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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 Q2 Investor Letter | Buyside Digest

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

Primary Source Intelligence • Q2 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

"Distillate's small/mid cap strategy outperformed Russell 2000 benchmarks by 4.6-10.1% in H1 2023 through disciplined focus on quality companies with attractive valuations and low leverage."

Executive Summary

Distillate's Small/Mid Cap Quality & Value strategy returned 12.6% in H1 2023, outperforming the Russell 2000 by 4.6% and Russell 2000 Value by 10.1%. The strategy maintains a disciplined approach to small and mid-cap investing by focusing on companies with attractive valuations, stable cash flows, and low leverage. Key contributors included Builders FirstSource, AutoNation, Toll Brothers, and Owens Corning, while detractors included Victoria's Secret and Hibbett. The portfolio achieves a 9.4% free cash flow to enterprise value yield, substantially higher than benchmark alternatives, while maintaining significantly lower leverage at 0.7x versus 2.0x-2.6x for Russell benchmarks. The strategy avoids companies with negative free cash flow estimates, which comprise 17% of Russell 2000 benchmarks. With rising interest rates creating refinancing risks for leveraged companies, the manager believes their quality-focused approach provides important downside protection while capturing opportunities in an often overlooked segment of the market.

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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 clear conviction in their quality-focused approach with specific portfolio metrics (0.7x leverage, 9.4% FCF yield) and explicit avoidance of negative FCF companies. Named specific contributors and detractors with basis point impacts, showing detailed portfolio management.

Growth Outlook

25%

BearishBullish

Bearish (25%)

Manager acknowledges opportunities exist in small/mid cap space but emphasizes selectivity and caution around leverage risks in current interest rate environment. Constructive but measured tone about the opportunity set.

Risk Appetite

15%

DefensiveAggressive

Defensive (15%)

Portfolio maintains defensive positioning with low leverage (0.7x vs 2.0x+ benchmarks) and avoids companies with negative free cash flow. Risk management is clearly prioritized over aggressive growth positioning.

Capital Deployment

5%

De-riskingDeploying

De-risking (5%)

Letter describes rebalancing activity with some new purchases (CF Industries, Marathon Petroleum) and sales (Builders FirstSource), but this appears to be routine portfolio maintenance rather than significant net deployment or de-risking.

Forward Guidance

10%

CautiousExpansionary

Cautious (10%)

Manager indicates continued focus on discipline and quality metrics going forward. No indication of aggressive deployment or major positioning changes, suggesting steady-state approach.

Language Signal

20%

BearishBullish

Bearish (20%)

Language emphasizes opportunities and attractive valuations in small/mid cap space, but balanced with significant discussion of risks around leverage and interest rates. Moderately positive directional language overall.

Perceived Risk

65%

Low RiskElevated

Elevated Risk (65%)

Manager identifies specific risks around rising interest rates, refinancing challenges for leveraged companies, and structural issues in small cap benchmarks. Detailed discussion of leverage risks and their portfolio implications to avoid these risks.

Opportunity Density

60%

ScarceAbundant

Selective (60%)

Manager sees selective opportunities in small/mid cap space, particularly among quality companies with attractive valuations. Emphasis on selectivity suggests opportunities exist but require careful screening.

Time Horizon

70%

Short-TermLong-Term

Decade+ (70%)

Strategy emphasizes long-term compounding and capital preservation through quality focus. Manager discusses allowing power of compounding to work for investors, suggesting multi-year investment horizon typical of fundamental value strategies.