Market Insights

September 2017

Each month, CIO Tony Minopoli pens a market commentary in which he shares his thoughts on the investment environment. Here is Tony's most recent commentary.

By my very nature, I am not a pack rat. I keep a relatively clean desk, review all emails on the day they are sent to me and am pretty judicious about not saving stuff for the sake of saving stuff. My one failure in this area is that I love to keep books and save articles. In fact, I have a cabinet in my office where I save interesting articles and papers that I have utilized during my 12 years at the Knights of Columbus, in the preparation for reports to our Board of Directors. Since the advent of Knights of Columbus Asset Advisors, I started saving articles that I could use in the preparation of my monthly Market Insights piece.

This has been a difficult year to reach into that pile because some timely piece of news seems to dominate headlines in the days just before I sit down to write this column. Currently, there are two troublesome issues occupying my mind: Hurricanes Harvey and Irma, and North Korea. We have been trying to assess the impact of Hurricane Harvey on gross domestic product (GDP) and fuel production. Unleaded gasoline prices are starting to retreat as refineries are coming back on line so we think the negative drag of higher energy prices will be short-lived and not have a significant impact on third quarter GDP.

Since March, unleaded fuel has averaged $1.47 on a wholesale basis and hit a high of $1.78 on August 31 as a result of shuttered refining capacity due to Hurricane Harvey. Gasoline futures are down below $1.70 this morning (Sept. 5) and expected to decline further as more refining capacity comes back on line. But wait — Hurricane Irma is just forming and, as of this writing, it is still unclear whether or not this storm will threaten the Gulf of Mexico.

The other dominant theme keeping me from perusing my trove of articles is North Korea. North Korea claimed to have detonated a hydrogen bomb that registered an anomalous seismic event of over 6 on the Richter scale. Hydrogen bombs, also known as thermonuclear weapons, are many times stronger than the devices the U.S. dropped on Hiroshima and Nagasaki to end World War II. The question is whether North Korea can miniaturize these devices to fit onto an intercontinental ballistic missile (ICBM). The world is fairly convinced that if the North Koreans do not possess this capability now, they will work feverishly to make this capability a reality as expeditiously as possible.

As I pen this piece at 10:45 a.m. on September 5, the S&P 500 is down 50 basis points and the 10-year Treasury has rallied a yield of 2.08%, the low for 2017. The Korean peninsula is causing lines to be drawn within the United Nations Security Council. While U.S. allies agree that stronger economic sanctions should be imposed on North Korea to choke off the cash the rogue nation needs to continue its weapons program, Russia and China continually call the sanctions ineffective and provocative to the North Korean regime.

Strategically, China wants North Korea to stay afloat because it creates a physical land buffer between mainland China and South Korea, a strong American ally, thus keeping the United States off their doorstep. Also, if North Korea falls, China likely gets flooded with refugees, a situation it clearly does not want to deal with.

Russia seems desirous of doing anything that is antagonistic to the United States. Realizing that it is no longer a dominant military or economic competitor to the United States, Russia takes to poking the U.S. at the United Nations to give it a seat at the big kids’ table. North Korea strives to develop a nuclear weapon, if not a nuclear arsenal, because it provides them leverage in negotiations with the U.S. and our allies. Nuclear capability also provides protection for Kim Jong-un’s regime to stay in place, which is candidly all he is probably worried about.

These geopolitical concerns are weighing on the stock market and driving up the value of bonds during an uncertain time. Gold, often a safe haven during geopolitical crises, also hit its high for 2017 this morning. Ultimately, I do not think we will end up in a military conflict because China desperately needs the U.S. markets for the sale of many Chinese goods. Russia needs to sell natural gas to Europe and other parts of the world. Beyond the advent of technology, the continuing interconnectedness of the global economy lessens the true potential for global war because countries need global markets to keep their home economies afloat. Regardless, if North Korea becomes desperate, all bets are off.

If we can ignore this North Korean distraction, there has been some pretty good news. U.S. GDP topped 3% for the second quarter and minus the volatile transportation sector, manufacturing has been fairly robust. The employment picture continues to improve and we are starting to witness some wage growth. Low inflation remains a conundrum with the Consumer Price Index both with and without food and energy registering 1.7% year-over-year increases as of the July 2017 release.

My article pile continues to grow and I am hopeful that one of these months I will be able to delve into something that is meatier without it seeming as though I am ignoring current headline news. Ultimately, markets and geopolitics are intertwined so we continue to focus on structuring portfolios to participate in a wide array of market environments given the significant list of global uncertainties.

Until next month.

 

Core Bond Fund

Information as of 08/31/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Core Bond Fund-Institutional 1.00% 4.45% 1.20% 2.30%
Bloomberg Barclays US Aggregate Bond Index .90% 3.64% -0.31% 1.85%
Lipper Core Bond Fund Average 0.74% 3.64% 0.46% 1.74%
Lipper Percentile Rank 22%

Gross Expense Ratio 1.19%, Net Expense Ratio 0.50%.

 

Limited Duration Bond Fund

Information as of 08/31/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Limited Duration Bond Fund-Institutional 0.20% 1.55% 0.79% 0.97%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.20% 1.18% 0.35% 0.98%
Lipper Short Investment Grade Debt Fund Average 0.19% 1.65% 1.54% 1.27%
Lipper Percentile Rank 70%

Gross Expense Ratio 1.19%, Net Expense Ratio 0.50%.

 

Large Cap Growth Fund

Information as of 08/31/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Large Cap Growth Fund 1.65% 16.13% 17.59% 5.55%
Russell 1000 Growth Index 1.83% 19.17% 20.42% 9.18%
Lipper Multi-Cap Growth Fund Average 1.08% 18.36% 20.07% 6.09%
Lipper Percentile Rank 71%

Gross Expense Ratio 1.55%, Net Expense Ratio 0.90%.

 

Large Cap Value Fund

Information as of 08/31/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Large Cap Value Fund -0.89% 4.77% 21.37% 6.60%
Russell 1000 Value Index -1.16% 4.81% 15.53% 7.08%
Lipper Multi-Cap Value Fund Average -1.24% 5.42% 17.87% 5.48%
Lipper Percentile Rank 18%

Gross Expense Ratio 1.654%, Net Expense Ratio 0.90%.

 

Small Cap Equity Fund

Information as of 08/31/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Small Cap Equity Fund -0.78% 4.63% 22.38% 6.09%
Russell 2000 Index -1.27% 4.42% 24.60% 7.62%
Lipper Small Cap Fund Average -1.64% 2.60% 20.89% 6.62%
Lipper Percentile Rank 32%

Gross Expense Ratio 1.51%, Net Expense Ratio 1.05%.

 

International Equity Fund

Information as of 08/31/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
International Equity 0.81% 20.79% 25.00% 4.80%
FTSE All World Ex US Index 0.50% 18.80% 20.87% 3.69%
Lipper International Multi-Cap Fund Average 0.29% 17.94% 19.48% 3.15%
Lipper Percentile rank 6%

Gross Expense Ratio 1.71%, Net Expense Ratio 1.10%.

 

The performance data quoted represents past performance. Past performance is not a guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth less than their original cost and current performance may be higher or lower than the performance quoted. For performance data current to the most recent month end, please call 1-844-KC-FUNDS.

* Fund performance for the 1 year and Inception to Date period are as of September 30th, 2016, the most recent quarter end. The inception date for each of the funds is February 27, 2015

** Knights of Columbus Asset Advisors LLC has contractually agreed to waive fees and/or to reimburse expenses to the extent necessary to keep Total Annual Fund Operating Expenses, (excluding interest, taxes, fund brokerage commissions, acquired fund fees and expenses and non-routine expenses) from exceeding the Net Expense Ratio for the respective Funds’ Institutional Shares average daily net assets until February 28, 2017.

 

Benchmark Definitions


Bloomberg Barclays Government/Credit 1-3 Year Index – benchmark for Limited Duration Fund
The U.S. Government/Credit Index is the non-securitized component of the U.S. Aggregate Index and was the first macro index launched by Barclays Capital. The U.S. Government/Credit Index includes Treasuries (i.e., public obligations of the U.S. Treasury that have remaining maturities of more than one year), government-related issues (i.e., agency, sovereign, supranational, and local authority debt), and corporates. The U.S. Government/Credit Index was launched on January 1, 1979 and is a subset of the U.S. Aggregate Index. The 1-3 year index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of between 1 and 3 years and are publicly issued.
Bloomberg Barclays US Aggregate Bond Index – benchmark for Core Bond Fund
The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US Universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986.
FTSE All-World Ex-U.S. Index – benchmark for International Equity Fund
The FTSE All-World ex US Index is one of a number of indexes designed to help investors benchmark their international investments. The index comprises Large and Mid cap stocks providing coverage of Developed and Emerging Markets excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
Russell 1000 Growth Index – benchmark for Large Cap Growth Fund
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics.
Russell 1000 Value Index – benchmark for Large Cap Value Fund
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The Russell 1000 Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.
Russell 2000 Index – benchmark for Small Cap Equity Fund
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
Labor Market Conditions Index – The Labor Market Conditions Index is derived from a dynamic factor model that extracts the primary common variation from 19 labor market indicators.
Quantitative Easing – Defined as a policy strategy of seeking to reduce long-term interest rates by buying large quantities of financial assets when the overnight rate is zero.
Indices are unmanaged and do not reflect the effect of fees. One cannot invest directly in an index.

Lipper Peer Group Definitions


Lipper Short Investment Grade Debt Classification – benchmark for Limited Duration Fund
Funds that invest primarily in investment-grade debt issues (rated in the top four grades) with dollar-weighted average maturities of less than three years. The Limited Duration Bond fund ranked 248 out of 323 funds measured for the one year ranking period as of September 30th, 2016.
Lipper Core Bond Classification – benchmark for Core Bond Fund
Funds that invest at least 85% in domestic investment-grade debt issues (rated in the top four grades) with any remaining investment in non-benchmark sectors such as high-yield, global and emerging market debt. These funds maintain dollar-weighted average maturities of five to ten years. The Core Bond fund ranked 248 out of 507 funds measured for the one year ranking period as of September 30th, 2016.
Lipper International Multi-Cap Core Classification – benchmark for International Equity Fund
Funds that, by portfolio practice, invest in a variety of market capitalization ranges without concentrating 75% of their equity assets in any one market capitalization range over an extended period of time. International multi-cap funds typically have characteristics compared to the MSCI EAFE Index. The International Equity fund ranked 18 out of 457 funds measured for the one year ranking period as of September 30th, 2016.
Lipper Multi-Cap Growth Classification – benchmark for Large Cap Growth Fund
Funds that, by portfolio practice, invest in a variety of market capitalization ranges without concentrating 75% of their equity assets in any one market capitalization range over an extended period of time. Multi-cap growth funds typically have above-average characteristics compared to the S&P SuperComposite 1500 Index. The Large Cap Growth fund ranked 326 out of 599 funds measured for the one year ranking period as of September 30th, 2016.
Lipper Multi-Cap Value Classification – benchmark for Large Cap Value Fund
Funds that, by portfolio practice, invest in a variety of market capitalization ranges without concentrating 75% of their equity assets in any one market capitalization range over an extended period of time. Multi-cap value funds typically have below-average characteristics compared to the S&P SuperComposite 1500 Index. The Large Cap Value fund ranked 240 out of 324 funds measured for the one year ranking period as of September 30th, 2016.