2024 Global Impact Value Equity Strategy (GIVES) Review
In 2024 our Global Value Impact Equity Strategy (GIVES) had a strong year, proving that our value approach to sustainable investing can deliver strong financial returns even as the impact index suffers. We generated a +5.7% net return, significantly outperforming our style benchmark of the MSCI Sustainable Impact Index, which returned -9.4%. As in 2023, concerns about the speed of adoption for major sustainability trends like EVs and renewables dragged down the valuations of many of the more obvious impact stocks. At the same time, our cheaply valued impact stocks managed to post reasonable financial returns, while also delivering positive change including almost four million tonnes of portfolio-weighted emissions avoided.
2024 Global Review Letter
In 2024 our Global Value Equity strategy generated a +6.1% net return, compared to +7.7% for the MSCI World Equal Weight Index and +18.7% for the MSCI World Index which benefited from a heavy dose of mega cap growth stocks in the U.S.
In 2024, the cap-weighted index outperformed its equal weight counterpart by 11 percentage points, after it outperformed by 7.1 percentage points in 2023. These are the third and fourth widest differentials in a calendar year over the 30 years since the inception of the MSCI World Equal Weight Index in 1995. It may feel like the dominating performance of U.S. mega-cap growth stocks will go on forever, but the data lead us to expect otherwise. Historically, whenever the cap-weighted index has outperformed the equal-weight index by the widest margins the following five years experienced a reversal, with the equal-weight index substantially outperforming. Furthermore, in those same environments, value stocks outperformed by even more.
We underperformed the +11.5% return of our style benchmark, the MSCI World Value, mostly due to the strong performance of international banks, which we avoid due to their extreme tail-risk, and lack of analyzability. Avoiding banks has been a long-term positive, as they have delivered negative compound returns over the past twenty years. That said, even bad industries can have a good year or two, and we believe that was the case in 2024.
2024 International Value Review
2024 was a disappointing year for our International Value Equity strategy which in USD returned -2.1%, compared to the +3.8% return of the EAFE and the +5.7% return of the EAFE Value.
The headwinds we faced in 2024 can be separated into three categories. First, the influence of mega-cap stocks drove the cap-weighted EAFE to outperform the equal-weighted EAFE by 210 bps. Over the past 30 years, the cap-weighted EAFE index has underperformed the equal-weighted index by 40 bps annualized. However, in 2024 it was the opposite, creating a headwind to our performance, as we have found the higher-quality values we seek outside of the mega-cap range.
2024 U.S. Value Review Letter
4Q 2024 Update Webinar Replay
Original broadcast details
Date: Thursday, January 16, 2025
Executive Summary
S&P 500 returns in 2024 continued to be propelled by a few mega-cap growth stocks.For 2023 and 2024 combined, an incredible 78% of the S&P 500 constituents underperformed, causing the S&P 500 EW to underperform by 12.4 percentage points in 2023, and 12 percentage points in 2024.
Lyrical CS outperformed the S&P 500 EW and S&P 500 Value again in 2024. While we also outperformed the S&P 500 in 2023, we were unable to keep pace with the S&P 500 in 2024.Our CS composite was up 13.4%, modestly outperforming both the S&P 500 Equal Weight and the S&P 500 Value in 2024. Over the last two years, Lyrical significantly outperformed the S&P 500 EW by 15.8 percentage points, and the S&P 500 Value by 7.3 percentage points.
S&P 500 outperformance has been driven by multiple expansion, not EPS growth.The S&P 500 and S&P 500 EW had similar P/Es for years, even as the S&P 500 EW grew EPS faster. Now the S&P 500 P/E is 32% higher than the S&P 500 EW’s, despite the same EPS growth for the last 7 1/2 years. If the S&P 500 P/E converges to that of the S&P 500 EW, it would drive significant underperformance over time, and historically, that is what has happened. Historically, after the best periods of S&P 500 outperformance, the next 5 years have produced significant underperformance.
International markets also benefited from outsized gains in the largest stocks.Our International and Global portfolios were down 2.1% and up 6.1%, respectively, in 2024, underperforming their cap-weighted benchmarks. For International, our underperformance was driven by our underweight position in the largest stocks and by not owning banks, which performed well in 2024.
For GIVES, our 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. In 2024, GIVES was up 5.7%, outperforming the MSCI ACWI Sustainable Impact Index by 1,510 bps.
We believe we are positioned well for the future.We believe our Lyrical CS composite P/E is attractive at 12.1x. Meanwhile, the S&P 500’s P/E is 21.8x, 36% above its average since our inception, and 85% above that of Lyrical-CS. Furthermore, Lyrical-CS’s current portfolio EPS growth history is more than two percentage points faster than S&P 500’s.
Large Cap or Value? You can’t be both!
You can learn a lot about a large-cap value product just by looking at the average market cap of the portfolio. While the category may be called large-cap value, there is an inherent conflict in trying to be both large-cap and value. Few of the largest stocks are cheap, and the cheapest stocks mostly fall toward the smaller end of the large-cap universe. So, if a large-cap value product has an average market cap over $50 or $100 billion, it is likely compromising value for the sake of market cap.
3Q 2024 Update Webinar Replay
Original broadcast details
Date: Thursday, October 10, 2024
Executive Summary
3Q24 was a great quarterOur CS composite produced an 11.8% net return, outperforming all our benchmarks. We outperformed the S&P 500 by 5.9 percentage points and the S&P 500 Value by 2.7 percentage points.
Mega-cap growth stocks underperformed
The mega-cap growth stocks that propelled the market for six quarters since the start of 2023 became a drag on market performance this quarter. The Magnificent Seven reduced the S&P 500 returns by about two percentage points, and more broadly, the S&P 500 underperformed the S&P 500 Equal Weight by 3.7 percentage points.
Our non-U.S. portfolios also performed well
Our Global and GIVES portfolios substantially outperformed the MSCI World Index by 3.7 and 7 percentage points, respectively, this quarter while our International portfolio performed in line with the MSCI EAFE Index.
Internationally, equal weighted indices outperformedAs with the U.S., since the start of 2023, global markets have been led by the mega-cap stocks. In this quarter, that prevailing trend reversed, and the equal-weighted indices outperformed.
Our valuation spread relative to the S&P 500 remains extremely wideThe P/E multiple of the S&P 500 expanded this quarter, rising to 21.7x, which is 36% above its average since our inception, and is 76% higher than our CS portfolio. Given the superior growth profile of our portfolio, we believe it should not trade at a discount to the S&P 500, and that over time the valuation spread should compress and drive substantial outperformance in the process.
3Q23 International Strategy Update
Our international strategy underperformed in the third quarter. The portfolio was down 6.7%, compared to the MSCI EAFE which was down 4.1% and the MSCI EAFE Value, which was up 0.6%.
Warning Signs
In the second quarter of 2024, the S&P 500 outperformed the S&P 500 Equal Weight by almost seven percentage points. This was one of the widest differentials on record. While this is clearly good news for the S&P 500 for the quarter, we believe it is also a clear warning sign of potential significant underperformance for the years ahead.
Q2 2024 Update Webinar Replay
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.
