Strategy Description: The Cantor Smith Dividend Growth strategy is a concentrated portfolio of 20 – 30 large predominately U.S. companies with a high level of current dividends and sustainable trend of increasing dividends. The portfolio is designed to provide long-term inflation protection and a solid risk-adjusted return over the full market cycle. The strategy is managed by Smith Group Asset Management, a 10-member investment team averaging 21 years of experience and 13 years of tenure with the firm. Originally founded in 1995, Smith Group became a part of Cantor Fitzgerald in 2021.
Portfolio Performance: The -4.8% return of the portfolio fell short of the -3.3% return of the S&P 500 and the -3.2% of the Russell 1000 Value. The 3.3% realized annualized yield of the portfolio remains well above the benchmark. The strategy seeks to combine low volatility with a high and growing level of income. The combination of low volatility and high dividends fared less favorably against the broad market in 3Q’23. Allocation effect was slightly positive while the selection effect of the portfolio was attributable for the underperformance versus the benchmark. This was driven almost entirely by the Communication Services sector, mostly due to poor performance by Omnicom, which was responsible for just under half of the strategy’s overall underperformance. (for more detail see page 3 of PDF)
Investment Factor Performance: Growth investment factors were negative for the quarter with over 90% of the growth factors Smith Group tracks showing negative price discrimination for the period. In a mirror image to growth metrics, over 90% of value factors had positive returns spreads for the period, with cash flow and earnings metrics generally outpacing all other measures. (for more detail see page 5 of PDF)
Earnings Trends: Over the past year, earnings have proven far more robust than we expected and after three quarters of side-ways to slightly down year-over-year reports that saw earnings fall by only 3.4%, earnings appear on an upward trajectory once again with an expected next 12- months rise of 10.2% for the average stock in the S&P 500 Index and an increase of 7.7% for the capitalization-weighted index. If consensus earnings expectations are accurate then the S&P 500 Index is trading at 19.3x forward earnings and the average stock in the index is trading at 18.0x forward earnings.
Market Comment: In July, US equity markets extended the rally that began in October 2022 with the S&P500 index rising 3.2%, lifting the index 30% off the October 2022 lows and a mere 1.8% below the highs of early 2022. But July 31 was the high-water mark for the index as it traded down 6.3% over the next two months and finished down 3.3% for the quarter. Traditionally defensive sectors provided little protection from the market pullback as Consumer Staples and Utilities stocks fell 7.9% and 11.4%, respectively, over August and September. Small Caps fared much worse in the sell-off with the Russell 2000 Index falling 10.6% for the last two months. The average stock in the S&P 500 continues to trail the index by a wide margin, returning 1.9% year-to-date versus 13.1% for the capitalization-weighted index. (for more detail see page 6 of PDF)