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| # | Fund | Strategy | Style | Geography | AUM | Latest Letter |
|---|---|---|---|---|---|---|
As of Oct 15, 2026
Distillate Capital's U.S. Fundamental Stability & Value (U.S. FSV) strategy generated a net return of 9.39% year-to-date through the third quarter of 2026, trailing the S&P 500's 12.73% and the Russell 1000 Value's 19.23%. The strategy's underperformance stems from its disciplined avoidance of the top 20 mega-cap artificial intelligence companies, which drove the majority of broad market appreciation despite flat aggregate free cash flows. The portfolio maintains an attractive valuation profile, trading at an 8.0% next-twelve-months free cash flow yield with conservative leverage of 1.1x net debt to EBITDA. The manager identifies severe systemic risks in the broader market, comparing the current environment to the late 1990s tech bubble. Hyperscaler capital expenditures have reached unprecedented levels as a share of GDP, financed through circular vendor arrangements and heavy debt issuance equivalent to 35% of long-term U.S. Treasury supply. Concurrently, rising global bond yields threaten to trigger severe equity multiple contraction, particularly for highly leveraged firms and speculative growth names that require extraordinary, unproven revenue growth to justify current valuations. Portfolio activity during the quarterly rebalance reflected systematic rotation into attractively valued, cash-generative businesses with strong balance sheets. New positions were initiated in Lowe's Companies (1.4%), AppLovin (1.3%), and PACCAR (1.0%), while allocations were increased in UnitedHealth Group (to 2.0%) and Booking Holdings (to 1.7%). These additions were funded by complete exits in Abbott Laboratories, Workday, and Global Payments, alongside trims in Salesforce, Accenture, and Merck.
Long-term equity returns are fundamentally driven by free cash flow generation, prudent leverage, and disciplined valuation rather than speculative multiple expansion.
The manager anticipates that equity multiples will ultimately re-synchronize with higher bond yields and normalized cash flow expectations, leading to substantial downside risk for expensive mega-cap benchmarks. Conversely, portfolios constructed around low financial leverage, stable through-cycle operations, and high free cash flow yields are projected to deliver resilient long-term compounding as speculative enthusiasm wanes.
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