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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Distillate Capital Long/Short Equity 2023 Q1 Investor Letter | Buyside Digest

Back to Fund Profile (Distillate Capital Long/Short Equity)

Primary Source Intelligence • Q1 2023 Letter Analysis

Distillate Capital Long/Short Equity Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Distillate Capital Long/Short Equity. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

QTD+6.04%

Annualized+2.77%

Positioning StanceConstructive

Market CapLarge Cap

GeographyUS, Global

Digest Analysis

Quick Take

"Distillate's value-focused strategy lagged in Q1 due to concentrated gains in five large unowned tech stocks but benefited from avoiding leveraged banks during sector turmoil."

Executive Summary

Distillate's Q1 2023 performance was impacted by concentrated gains among a small number of large unowned stocks, with five stocks (NVIDIA, Microsoft, Tesla, Meta, and Amazon) creating a 3.25% headwind. The firm's U.S. FSV strategy returned 6.04% net of fees, lagging the S&P 500 by 1.46%, though it outperformed the Russell 1000 Value ETF by 5.07%. Banking sector turmoil from Silicon Valley Bank and Signature Bank collapses benefited the strategy due to its avoidance of highly leveraged financial institutions. The firm maintains its disciplined approach of investing in attractively valued companies with strong balance sheets and stable cash flows. Current portfolio characteristics show a 7.0% free cash flow yield versus 4.8% for the S&P 500, with significantly lower leverage ratios. Despite macroeconomic uncertainties including inflation, interest rate concerns, and potential recession, management remains optimistic about the current opportunity set and attractive valuations available in high-quality companies with little debt.

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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

72%

CautiousHigh

High Conviction (72%)

High conviction evidenced by concentrated portfolio moves including full exit of Apple (former largest holding), significant additions to UnitedHealth and Johnson & Johnson with specific weight changes disclosed, and clear articulation of valuation thresholds. Manager provides specific free cash flow yields for new purchases and explains exact reasoning for position changes.

Growth Outlook

25%

BearishBullish

Bearish (25%)

The manager acknowledges economic softening and recession possibility but frames current interest rate levels as reasonable in historical context and notes that such levels historically have not significantly impeded economic growth. Mixed outlook with cautious optimism about longer-term conditions.

Risk Appetite

15%

DefensiveAggressive

Defensive (15%)

Portfolio positioning remains disciplined with continued avoidance of leveraged sectors like banking. The manager is selectively adding to underperforming quality names but maintains risk controls through debt screening and valuation discipline.

Capital Deployment

25%

De-riskingDeploying

De-risking (25%)

Moderate deployment activity with rotation from outperforming tech stocks to underperforming healthcare and telecom names. No cash level changes disclosed, but significant position additions (UnitedHealth from 1.7% to 2.6%) and new purchases (T-Mobile, Philip Morris, Altria) indicate selective deployment.

Forward Guidance

35%

CautiousExpansionary

Cautious (35%)

Manager explicitly states being 'very optimistic about the current opportunity set' and plans to 'take advantage of valuation opportunities that short-term pressures create.' Clear bias toward selective deployment in quality companies.

Language Signal

20%

BearishBullish

Bearish (20%)

Language balances opportunity-focused terms like 'attractive valuations,' 'tremendous opportunities,' and 'optimistic' with risk acknowledgments around recession, banking stress, and economic softening. Slightly more constructive than cautious overall.

Perceived Risk

68%

Low RiskElevated

Elevated Risk (68%)

Manager identifies multiple specific macro risks including banking system stress, recession possibility, commercial real estate pressures, and non-bank lending concerns. Detailed discussion of Silicon Valley Bank collapse mechanics and broader financial system vulnerabilities indicates elevated risk perception.

Opportunity Density

75%

ScarceAbundant

Abundant (75%)

Manager explicitly states being 'very optimistic about the current opportunity set' and describes 'tremendous opportunities' created by market fears. Multiple new purchases made and valuation spreads highlighted as creating significant opportunity through selectivity.

Time Horizon

70%

Short-TermLong-Term

Decade+ (70%)

Strategy emphasizes 'long-term' investing and 'compounded long-term returns' with focus on companies that can navigate economic challenges over time. Manager discusses taking advantage of short-term pressures for long-term positioning, indicating multi-year investment horizon.