The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling (833) 417-0090. The gross expense ratio for the fund is 1.32%.
View LBAY standardized performance here.
The Fund’s NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The market price is the most recent price at which the Fund was traded.
Mega cap stocks have been a main story during the first six months of 2023. The sheer size in mega cap stock moves has been astounding. An estimated $4.1 trillion in market capitalization has been created across seven of the largest US stocks so far this year through June 30th, with year-to-date total returns that are equally as remarkable.
If you were not a holder of a few of these names in your portfolio, it is likely you are dramatically underperforming year to date. Interestingly as well, if you are a dividend-focused investor, only three of the seven names pay a dividend and none of them maintain even a 1% dividend yield! Artificial Intelligence-related names and technology sector stocks seem to be buoying “broad” US market indices.
If you are an active institutional investor underperforming, you are probably asking yourself what do I do now, and where should I invest for the remainder of 2023?
View LBAY top 10 holdings here. Holdings are subject to change. Characteristics and metrics of the companies shown do not represent or predict the performance of the fund.
VALUE STOCK ROTATION PAUSED IN 2023 - WHAT NEXT?
In the market sentiment taking place not so long ago, equity investors found themselves rotating toward value securities and away from long duration* growth. Then 2023 arrived.
“It was an amazing first six months, like nothing we’ve ever seen… The capitalization-weighted S&P 500 was up about 17% through June 30. The equal-weighted S&P index rose only about 7%. Normally, when the market is up a lot, a large percentage of stocks are up as well. I’m looking at a table we prepared that shows the percentage of stocks in the S&P 500 that drove most of the returns in the 'up' years of 2017, 2019, 2020, 2021, and 2023. In 2017, 203 stocks, or 40% of index components, drove those returns. In 2019, it was 65%, and in 2021, 52%. In this year’s first half it was only seven stocks, or just over 1%, all tied to generative AI, that drove 80% of index returns. That’s extraordinary.” – Bill Priest
After celebrating throughout 2022, short sellers have been despondent so far this year. The NASDAQ 100 Index3 has returned nearly 40% year to date through June 30, which is its best start going back to 1999.4 However, we believe it would be premature to declare a new bull market for growth stocks.
In our opinion, the key measure to watch is interest rates, which are a crucial element in determining the value of future cash flows*; and importantly rates tend to follow the path of inflation. We do not get the feeling we are alone:
“Consumers are slowly using up their cash buffers, core inflation has been stubbornly high (increasing the risk that interest rates go higher, and stay higher for longer), quantitative tightening of this scale has never occurred, fiscal deficits are large….” – Jamie Dimon, 2nd Quarter 2023 earnings press release
PORTFOLIO REVIEW5
We have had positive outperformance recently from several long names across multiple sectors, including industrial Carrier Global Corporation (CARR), medical device maker Zimmer Biomet Holdings, Inc. (ZBH) and timber REIT PotlatchDeltic Corporation (PCH), each advancing by 22%, 14.5% and 14.7% respectively in June. Notably, Activision Blizzard, Inc. (ATVI), which we have been long since before the Microsoft Corporation (MSFT) takeover announcement in January 2022, has rallied sharply recently as MSFT nears the anticipated closing of the acquisition following approvals in the US and European Union. We expect to maintain our position in ATVI until the proposed deal closes in the upcoming months.
Next, Intercontinental Exchange, Inc. (ICE) continues to be a core long position in our portfolio. The $65B market capitalization company is awaiting approval of its acquisition of Black Knight, Inc. (BKI). As it awaits approval, the company has paused capital allocation decisions such as share buybacks and dividend increases. We expect closing of the deal could be a catalyst for the stock as it provides management the ability to resume focus on capital allocation as opposed to antitrust and legal issues.
Finally, the short side of the ledger has been very humbling in 2023 for the Fund. With nearly two decades of short-selling experience, we are unphased by what we view as temporary momentum in uneconomic security valuations. We believe the remainder of 2023 may provide the opportunity for much more alpha generation* than during the first half. Short positions are presently allocated with an inclination toward the US Consumer space, Technology and Real Estate, with an emphasis on idiosyncratic ideas with possible peak earnings and seemingly over-optimistic market sentiment.
View LBAY top 10 holdings here. Holdings are subject to change. Characteristics and metrics of the companies shown are for the underlying securities in the fund’s portfolio and do not represent or predict the performance of the fund. There is no guarantee that a company will pay or continually increase its dividend.
FINAL THOUGHTS
We hope our investor partners enjoy our monthly perspectives. We are finding many compelling ideas both long and short and we look forward to continuing our dialogue in the weeks and months ahead.