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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Distillate's International FSV strategy lagged in Q2 2026 as AI-driven momentum and semiconductor concentration dominated returns, but the manager sees this as opportunity. AI names gained $25 trillion in value on just $300 billion of FCF growth, creating extreme valuation bifurcation."
Distillate Capital's International FSV strategy returned 3.89% YTD net of fees in Q2 2026, lagging the MSCI ACWI Ex-US benchmark's 14.69% gain, driven primarily by the strategy's underweight to semiconductors and banks which dominated international returns. AI enthusiasm drove massive market moves with AI-related names gaining over $25 trillion in value since early 2023, yet next-twelve-month free cash flow estimates rose by only $300 billion, meaning share prices moved over 80x fundamental improvement. Momentum dominated with the S&P 500 Momentum index outperforming equal weight by a record 30 percentage points, reminiscent of the tech bubble. The manager is not bearish on AI as technology but worries profit generation needed to satisfy current valuations will be difficult in an extremely competitive industry. Outside of AI and mega-caps, tremendous value opportunities remain with numerous high-quality stocks trading at double-digit FCF yields. The strategy's 8.5% FCF/EV yield versus the benchmark's 4.6% represents the widest valuation advantage since inception. The manager focuses on fundamentals over sentiment, rotating into cheaper stocks where each dollar buys more underlying free cash flow, believing this approach will prevail as it did post-2000 when cheaper stocks significantly outperformed despite initial underperformance during the bubble.
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