by Kerri Fronczak
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by Kerri Fronczak
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Distillate’s U.S. and international strategies outperformed their respective benchmarks in 2020. In the U.S., substantial outperformance among the largest stocks presented a significant headwind and the resulting rich valuations are making the overall market look somewhat expensive. Much of the risk from valuation appears concentrated in certain segments.
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We examine the mechanics of our cash-flow valuation approach, the source of returns for long-term investors, and how systematic rebalancing improves portfolio fundamentals, the ultimate driver of returns. VIEW/DOWNLOAD
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We look at the significant recent contribution to equity returns coming from valuation expansion in a historical context and what it might mean for forward returns. VIEW/DOWNLOAD
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The S&P 500 in our view is expensive, at levels that have proven perilous in the past, and is also concentrated beyond historical precedents. For those who have stayed with the broad market, is it time to move to Value? The reality is that the Russell 1000 Value is only marginally cheaper and also has concentration issues and a legacy of slower underlying fundamental growth. VIEW/DOWNLOAD
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Since May 2017, the S&P 500 has achieved a 14.3% annualized total return, with a significant portion (4.6 percentage points) stemming from valuation expansion, particularly among the largest stocks. The remaining return came from dividends and free cash flow growth. Distillate’s U.S. FSV strategy, which has nearly matched the S&P 500’s performance over this period, did not benefit from this valuation expansion. Instead, its net-of-fee returns were driven by superior underlying free cash flow growth, primarily due to systematically rebalancing into less expensive stocks. VIEW/DOWNLOAD
