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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Past performance is not necessarily indicative of future results. 

Please see the more complete performance information, and the footnotes and disclaimers set forth in the replay. As well, please see www.lyricalam.com/notes for a discussion of material risks of an investment. 

Summary Performance Data:

ALL DATA IS AS OF JUNE 30., 2024. THIS DOCUMENT IS CONFIDENTIAL AND INTENDED SOLELY FOR THE RECIPIENT. IT MAY NOT BE REPRODUCED OR REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF LYRICAL ASSET MANAGEMENT (LAM).

THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO INVEST IN THE STRATEGY PRESENTED. ANY SUCH OFFERING CAN ONLY BE MADE FOLLOWING A ONE-ON-ONE PRESENTATION, AND ONLY TO QUALIFIED INVESTORS IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW.

THERE IS NO GUARANTEE THAT THE INVESTMENT OBJECTIVES OF OUR STRATEGIES WILL BE ACHIEVED. RISKS OF AN INVESTMENT INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS OF INVESTING IN EQUITY SECURITIES GENERALLY, AND IN A VALUE INVESTING APPROACH, MORE SPECIFICALLY. MOREOVER, PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS AN INDICATOR OF FUTURE PERFORMANCE. THE FOREGOING INFORMATION HAS NOT BEEN PROVIDED IN A FIDUCIARY CAPACTIY, AND IT IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED AS, IMPARTIAL INVESTMENT ADVICE.

INDEXES ARE PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY, ARE UNMANAGED, REFLECT REINVESTMENT OF INCOME AND DIVIDENDS AND DO NOT REFLECT THE IMPACT OF ADVISORY FEES. INVESTORS CANNOT INVEST DIRECTLY IN AN INDEX. COMPARISONS TO INDEXES HAVE LIMITATIONS BECAUSE INDEXES HAVE VOLATILITY AND OTHER MATERIAL CHARACTERISTICS THAT DIFFER FROM THOSE OF LYRICAL’S STRATEGIES.

THE S&P 500 INDEX IS A MARKET CAPITALIZATION WEIGHTED INDEX COMPRISED OF 500 WIDELY-HELD COMMON STOCKS. THE S&P 500 VALUE INDEX MEASURES THE PERFORMANCE OF THE LARGE CAP VALUE SEGMENT OF THE U.S. EQUITY UNIVERSE. IT INCLUDES THOSE S &P 500 COMPANIES WITH LOWER PRICE TO BOOK RATIOS AND LOWER EXPECTED GROWTH VALUES.

THE S&P 500 EQUAL WEIGHT INDEX (EWI) IS THE EQUAL-WEIGHT VERSION OF THE WIDELY-USED S&P 500. THE INDEX INCLUDES THE SAME CONSTITUENTS AS THE CAPITALIZATION WEIGHTED S&P 500, BUT EACH COMPANY IN THE S&P 500 EWI IS ALLOCATED A FIXED WEIGHT - OR 0.2% OF THE INDEX TOTAL AT EACH QUARTERLY REBALANCE.

THE MSCI EAFE INDEX IS DESIGNED TO REPRESENT THE PERFORMANCE OF LARGE AND MID-CAP SECURITIES ACROSS 21 DEVELOPED MARKETS, INCLUDING COUNTRIES IN EUROPE, AUSTRALASIA AND THE FAR EAST, EXCLUDING THE U.S. AND CANADA. THE INDEX IS AVAILABLE FOR A NUMBER OF REGIONS, MARKET SEGMENTS AND SIZES AND COVERS APPROXIMATELY 85% OF THE FREE FLOAT-ADJUSTED MARKET CAPITALIZATION IN EACH OF THE 21 COUNTRIES.

THE MSCI WORLD INDEX CAPTURES LARGE AND MID-CAP REPRESENTATION ACROSS 23 DEVELOPED MARKETS (DM) COUNTRIES*. WITH 1,430 CONSTITUENTS, THE INDEX COVERS APPROXIMATELY 85% OF THE FREE FLOAT-ADJUSTED MARKET CAPITALIZATION IN EACH COUNTRY.

 THE MSCI ACWI SUSTAINABLE IMPACT INDEX IS DESIGNED TO IDENTIFY LISTED COMPANIES WHOSE CORE BUSINESS ADDRESSES AT LEAST ONE OF THE WORLD’S SOCIAL AND ENVIRONMENTAL CHALLENGES, AS DEFINED BY THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS. THE SUSTAINABLE IMPACT CATEGORIES INCLUDE: NUTRITIOUS PRODUCTS, TREATMENT OF MAJOR DISEASES, SANITARY PRODUCTS, EDUCATION, AFFORDABLE HOUSING, LOANS TO SMALL AND MEDIUM SIZE ENTERPRISES, ALTERNATIVE ENERGY, ENERGY EFFICIENCY, GREEN BUILDING, SUSTAINABLE WATER, AND POLLUTION PREVENTION. TO BE ELIGIBLE FOR INCLUSION IN THE INDEX, COMPANIES MUST GENERATE AT LEAST 50% OF THEIR SALES FROM ONE OR MORE OF THE SUSTAINABLE IMPACT CATEGORIES AND MAINTAIN MINIMUM ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) STANDARDS. THE PARENT INDEX IS MSCI ACWI. CONSTITUENT SELECTION IS BASED ON DATA FROM MSCI ESG RESEARCH.