Original broadcast details
Date: Thursday, July 13, 2023
Executive Summary
At the halfway point of 2023, we believe Lyrical is having a deceptively good year.
It may not seem that good on the surface since we are trailing the S&P 500 and S&P 500 Value, but the returns of both those indices have been largely driven by a handful of mega-cap growth stocks. Excluding those stocks, our U.S. composites have materially outperformed the rest of the stocks in those indexes this year. We are also outperforming 94% of our Morningstar peer group with our LYRIX mutual fund’s first half returns ranked in the 6th percentile.
Artificial Intelligence (AI) was all the talk in 2Q23.
The AI trade materially impacted two of our stocks, positively for Broadcom and negatively for Concentrix. Given our larger weight in Broadcom it was a net benefit to the portfolio. In both cases, however, we believe the market overreacted.
Most of our portfolio companies remain solidly on track to meet or exceed earnings expectations, given the current benign economic environment.
Overall, the average earnings growth history of our portfolio companies has been better than that of the S&P 500 by about two percentage points per annum.
Just like the U.S. portfolio, our international portfolio had a strong second quarter.
Lyrical recently presented a webinar highlighting the opportunity in international stocks, and especially international value stocks. While the S&P 500 has significantly outperformed the MSCI EAFE Index for the past decade, it has done so by getting more expensive, not by delivering materially better earnings growth. We believe this sets up one of the best opportunities in international stocks that we’ve seen over our careers.
Portfolio valuation remains attractive even after 2Q23 gains.
We believe our absolute valuation is still attractive at about 10x consensus forward earnings, and the valuation spread relative to the S&P 500 remains extremely wide at 99%. Pre-2018 that spread averaged 29%. If the spread remains at 99%, we expect to outperform given our history of faster earnings growth, but if the spread reverts to pre-2018 levels, we could outperform more significantly.
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