2025 3Q Letter to Investors: Execution Supersedes Intention
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.
2025 2Q Letter to Investors: Return Pillars & Valuation Risk
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.
2025 1Q Letter to Investors: Uncertainty
Uncertainty related to tariffs, AI, and the sustainability of federal spending are all creating significant investor unease and market volatility/weakness. While there is much that is unique to the current environment, we do see many parallels to both the macroeconomic and market backdrop of exactly 25 years ago. As we again enter uncertain times, we are optimistic that the combination of a valuation discipline and quality measures may again prove highly differentiating as was the case back then.
2024 4Q Letter to Investors: Prices & Fundamentals Diverging
A disconnect between prices and fundamentals is being driven mostly by just a handful of the largest stocks. Given their enormous weight in the broad benchmarks, the overall market has become much more expensive and there looks to be considerable valuation risk for large U.S. stocks in aggregate as a consequence.
2024 3Q Letter to Investors: Valuation Risk
Large cap U.S. stocks in aggregate look expensive. This is primarily a function of current market leadership, where the 15 most expensive companies over $250 billion in market cap are collectively trading at a 72% premium to the rest of the market. The situation appears similar to the one in March, 2000, when the overall market was even more expensive, but a set of opportunities below the surface provided good absolute returns, even as the TMT bubble collapsed. We take a harder look at the market now versus 2000 in our letter.
2024 2Q Letter to Investors: A Tale of Two Markets
The concentration within the S&P 500 is at historic levels. This has produced a divergent set of returns and valuations across the large cap market we have not seen in decades. While our U.S. FSV portfolio has underperformed in this environment, we are steadfast in the view that valuation matters and are optimistic given that our portfolio is at a record free cash flow yield premium to the market. The Small/Mid QV and International FSV strategies also continue to have attractive free cash flow yields while maintaining an eye on quality.
2024 1Q Letter to Investors: The Magnificent 1?
While NVIDIA has driven the market’s valuations higher, we continue to find valuation opportunities that meet our quality standards, leading our U.S. FSV portfolio to its widest free cash flow yield premium in its history. Our Small/Mid QV and International FSV portfolios likewise offer very attractive combinations of valuation and quality.
2023 Year-End Letter to Investors
The U.S. equity market’s performance was dominated by its largest constituents during 2023. Looking at the annual performance of an equal weighted index of large stocks compared to a cap-weighted one shows that 2023 was the second worst year for the equal weight index going back to 1930!
2023-3Q Letter to Investors: Avoiding Risk
October 11, 2023: Lofty valuations among most of the so-called “Magnificent Seven” stocks place a heavy demand on future growth for those stocks as a group. If history is a guide, failure to achieve those implied growth rates could leave investors sorely disappointed.
