Webinars [[{“value”:”Original broadcast details
Date: Tuesday, July 16, 2024
Executive Summary
Returns of the S&P 500 in 2Q24 continued to be propelled by a few mega-cap growth stocks to the exclusion of almost everything else. Despite not owning any mega-cap growth stocks, our value stock portfolio outperformed the S&P 500 in both 2023 and 1Q24. But in 2Q24, we could not keep pace.
Lyrical CS underperformed the S&P 500 by 10 percentage points. Performance wasn’t about anything going wrong fundamentally, but instead about our not owning mega-cap growth stocks. While some of our stocks experienced material price declines, it was all multiple compression, as earnings estimates increased for all five of our worst detractors.
Warning! The S&P 500 outperformance over the S&P 500 EW was historic. The S&P 500 EW trailed by 690 bps, and 75% of S&P 500 constituents underperformed in the quarter. This was the 6th best 3-month period for the S&P 500 relative to the S&P 500 EW. Be wary, since after each of the 30 best 3-month periods, the S&P 500 significantly underperformed for the subsequent 3- and 5-year periods.
International markets also benefited from outsized gains in the largest stocks.
Our International and Global portfolios underperformed their cap-weighted benchmarks due to our underweight of the largest stocks. Our average market cap and our performance has been inline with the equal-weighted index.
Our GIVES value approach to impact investing outperformed the style benchmark.Many richly priced impact-themed stocks have suffered serious declines, which we avoided given our valuation discipline. Year-to-date, GIVES has outperformed the MSCI ACWI Sustainable Impact Index by 990 bps.
Our valuation spread relative to the S&P 500 is now historically wide.
We continue to believe that the spread will eventually narrow, given our portfolio has demonstrated faster earnings growth and has no greater economic sensitivity. By the metrics, our portfolio deserves a premium, not a discount.
We expect the valuation spread to narrow, driving outperformance.
We expect the spread to narrow from 100%+ to ~30%, the average spread in our first decade. Even if the valuation spread remains around 100%, our faster expected EPS growth should still drive some outperformance. But, if the spread narrows, outperformance could be vastly greater.
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