For the quarter ended June 30, 2022, Fund positions delivered -5.34% at NAV, versus benchmark losses of -19.08% by the S&P Aerospace & Defense Industry Index over the same period.
- Contributors: Northrop Grumman, Huntington Ingalls
- Detractors: Teledyne, Kratos, Ameresco
- Outlook: In line with our previous outlook, toppy markets for Aerospace and Defense benchmarks shed premium 1Q2022 valuations relative to the broader equity market. Barring an abatement to the Ukraine-Russia war, significant progress on reducing inflation, and/or improvements to financial conditions, we expect FEDX to remain a defensive, range-bound investment into year-end.
Quarter in review
- Despite a down quarter, FEDX reaped benefits of its outsized allocation to defense names that pared losses from aerospace and cyclical fund constituents.
- Federal service providers proved susceptible to inflation as the services component of headline CPI rises more than 50% from its January level.
- As the armed conflict in Ukraine persists, Northrop and Huntington Ingalls emerge as beneficiaries of the duress while previous contributors such as Lockheed Martin fall back on below-estimate earnings.
- A tale of two cities, the Aerospace & Defense category has largely been held up by defense bellwethers as military spending will likely persist until an abatement of the Ukraine-Russia war. On the other hand, our outlook for pent up flight demand fueling Aerospace outperformance softens as recession risks and isolated COVID outbursts stage caution for the subsector.
- Similarly, we expect recession risks and rising services inflation to curb service demand on a non-secular basis while federal agencies turn to legislation on where to award contracts. As such, the FEDX portfolio aims to capture these pivots in spending priorities and looks forward to analyzing the federal spending database and potential portfolio turnover.