Inflation and risk of a recession weighed on the market with most indexes posting negative results for the quarter. Consumers continued to grapple with high gasoline prices as oil surged to over $100 per barrel. Russia’s invasion of Ukraine, stretched refining capability, and strong consumer demand led to a 38% increase in oil since the start of the year.
Recovery in the labor market has been particularly strong. The unemployment rate remains low and has been steady at 3.6%, the lowest level since February 2020. The demand for labor, coupled with rising prices, continues to lead to wage pressure. From May 2021 to May 2022, the Consumer Price Index (CPI) spiked to 8.6%, the largest increase since December 1981.
During the quarter, the Federal Reserve intensified the magnitude of its interest rate increases. The most recent increase of 75 basis points is its most aggressive hike since 1994. Chairman Powell announced that he expects the July meeting to result in another increase of 50 or 75 basis points. He also indicated a much stronger path of rate increases ahead, to arrest inflation moving at its fastest pace in over 40 years.
The Snow Large Cap Value strategy outperformed its benchmark by 46 basis points, returning -11.75% gross of fees (-11.86% net of fees) during the quarter while the Russell 1000 Value Index declined -12.21%. The strategy is outperforming the index by 309 basis points (298 net) through the first half of 2022.
The portfolio benefited the most from security selection in Consumer Staples, Energy, and Industrials. The portfolio was also aided by an underweight allocation in both Real Estate and an overweight in Energy. Security selection in Consumer Discretionary and Materials, along with an underweight allocation in Utilities, were the largest detractors from relative performance during the quarter.
Top 5 Performance Contributors
|Stock||Avg Weight %||Contribution %|
|Lamb Weston Holdings||3.01||0.51|
Lamb Weston Holdings (LW)
LW appreciated following a robust quarterly report, which indicated improving demand levels for the company’s potato products and a better-than-expected gross margin outlook. LW is facing an industry-wide problem of a poor potato crop, however the company has taken several initiatives to control costs and pass along price increases.
VST performed well during a volatile quarter for major indices. Utilities across the board outperformed, but VST showed further relative strength as the company executed on their green energy initiatives and their shareholder friendly capital allocation plans. After significant appreciation in the stock, we sold VST to redeploy the capital in investments with more favorable risk/reward profiles.
Marathon Petroleum (MPC)
MPC outperformed during the quarter as demand for refined products has come at a time where there is a mismatch with supply. Despite higher prices for gasoline and diesel, demand will likely remain strong as China reopens from lockdowns and global inventories remain low. With a strong balance sheet and capital return policy, MPC provides an attractive way to benefit from the supply/demand imbalance in petroleum based refined products. We liquidated the position in order to invest the proceeds in an opportunity with a more imminent catalyst.
Top 5 Performance Detractors
|Stock||Avg Weight %||Contribution %|
|CNO Financial Group||1.78||-0.54|
FCX negatively impacted performance as copper prices deteriorated during the quarter, primarily due to concerns about global economic growth. While copper prices may be volatile in the near-term, we continue to hold shares of FCX; the company is a low-cost producer with unique production growth opportunities in a supply-constrained industry. The company provides a robust shareholder return program and shares have an intriguing valuation, trading for ~10x forward earnings.
KSS underperformed along with several Consumer Discretionary stocks as inflationary pressures weighed on consumer demand. Sentiment on KSS has deteriorated after the company rejected lowball takeout bids. We believe that in a normalized environment, KSS can demonstrate improved earnings power and deliver significant shareholder returns.
The Walt Disney Company (DIS)
DIS pulled back during the quarter as costs and losses continue to build in the direct-to-consumer segment of the company. The firm continues to build the streaming platform globally, which includes Disney+, ESPN+ and Hulu. We believe the short-term costs to build out the streaming platform are prudent. In our view, the company’s brand strength and diversified cash flow streams from their parks and consumer products lines differentiates DIS from pure-play streaming companies.
as of June 30, 2022*
|QTD||1 Yr||3 Yr||5 Yr||7 Yr||10 Yr||Since Inception* *|
|Russell 1000 Value||-12.21%||-6.82%||6.86%||7.16%||7.68%||10.49%||7.31%|
Calendar Year Performance
|Russell 1000 Value||-12.86%||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: 7/1/2005
Top 10 Holdings
|Truist Financial Corp.||3.02%|
|JPMorgan Chase & Co||3.00%|
|Bank of America Corp.||2.84%|
|Cardinal Health inc.||2.83%|
|Walt Disney Co.||2.68%|
|Lamb Weston Holdings Inc.||2.49%|
|Wells Fargo & Co.||2.40%|
Total Effect Attribution vs Russell 1000 Value
We continue to be optimistic about the long-term outlook for the portfolio. While low P/E stocks performed relatively well for the first six-months of 2022, large valuation disparities remain. In turn, we expect value to continue to outpace growth over the coming quarters.
Energy has been the only positive returning sector within the Russell 1000 Value Index this year. With the U.S economy slowing, many investors expect a cyclical pullback in commodity markets. Consumers are becoming more cautious of a slowing economy and higher inflation. Many believe that these factors will inhibit the Energy sector to continue its strong run. In contrast, we expect further equity appreciation in the Energy sector. There is a secular upward trend in demand for petroleum-based products and supply shortages created by global refining products, tightening that will likely persist through 2023.
Further contributing to the Energy sector is a decrease in the number of refineries within the U.S. America has lost in excess of one million barrels of daily refining capacity over the course of the last two years, and at least seven facilities have closed. This decreased refining production has led to an imbalance between supply of crude oil and U.S. refining capacity. Crude oil has no utilitarian value until a refiner processes it into fuels such as gasoline, diesel and jet fuel. The overall pricing difference between a barrel of crude oil and the products refined from it, is called a “crack spread.” Currently, widening crack spreads within the U.S are increasing the price of petroleum-based fuels. Despite higher prices for gasoline and diesel, demand will likely remain strong, supporting stocks within the Energy sector. Although U.S. crack spreads are mainly impacted by national refineries, global affairs continue to put pressures on supply and demand of crude oil. Crack spreads expanded further as the impact of Russian sanctions translated into even lower refined product supply. All things considered, we believe several of our positions within the Energy sector will benefit from this dynamic.
We believe the road ahead remains favorable for our investment approach. The stocks in our portfolio have compelling business fundamentals, strong balance sheets, skilled management teams, reoccurring cash flows, and the flexibility to adapt to an inflationary environment. We believe these stocks will compound earnings over an extended period through both rising and declining markets.
All told, we remain dedicated to delivering strong long-term performance and transparent communications to our shareholders. As always, thank you for your commitment to Easterly Investment Partners.
Given the market backdrop, we continue to hold a large allocation to the Financials sector. This sector has historically been among the most sensitive to changes in interest rates. Within Financials, banking stocks have been hit, as concerns about the economy have grown and they continue to trade at steep valuation discounts relative to the broader market.
Even if the economy is recession bound, banks are better equipped to handle economic shocks than they were in the past. As a group, banking stocks have a more attractive balance of risk and reward than any other sector. Banks also generally benefit from higher rates, as they can increase profit margins from the spread between deposits and loans. At the same time, many of these companies could drive significant shareholder value in the form of dividends and share repurchases. Our focus within the sector is on those firms that are well capitalized, with strong credit quality and the ability to grow net interest margins, as well as market share.
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 Snow Large Cap Value composite contains fully discretionary large cap value equity accounts and for comparison purposes is measured against the Russell 1000 Value index.
In presentations prior to January 1, 2009, the composite performance included the S&P 500 as a comparative benchmark. Although the S&P 500 index is widely employed as a performance benchmark of the broad market, it is not representative of the Large Cap Value Composite and therefore was removed as a comparison benchmark on January 1, 2009.
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. 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.
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.