With 2024 in the rear-view mirror, investors appear guardedly optimistic following a year of generally solid economic and stock market performance. Dominated by mega-caps and technology stocks, the S&P 500 Index posted a +25.1% return in 2024, marking the first back-to-back +20% performance for that index since the dot-com bubble of 1998-1999. The impressive two-year rally has left stocks looking increasingly expensive, as the average price-to-earnings ratio (P/E) expanded to 27.4x, near the top of its 10-year range. Mid and small cap stocks also participated in the rally but not to the same extent, rising 15.4% and 11.5%, respectively. The bond market slumped in the fourth quarter, with the Bloomberg Aggregate Bond Index declining 3.1% as investors weighed the outlook for inflation and additional interest rate cuts by the Federal Reserve Bank, ending the year up 1.3%.
From an economic perspective, the US continues to expand as the country’s gross domestic product (GDP) grew at a year-over-year pace of between +2.7% and +3.0% throughout 2024. While the service sector has been the engine of growth since the COVID-19 pandemic, the country’s manufacturing base is accelerating to the upside, with the Institute for Supply Manufacturing Index moving in a positive direction in the fourth quarter. The sharp decline we have witnessed in headline inflation since mid-2022, as measured by the Consumer Price Index (CPI), has stalled in the 2.4%-3.0% range over the past six months, slightly above the Fed’s 2.0% target rate. President Donald Trump’s proposed policies to enact across-the-board tariffs and mass deportations have heightened concern over inflation, which prompted Fed Chair Jerome Powell to reign in projections for interest rate cuts in 2025. Counteracting these potential inflationary pressures are expectations around Trump’s growth-positive policies, including extending the 2017 tax cuts and mandating looser regulations on businesses. While the negative effects of tariffs and positive effects of tax-cuts could offset each other to some degree, a recent report by the Peterson Institute for International Economics (PIIE) predicts a negative impact on after-tax household income for nearly all income groups except the top 1%. Many investors anticipate that a resilient economy and a Federal Reserve that has shown its willingness to cut interest rates will set the stage for higher stock prices, but the contradictions and uncertainties arising from the myriad of policy proposals make it difficult to predict an outcome, arguing for a disciplined, high-quality, diversified investment approach.
Through December 2024, the Quaker Growth & Income Fund posted a 12-month net-of-fee investment performance of +10.1%, slightly behind the blended benchmark return of +11.1%. (Please refer to the page 2 footnote for a definition of the benchmark.) Seven of the fund’s thirteen asset sleeves representing 45% of the fund outperformed their respective benchmarks, while the other six underperformed. The majority of underperformance came from the fund’s 30% allocation to large cap stocks (growth, value, and core styles), which could not keep pace with the mega-cap and heavily tech-weighted S&P 500 Index. We are pleased with the relative performance of the fund’s international equity exposure, as both active manager Boston Common Asset Management and the passive index component outperformed the All-Country World ex-US Index. Also on a positive note, the fund’s fixed income allocation performed well, with both domestic and global bonds outperforming their respective benchmarks.
The Quaker Growth & Income Fund will pay its next semi-annual distribution in June 2025 at a rate of $1.22 per unit, the same as the $1.22 per unit paid in December 2024. The distribution is calculated using a trailing three-year rolling average of the unit value. The 4.0% annualized distribution rate is approved annually by the FFC Investment Committee and Board of Directors. The rate is set at a level that is deemed to be sustainable over the long term while preserving the purchasing power of the fund’s principal over time. As always, constituents may take more or less than the semi-annual amount, and withdrawals can occur at any time throughout the year.
The Quaker Green Impact Fund posted a 12-month net-of-fee performance of +6.0% versus its blended benchmark of +20.9%. To improve the fund’s performance, we made a substantial change in the fourth quarter, reducing the composition of the fund from three active “impact” managers down to two. Unfortunately, recent rhetoric towards renewable power under Trump’s policies and, clean tech stocks, and ESG (environment, social, and governance) investment themes, headwinds continued and even accelerated. On a brighter note, we agree with the fund’s impact managers that there is fundamental strength in these underlying businesses, making us confident in the solutions-based companies in which we are invested.
Investment performance for the Quaker Index Fund was solid in 2024, with a net-of-fees return of +22.2% versus +25.1% for the S&P 500 Index. Following our Quaker guidelines, the fund avoids companies involved with weapons, alcohol, tobacco, fossil fuels, and for-profit prisons. The largest detractors from performance were the fund’s technology, communications services, and materials exposure, while the biggest contributions to performance came from being underweight to energy stocks, and from exposure to real estate and consumer discretionary names.
FFC’s two fixed income funds outperformed their respective benchmarks in 2024. The Quaker Core Bond Fund posted a return of +1.8% compared to 1.3% for the Bloomberg Aggregate Bond Index, and the Short Term Investment Fund returned +4.5% versus +4.1% for its benchmark. (Please refer to performance table footnotes on page two for a definition of the benchmark.)
Given the uncertainties surrounding President Trump’s policies and executive orders, coupled with ongoing geopolitical tensions in Europe and the Middle East, we anticipate increased volatility in the markets. Notwithstanding the extended valuations of large cap stocks, we expect market returns to broaden in 2025, leading to stronger relative performance from small and mid-cap stocks. As always, we pay close attention to economic and market conditions, and will make portfolio adjustments as needed. We appreciate the relationships we have with our investors and thank you for your support.
Richard Kent, CFA, Chief Investment Officer
