Market Insights

November 2017

By: Tony Minopoli, CIO of the Knights of Columbus

The focus of this column is to look at the recent month’s happenings and focus on the here and now as it pertains to the capital markets. From time to time, a significant event will occur after the end of the month, but before I sit down to write this column for the following month. This November, we appear to have two: the recently nomination of a new chairman of the Federal Reserve and the potential for tax reform.

First, President Trump has announced that he will not reappoint Federal Reserve Board Chair Janet Yellen to another term and is nominating Jerome Powell to succeed her. The short story is that we do not think this will be a significant departure from current Fed policy as Powell, a current Fed member, has stated he believes it will take a prolonged amount of time to normalize rates and the Fed’s balance sheet. Powell is a more status-quo pick and one that will unlikely cause any upheaval in the market. Had the president gone with Stanford University professor John Taylor, we think the story could have been different. Taylor would have been a much sharper change because he has avowed that financial markets would perform better if the Fed simply got out of the way.

From the standpoint of believing in the free market system, had the Fed not been as aggressive as it was during the financial crisis, we believe that the crisis would have been longer and deeper. At the same time, assets would have repriced, the market would have chosen winners and losers and we likely would have approached trend growth much faster. I do not think I can emphasize enough that we believe the Fed did the right thing at the time because allowing the market to clear would have been a very painful process and we think the stock market would have gone far lower and unemployment would have been much more severe. The resulting human toll would have been horrific. The Fed did what it had to do and, presupposing his confirmation, Chairman Powell will be on the same gradual policy normalization plan as Yellen had been since the start of the quantitative easing exercise.

Shifting my focus to taxes, the president, still smarting over the inability of the Republicans to get a health care replacement plan through Congress, seems even more determined to get a tax package complete. Now that the Republicans have started to reveal the details of the tax plan, we know that the top rate will stay at 39.6%, but will be levied at incomes of $1 million and above. The increase in the personal exemption seems to be something that will benefit many of the people in the middle class, and tax reporting will possibly become much simpler for many folks. The bill increases the child tax credit to $1,600 but asks for a repeal of the estate tax in 2024.

The real impact of the new tax plan is that it lowers corporate taxes for S corporations, C corporations and other pass-through entities, thus allowing these companies to have more money to invest. The bill proposes to limit corporate taxes to 20% but as a “give” to the Democrats, the Republican plan limits the home interest deduction to $500,000. The plan also calls to eliminate the alternative minimum tax (AMT), but the 3.8% surtax in the Affordable Care Act remains in place unless there is something done with health care – perhaps a tall order at the moment. The limits placed on state and local taxes (knows as SALT) will likely be the subject of much contention. Now if you happen to believe some poking is going around here, the heavily Democratic states, such as California, New York and New Jersey, would be among the hardest hit by this tax limit. If you simply look at numbers, you’ll know that something deducted must be added back somewhere else, unless we actually could cut spending. Oh to dream the impossible dream!

The reality behind this tax package is that there is a little can-kicking involved in the math. If the rates are cut and if there is economic stimulus, then there will be greater tax revenues to collect in the future. The Republicans are trying to establish that a comprehensive tax plan — or at least a plan as comprehensive as can be agreed upon by the bitterly divided Congress — has the ability to finally help drive economic growth rates above 3.0% per annum. The Democrats, in an odd political twist, are now worried about the impact on the budget deficit, though it is quite surprising that they didn’t worry too much about the cost of Obamacare when Pelosi and Company were sending the health care bill through Congress. You have to love the contact sport of politics!

In any event, we think it is highly likely that a tax package will get through Congress. The bond market was a little worried about the inflationary possibilities as rates on the 10-year Treasury increased to 2.46% on October 26, only to retreat to 2.34% on November 3 as the tax package has already been watered down from a pure Republican set of tax ideals. We think the tax plan will be positive and potentially slightly inflationary, and if that means the Fed and analysts stop worrying about deflation, we will all be the better for it.

The president would like something done before Christmas, but it will likely lead into 2018 to iron out all the details in the tax plan. If the final bill does not become law until early next year, we believe that the tax plan will be made retroactive to January 1, 2018. With respect to the outcome of the tax debate, stay tuned, pick your favorite cliché and keep watching because as Yogi Berra once said, “it ain’t over till it’s over.”

Until next month.

Core Bond Fund

Information as of 10/31/17 One Month YTD 1 Year
(as of 09/30/17)
Since Inception
(as of 09/30/17)
Core Bond Fund-Institutional 0.20% 4.17% 1.36% 2.44%
Bloomberg Barclays US Aggregate Bond Index 0.06% 3.20% 0.07% 2.00%
Lipper Core Bond Fund Average 0.06% 3.29% 0.47% 1.89%
Lipper Percentile Rank 16%

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

Limited Duration Bond Fund

Information as of 10/31/17 One Month YTD 1 Year
(as of 09/30/17)
Since Inception
(as of 09/30/17)
Limited Duration Bond Fund-Institutional 0.00% 1.48% 1.10% 1.08%
Bloomberg Barclays Government/Credit 1-3 Year Index -0.03% 1.03% 0.66% 1.02%
Lipper Short Investment Grade Debt Fund Average 0.10% 1.77% 1.46% 1.33%
Lipper Percentile Rank 58%

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

Large Cap Growth Fund

Information as of 10/31/17 One Month YTD 1 Year
(as of 09/30/17)
Since Inception
(as of 09/30/17)
Large Cap Growth Fund 4.40% 22.45% 17.87% 6.97%
Russell 1000 Growth Index 3.87% 25.40% 21.94% 10.67%
Lipper Multi-Cap Growth Fund Average 3.08% 24.25% 19.92% 7.68%
Lipper Percentile Rank 72%

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

Large Cap Value Fund

Information as of 10/31/17 One Month YTD 1 Year
(as of 09/30/17)
Since Inception
(as of 09/30/17)
Large Cap Value Fund 1.82% 10.90% 20.48% 7.32%
Russell 1000 Value Index 0.73% 8.70% 15.12% 7.63%
Lipper Multi-Cap Value Fund Average 1.02% 10.08% 16.88% 6.57%
Lipper Percentile Rank 19%

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

Small Cap Equity Fund

Information as of 10/31/17 One Month YTD 1 Year
(as of 09/30/17)
Since Inception
(as of 09/30/17)
Small Cap Equity Fund 1.65% 13.11% 21.39% 7.85%
Russell 2000 Index 0.85% 11.89% 20.74% 9.15%
Lipper Small Cap Fund Average 1.17% 9.79% 18.57% 8.01%
Lipper Percentile Rank 18%

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

International Equity Fund

Information as of 10/31/17 One Month YTD 1 Year
(as of 09/30/17)
Since Inception
(as of 09/30/17)
International Equity 4.06% 27.24% 23.20% 6.84%
FTSE All World Ex US Index 1.95% 23.38% 19.83% 5.68%
Lipper International Multi-Cap Fund Average 1.65% 22.41% 18.94% 5.05%
Lipper Percentile rank 8%

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 annualized. 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, 2018.

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 192 out of 332 funds measured for the one year ranking period as of September, 30, 2017.

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 78 out of 493 funds measured for the one year ranking period as of September, 30, 2017.

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 35 out of 421 funds measured for the one year ranking period as of September, 30, 2017.

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 384 out of 532 funds measured for the one year ranking period as of September, 30, 2017.

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 69 out of 370 funds measured for the one year ranking period as of September, 30, 2017.

Lipper Small-Cap Core Classification – benchmark for Small Cap Equity Fund
Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) below Lipper’s USDE small-cap ceiling. Small cap core funds have more latitude in the companies in which they invest. These funds typically have average characteristics compared to the S&P SmallCap 600 Index. The Small Cap Equity fund ranked 183 out of 1007 funds measured for the one year ranking period as of September, 30, 2017.

Tilt Fund: A fund developed when an institution compiles a core holding of stocks that mimic a benchmark type index such as the S&P 500 to which additional securities are added to help tilt the fund toward outperforming the market.

Smart Beta: A set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. Emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way.