |
| ZOOM VIDEO COMMUNICATIONS-A | 3.21 | 0.59 |
Top 5 Performance Detractors
| Stock | Avg Weight % | Contribution % (net) |
|---|---|---|
| SILICON MOTION TECHNOL-ADR | 2.72 | -0.93 |
| MARATHON OIL CORP | 3.21 | -0.24 |
| SENSATA TECHNOLOGIES HOLDING | 3.76 | -0.19 |
| COMMERCIAL METALS CO | 1.81 | -0.08 |
| SUNCOR ENERGY INC | 4.13 | -0.07 |
Positioning
The strategy is positioned with the largest overweight in Materials, followed by Financials. On the other hand, the strategy holds underweights in Industrials and Real Estate. These sector exposures are the result of stock-specific decisions and don’t reflect any overarching macroeconomic views.
Financials, Health Care, and Information Technology dominate the strategy, representing the three largest sector allocations. Financials is the largest sector allocation, with several substantial holdings, while Health Care and Information Technology follow, each represented by fewer, but significant, positions.
Key holdings include JPMorgan Chase & Co., Lincoln National Corporation, and Citigroup Inc. in Financials, along with Amgen Inc. and Centene Corporation in Health Care. FMC leads the Materials sector, and OpenText Corporation represents a significant holding in Information Technology. The top 10 positions account for 47.81% of the strategy.
Overall, the strategy’s sector exposures are driven by a bottom-up stock-picking process, with no direct consideration of broader macroeconomic factors. The focus remains on individual company fundamentals.
Positioning
| Stock | Portfolio Weight (%) | Sector |
|---|---|---|
| JP MORGAN CHASE & CO | 5.89 | Financials |
| LINCOLN NATIONAL CORP | 5.32 | Financials |
| CITIGROUP INC | 5.31 | Financials |
| FMC CORP | 4.82 | Materials |
| OPEN TEXT CORP | 4.57 | Information Technology |
| JACKSON FINANCIAL INC | 4.51 | Financials |
| AMGEN INC | 4.50 | Health Care |
| CENTENE CORP | 4.47 | Health Care |
| KENVUE INC | 4.28 | Consumer Staples |
| WHIRLPOOL CORP | 4.23 | Consumer Discretionary |
| Total | 47.81 |
Source: SEI Global Services as of September 30, 2024
Excludes cash and cash equivalents.
Securities shown represent the largest 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 are 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.
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.
Trailing Performance (%)
as of September 30, 2024
| QTD | YTD | 1 Yr | 3 Yr | 5 Yr | 7 Yr | 10 Yr | Since Inception* | |
|---|---|---|---|---|---|---|---|---|
| Composite (gross) | 7.80 | 17.88 | 33.11 | 14.16 | 15.72 | 11.30 | 8.33 | 14.75 |
| Composite (net) | 7.54 | 17.05 | 31.86 | 13.08 | 14.63 | 10.26 | 7.31 | 13.67 |
| Russell 1000 Value | 9.43 | 16.68 | 27.76 | 9.02 | 10.68 | 9.53 | 9.22 | 11.73 |
Calendar Year Performance (%)
| 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Composite (gross) | 19.01 | -1.11 | 31.80 | 2.56 | 28.00 | -18.03 | 17.76 | 15.10 | -18.20 | 15.17 |
| Composite (net) | 17.89 | -2.04 | 30.57 | 1.59 | 26.81 | -18.81 | 16.66 | 14.03 | -18.99 | 14.10 |
| Russell 1000 Value | 11.46 | -7.54 | 25.16 | 2.80 | 26.54 | -8.27 | 13.66 | 17.34 | -3.83 | 13.45 |
Source: SEI Global Services
*Inception: 12/31/08
Performance shown is the Easterly Investment Partners LLC (“the Firm”) Snow 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 which is higher than the actual average weighted management fee charged to accounts in the composite applied to gross performance results. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. The Firm claims compliance with the GIPS® standards; this information is supplemental to the GIPS® report included in this material. Returns greater than one year are annualized.
Attribution vs Russell 1000 Value
Source: Bloomberg
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.
Outlook
Looking ahead to Q4 2024, we see continued opportunities to populate our strategy with great companies and to identify stocks trading at discounted levels, especially as correlations remain high across the equity market universe.
We remain confident in the stocks we’re buying and continue to find great value and opportunities while populating our strategy, but would welcome a pullback in more frothy pockets of the market to better align with investor expectations. We have a positive outlook on the Energy sector, as current world events are threatening oil supplies and as the U.S. works to refill strategic petroleum reserves that are near historical lows. We’re also optimistic about the banks and insurance companies in the strategy that would stand to benefit from a steepening yield curve. 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.
Our positioning is solely a function of stock selection, as valuation levels for these stocks continue to discount a perceived recession. As a soft landing has become the collective expectation, we feel the strategy will see considerable mean-reversion. Mean-reversions are often fast, but can have long-lasting implications for relative performance.
In managing the Easterly Snow Focused Value Strategy, we remain laser-focused on populating our strategy with companies featuring strong balance sheets, real free-cash-flows, stock-specific catalysts, and a path towards a normalized earnings recovery—which we believe will ultimately lead to a price-to-earnings (P/E) re-rating. While the visible uncertainties today seem to stand in contrast to the market’s steady climb, Snow’s research team remains agile and eager to continue being an effective steward of capital no matter the macroeconomic or geopolitical backdrop.
Easterly Investment Partners LLC Snow Focused Value Composite GIPS® Report
Composite Inception Date: December 31, 2008
Composite Creation Date: 07/01/2021
| Composite Performance | Annualized 3-Year Standard Deviation | Total Assets (millions) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Year End | Gross | Net | Russell 1000 Value | Composite | Russell 1000 Value | Composite Dispersion | Total Firm Assets | Firm (AUM) | Firm (AUA)* | Composite | Number of Accounts |
| 2023 | 19.01% | 17.89% | 11.46% | 18.35% | 16.74% | 0.16% | 1,730 | 1,090 | 640 | 17 | 6 |
| 2022 | -1.11% | -2.04% | -7.54% | 25.73% | 21.55% | N/A | 1,834 | 1,341 | 493 | 1 | Five or fewer |
| 2021 | 31.80% | 30.57% | 25.16% | 24.28% | 19.33% | N/A | 2718 | 1540 | 1178 | 30 | Five or fewer |
| 2020 | 2.56% | 1.59% | 2.80% | 24.63% | 19.62% | 0.10% | - | - | 26 | 10 | |
| 2019 | 28.00% | 26.81% | 26.54% | 14.90% | 11.90% | 0.14% | - | - | 31 | 9 | |
| 2018 | -18.03% | -18.81% | -8.27% | 15.30% | 10.80% | 0.05% | - | - | 3 | 8 | |
| 2017 | 17.76% | 16.66% | 13.66% | 16.65% | 10.20% | 0.06% | - | - | 5 | 8 | |
| 2016 | 15.10% | 14.03% | 17.34% | 17.07% | 10.77% | N/A | - | - | 25 | 6 | |
| 2015 | -18.20% | -18.99% | -3.83% | 15.63% | 10.68% | N/A | - | - | 26 | 7 | |
| 2014 | 15.17% | 14.10% | 13.45% | 13.98% | 9.20% | N/A | - | - | 37 | Five or Fewer | |
*Firm-wide advisory-only assets. Assets under Advisement (AUA) includes the assets where Easterly Investment Partners (“Easterly”) provides its advisory services in similar strategies and does not have discretionary trading authority.
Firm Definition
For purposes of complying with the GIPS® standards, the firm is defined as Easterly Investment Partners LLC (“EIP”) which is an SEC registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended, effective January 2019. The firm was redefined on 1/1/2023 to reflect that EIP is comprised of two distinct firms: the institutional asset management operations, investment strategies, performance track records, certain employees and client accounts of Levin Capital Strategies, which were acquired by EIP in March 2019, and Snow Capital Management LLC’s (“SCM”) asset management business, investment strategies, performance track records, client accounts, and certain employees, acquired by EIP in July 2021.
Firm Verification Statement
Easterly claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Easterly has been independently verified for the period April 1, 2019 through December 31, 2023. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis.
Composite Verification Statement
The Focused Value Composite has had a performance examination from composite inception date through December 31, 2023. The verification and performance examination reports are available upon request.
Composite Description
The Focused Value composite provides concentrated exposure to the mid- and large-capitalization segments of the value equity market.
Benchmark Description
The Russell 1000® Value Total Return Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000® Index companies with lower price-to-book ratios and lower expected growth values. The total return index is the price level index plus the dividend reinvested. Indexes are unmanaged. It is not possible to invest directly in an index.
Performance Calculation
All returns are calculated and presented in US dollars based on fully discretionary AUM, including those investors no longer with the firm. All gross composite returns are net of transaction costs and foreign withholding taxes, if any, and reflect the reinvestment of interest income and other earnings. Net performance results reflect the application of a model investment management fee which is higher than the actual average weighted management fee charged to accounts in the composite applied to gross performance results. Composite net returns are calculated by reducing daily gross returns by an amount where the monthly net return will be the monthly gross return reduced by 1/12th of the highest advisory fee rate. Monthly net returns are then geometrically linked to calculate the annual net return. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Actual investment advisory fees incurred by clients will vary. Policies for valuing investments, calculating performance, and preparing GIPS reports are available upon request. A list of composite descriptions and a list of broad distribution pooled funds are available upon request. Past performance is not indicative of future performance. Results may be higher or lower based on IPO eligibility, and actual investor’s returns may differ, depending upon date(s) of investment(s). Additional information is available upon request. The Focused Value Composite has removes accounts from the composite for the period of significant cash of greater than or equal to 10% of the account’s market value.
Investment Management Fee Schedule
The current standard management fee schedule for a segregated account managed to the composite strategy is as follows: 0.95% on assets.
Composite Dispersion
The annual composite dispersion, if shown, is an asset-weighted standard deviation calculated using gross returns for the accounts in the composite the entire year. The internal dispersion measure is not applicable if there are five or fewer portfolios in the composite for the entire year if that is the reason this is N/A.
Standard Deviation
The annualized 3-year standard deviation represents the annualized standard deviation of actual gross composite and benchmark returns, using the rolling 36 months ended each year end. Standard deviation is a measurement of historical volatility of investment returns.
Trademark
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
Important Disclosures
© 2024. Easterly Asset Management. All rights reserved.
Easterly Asset Management’s advisory affiliates (collectively, “EAM” or “the Firm”), including Easterly Investment Partners LLC, Easterly Funds LLC, and Easterly EAB Risk Solutions LLC (“Easterly EAB”) are registered with the SEC as investment advisers under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its investment strategies and objectives, can be found in each affiliate’s Form ADV Part 2 which is available on the www.sec.gov website. This information has been prepared solely for the use of the intended recipients; it may not be reproduced or disseminated, in whole or in part, without the prior written consent of EAM.
No funds or investment services described herein are offered or will be sold in any jurisdiction in which such an offer or sale would be unlawful under the laws of such jurisdiction. No such fund or service is offered or will be sold in any jurisdiction in which registration, licensing, qualification, filing or notification would be required unless such registration, license, qualification, filing, or notification has been affected.
The material contains information regarding the investment approach described herein and is not a complete description of the investment objectives, risks, policies, guidelines or portfolio management and research that supports this investment approach. Any decision to engage the Firm should be based upon a review of the terms of the prospectus, offering documents or investment management agreement, as applicable, and the specific investment objectives, policies and guidelines that apply under the terms of such agreement. There is no guarantee investment objectives will be met. The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. Client portfolios are managed according to mutually agreed upon investment guidelines. No investment strategy or risk management techniques can guarantee returns or eliminate risk in any market environment. All information in this communication has been obtained from sources believed to be reliable but cannot be guaranteed. Investment products are not FDIC insured and may lose value.
Investments are subject to market risk, including the loss of principal. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate. The information contained herein does not consider any investor’s investment objectives, particular needs, or financial situation and the investment strategies described may not be suitable for all investors. Individual investment decisions should be discussed with a personal financial advisor.
Any opinions, projections and estimates constitute the judgment of the portfolio managers as of the date of this material, may not align with the Firm’s opinion or trading strategies, and may differ from other research analysts’ opinions and investment outlook. The information herein is subject to change without notice and may be superseded by subsequent market events or for other reasons. EAM assumes no obligation to update the information herein.
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. As a reminder, investment return and principal value will fluctuate.
The indices cited are, generally, widely accepted benchmarks for investment performance within their relevant regions, sectors or asset classes, and represent non managed investment portfolio. It is not possible to invest directly in an index.
This communication may contain forward-looking statements, which reflect the views of EAM and/or its affiliates. These forward-looking statements can be identified by reference to words such as “believe”, “expect”, “potential”, “continue”, “may”, “will”, “should”, “seek”, “approximately”, “predict”, “intend”, “plan”, “estimate”, “anticipate” or other comparable words. These forward-looking statements or other predications or assumptions are subject to various risks, uncertainties, and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Should any assumptions underlying the forward-looking statements contained herein prove to be incorrect, the actual outcome or results may differ materially from outcomes or results projected in these statements. EAM does not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law or regulation.
Past performance is no guarantee of future results.
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