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 Large Cap Value strategy trailed the benchmark by 14 basis points during the quarter, returning 0.87% gross of fees (0.76% net of fees), while the Russell 1000 Value index gained 1.01%. The strategy has now outperformed the benchmark by 374 basis points over the prior one-year period, returning -2.17% gross of fees (-2.60% net of fees), while the Russell 1000 Value declined -5.91%.
The Large Cap Value strategy’s underperformance was due to negative stock selection, as sector positioning contributed to relative performance. The portfolio benefited from an underweight position in Financials and an overweight position in Information Technology. Stock selection was strong in Health Care, Industrials, and Consumer Staples but lost the most relative value in Financials and Communication Services.
Top 5 Performance Contributors
|Stock||Avg Weight %||Contribution %|
Bio-Rad Laboratories (BIO)
BIO had a noisy 4th quarter earnings print, but a good 2023 guidance, with 6-7% organic growth and a path to 20% margins. BIO also stated that they are working to get their supply chain fixed and that chip shortages would no longer be holding back shipments. Additionally, BIO has a large China business, which would benefit from China re-opening.
Taiwan Semiconductor Manufacturing (TSM)
TSM rallied during the quarter, along with other semiconductor stocks, which was driven by decreasing channel inventory and capacity cuts. TSM’s monthly sales worsened through Q1, as expected, and the company will report Q1 results in mid-April. We expect to see second half improvements in their revenue, based mainly on price increases and AI chip unit growth, coupled with a flattening in PC and mobile. TSM remains a beneficiary of greater customization of high-end chips in end markets from AI to Automotive.
Cisco Systems (CSCO)
Shares of CSCO gained after the company reported better than expected earnings in mid-February. CSCO faces one more quarter of difficult year-over-year comparisons for order growth, after which comparisons ease and we expect positive order growth to return. CSCO has almost a year’s worth of forward revenue booked in backlog and easing component constraints will drive better revenue growth. Recurring revenue was 44% of the total from last quarter, supporting our thesis that CSCO will transform into a subscription model with a higher multiple for the stock.
Top 5 Performance Detractors
|Stock||Avg Weight %||Contribution %|
|Truist Financial Corp||4.20||-0.87|
|American International Group||3.42||-0.72|
Truist Financial (TFC)
TFC sold off during 1Q, along with almost all regional banks, as investors looked past banks earnings power and sold the group broadly after SIVB and Signature Bank failed. TFC is a super-regional and should pick-up share in loans and deposits as capital flees small and community banks. In addition, TFC announced it would sell a minority stake (20%) of its insurance business for $1.95B, which is accretive to tangible book value. TFC trades at 9-10x and insurance assets trade at 18-20x. By entering into this agreement, TFC will work with its new partner Stone Point Capital to increase scale and scope of the business to eventually spin, sell or IPO the entire assets at a value north of $15 billion or 30% of the market cap.
VTRS underperformed as their 4th quarter results were underwhelming, as sales and EPS came in slightly below expectations. Initial guidance for 2023 was within expectations. In a separate press release, the company announced that there would be a CEO transition as it moves onto the second phase of its strategic evolution. This was unexpected and creates additional noise to the story. That being said, pending asset sales are on track, which is a key part of the VTRS story.
American International Group (AIG)
AIG’s stock finished 2022 on a strong note, trading near its 52-week high. 4th quarter financial results overall were better than expectations and the company again posted an impressive net favorable PYD. Commercial pricing continues to be strong and the company offered some insight into reaching their 10% ROE target. Despite the good news, the stock hit an air-pocket in March alongside all financials. While we view fundamentals favorably, perhaps the market soured on the likelihood of a near-term CRBG secondary, given its associated poor price action.
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%||6.46%|
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: 1/1/07
Performance shown is the Easterly Investment Partners Large Cap 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
|Goldman Sachs Group||4.64%|
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.
Many signs point to an impeding recession with economic reports indicating slowing growth measures. Moreover, the yield curve is steeply inverted, ISM manufacturing and services report declining levels and retail sales growth has been negative. For the past year high inflation has challenged central banks, stressed financial markets and weighed heavily on investors. With the Fed bringing about its sharpest tightening of monetary policy since the 1980s, many investors are asking, when will it come to an end. While several believe the end of the tightening cycle is soon, the Fed, in contrast, is worried that wage growth remains too high to declare victory. In our view, 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.
This complex environment presents opportunities for our fundamental, bottom-up research process. The team continues to find new cheap, contrarian names with idiosyncratic catalysts that should lead to price appreciation going forward. Thus, we are turning over the portfolio as other stocks either hit their price targets or have their catalyst play out, resulting in a concentrated, but diversified, portfolio of our best ideas. We welcome you to join either our daily morning meeting or our new idea generation meetings which take place weekly. In the meantime, we look forward to speaking with you all on our quarterly reviews. Please do not hesitate to reach out to discuss the portfolio or our outlook. We appreciate your commitment to Easterly Investment Partners.
The information provided in this report should not be considered a recommendation or solicitation to purchase or sell any particular security or investment strategy. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed was or will prove to be profitable, or that the investment recommendations or decisions the subadvisor makes in the future will be profitable or will equal the investment performance of the securities discussed herein. As a reminder investment return and principal value will fluctuate.
All information in this presentation has been obtained from sources believed to be reliable but cannot be guaranteed. There can be no assurance that the investment objective for this fund can be achieved and past performance is no guarantee of future results. The Russell 1000 Value Index® is a benchmark of unmanaged securities, and the index is not a security that can be purchased or sold.
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This communication also contains forward-looking statements, which reflect the views of Easterly Investment Partners LLC. 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 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. Easterly Investment Partners LLC and its affiliates do 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.