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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Distillate Capital U.S. Small/Mid Cap Quality & Value 2023 Q1 Investor Letter | Buyside Digest

Back to Fund Profile (Distillate Capital U.S. Small/Mid Cap Quality & Value)

Primary Source Intelligence • Q1 2023 Letter Analysis

Distillate Capital U.S. Small/Mid Cap Quality & Value Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Distillate Capital U.S. Small/Mid Cap Quality & Value. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

Annualized+13.78%

Positioning StanceConstructive

GeographyUS

Digest Analysis

Quick Take

"Portfolio maintains significant quality advantages over Russell benchmarks while avoiding banking sector stress. Management sees compelling opportunities in current environment to invest in high-quality companies at attractive valuations despite macro uncertainties."

Executive Summary

Distillate's Small/Mid Cap Quality & Value strategy returned 6.55% net in Q1 2023, outperforming the Russell 2000 by 3.79% and Russell 2000 Value by 7.14%. The strategy maintains its focus on companies with attractive free cash flow valuations and low leverage, achieving a 9.7% free cash flow to enterprise value yield versus 3.5%-4.1% for benchmarks. Portfolio leverage of 0.8x compares favorably to 2.0x-2.9x for Russell benchmarks, with zero exposure to negative free cash flow companies versus 17% for Russell 2000. Top contributors included AutoNation, PulteGroup, and PROG Holdings, while detractors were Western Union, Advanced Auto Parts, and WestRock. The strategy benefited 1.5% from avoiding regional banks amid sector stress. Despite macroeconomic uncertainties including banking pressures, recession risks, and commercial real estate concerns, management remains optimistic about the current opportunity set, emphasizing their ability to find attractively valued, high-quality companies with little debt and proven track records of navigating economic challenges through disciplined stock selection.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

68%

CautiousHigh

Moderate (68%)

Manager demonstrates high conviction through specific portfolio positioning decisions, clear avoidance of banking sector, and explicit optimism about opportunity set. Strategy maintains concentrated focus on quality/value criteria with specific examples of adds/trims and performance attribution to named positions.

Growth Outlook

25%

BearishBullish

Bearish (25%)

Manager acknowledges recession as distinct possibility and banking system strains, but emphasizes that potential recession unlikely to be as severe as previous downturns. Balanced view with concerns tempered by historical context and reasonable interest rate levels.

Risk Appetite

40%

DefensiveAggressive

Defensive (40%)

Portfolio maintains selective risk-on positioning through stock selection while actively avoiding high-leverage banking sector. Strategy continues to deploy capital in quality companies but with clear risk management through debt avoidance and cash flow focus.

Capital Deployment

20%

De-riskingDeploying

De-risking (20%)

Strategy shows selective deployment through specific new purchases like APA Corporation and Builders FirstSource, while also trimming positions that no longer meet criteria. Balanced rotation activity with some net positive deployment bias but no dramatic cash level changes mentioned.

Forward Guidance

50%

CautiousExpansionary

Neutral (50%)

Manager explicitly states being very optimistic about current opportunity set and ability to find attractive valuations. Clear intent to take advantage of opportunities created by short-term pressures for long-term investment in quality companies.

Language Signal

30%

BearishBullish

Bearish (30%)

Language balances opportunity-focused terms like attractive valuations and optimistic outlook with risk-aware discussion of banking strains, recession possibility, and economic softening. Slightly more cautious than bullish overall.

Perceived Risk

72%

Low RiskElevated

Elevated Risk (72%)

Manager identifies multiple specific risks including recession possibility, banking system strains, commercial real estate pressures, non-bank lending concerns, and leverage risks from higher rates. Detailed discussion of Silicon Valley Bank collapse and broader financial system vulnerabilities.

Opportunity Density

75%

ScarceAbundant

Abundant (75%)

Manager explicitly states being very optimistic about current opportunity set and finding attractive valuations. Emphasizes wide valuation dispersions in small/mid cap space creating significant opportunities through selectivity, with specific examples of attractive new purchases.

Time Horizon

70%

Short-TermLong-Term

Decade+ (70%)

Strategy emphasizes long-term investment approach, taking advantage of short-term pressures to invest for the long-term. Focus on companies with successful track records of navigating economic challenges suggests multi-year investment horizon, though some quarterly rebalancing activity indicates medium-term flexibility.