Market Insights

July 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.

June was a very interesting month and certainly we continue to see political rancor rule the day. The Tweeter-in-Chief continues to make his presidency the most unconventional in the history of our republic. We have been acutely watching the fixed income market as interest rates have started to meander higher. We think this is as much about the Eurozone starting to “normalize” policy and this may mean that interest rates will be less manipulated going forward versus what has been the norm since the onset of the financial crisis.

Sticking with the geo political issues, we are focused on the growing tensions around the Korean Peninsula as the North Koreans are getting much closer to developing the capability to launch nuclear-equipped intercontinental ballistic missiles (ICBMs) that could reach the west coast of the United States. Certainly, North Korea possesses capabilities right now to inflict significant harm on our strong allies both in South Korea and Japan. The tensions in Syria, and therefore Russia, continue to be a hot issue as well. The president’s ongoing battle with media outlets and his declarations of “fake news” continue to add to the mounting political distractions.

Shifting to the U.S economy, we recently had a slight upward revision to GDP such that year- over-year GDP reflected 2.5% growth through the end of the first quarter. While it is certainly pleasing to see an increase in overall economic growth, this level is that sort of “stall speed” that keeps this tepid expansion growing, but the growth we are experiencing is anything but robust.

I think of great concern is that we started to see some upward movement in inflation, which has provided some cover for the Federal Reserve (Fed) to lift interest rates. However, through the end of May, the most recent releases for the Consumer Price Index (CPI) showed 1.9% year over year growth and factoring out food and energy, this inflation indicator is up only 1.7%. Again, this level of inflation likely keeps us from slipping into deflation, but does not have the type of robust inflation that the Fed was hoping to see thus far.

Many readers may know that while the Fed certainly watches the CPI, their preferred inflation measure is the Personal Consumption Expenditures Index (PCE), which has declined to year over year growth of just 1.4% as of the end of May, compared with 2.1% at the end of February. It is the slowing of the rate of inflation that is leading many to believe that we might not see another rate increase in 2017.

In the equity market, the continued low rate environment and the gridlock in Washington have largely been constructive for the U.S. stock market. Furthermore, the emergence of “green shoots” in the Eurozone economy have also been beneficial. For some time, we have posited that the global economy was being pulled along by the U.S. and our focus was on whether or not the U.S. would be the engine to continue to drive global economic growth or if the world would derail the tepid U.S. expansion. With some emerging signs for European growth, the U.S. stock market has benefited from views of a broader global expansion, no matter how lackluster it might be.

The S&P 500 is up over 8.2% for 2017, as of June 30, 2017, having set numerous record closes this year and hitting an all-time high of 2,453 on June 19. The end of June saw the index just 30 points below that record close.

The bond market, measured by the United States 10-year Treasury yield, continues to be somewhat volatile, having increased 50 basis points right after Trump’s victory. This acceleration in interest rates was being driven by a belief that we were on the precipice of tax and regulatory reform as well as a new spate of infrastructure building and changes to fiscal policy that would accelerate inflation. A few misplaced Tweets, questions over Russian meddling in the presidential election and a number of geopolitical concerns caused the rates to hit their 2017 low of 2.13% on June 14. With some thought that Europe will be retreating from their accommodative monetary stance, rates melted up to 2.30% as of quarter end.

The direction of interest rates will now be driven by whether there really is inflation (real or perceived) as a result of the end of the accommodative stance of both the European Central Bank (ECB) and the Fed. Also, the other economic data that we see over the coming months will be extremely important in determining the short-term direction for rates and this will obviously have a significant impact on stocks as we move into and through the summer months.

For the macro economy, we do still see positives, with Industrial Production growing at 2.2% over last year. Capacity utilization is at 76.6%, versus 75.8% at this time last year. At the same time, the orders for durable goods, although up 5.1% in May, are down 1.1% versus this time last year. The pace of good news being offset by at least some bad news continues.

What does this mean for investors? For us, portfolio flexibility and diversification are paramount because of the potential for economic or geopolitical headlines to emerge at almost any time. We also continue our goal of owning quality companies because in an environment with numerous risks just below the surface, holding a portfolio of quality stocks and bonds is a solid way to help manage risk.

We would welcome a bit more consensus among our elected officials in Washington and some clarity on several issues including healthcare, tax policy and the Fed’s plan for their bloated balance sheet. I suppose that may be a bit too much to ask for.

 

Core Bond Fund

Information as of 06/30/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Core Bond Fund-Institutional 0.18% 3.01% 1.20% 2.30%
Bloomberg Barclays US Aggregate Bond Index -.10% 2.27% -0.31% 1.85%
Lipper Core Bond Fund Average -0.04% 2.40% 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 06/30/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Limited Duration Bond Fund-Institutional -0.07% 0.94% 0.79% 0.97%
Bloomberg Barclays Government/Credit 1-3 Year Index -0.04% 0.72% 0.35% 0.98%
Lipper Short Investment Grade Debt Fund Average 0.04% 1.30% 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 06/30/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Large Cap Growth Fund -0.95% 11.77% 17.59% 5.55%
Russell 1000 Growth Index -.26% 13.99% 20.42% 9.18%
Lipper Multi-Cap Growth Fund Average 0.15% 14.26% 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 06/30/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Large Cap Value Fund 3.04% 5.33% 21.37% 6.60%
Russell 1000 Value Index 1.63% 4.66% 15.53% 7.08%
Lipper Multi-Cap Value Fund Average 1.80% 5.20% 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 06/30/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
Small Cap Equity Fund 4.10% 5.09% 22.38% 6.09%
Russell 2000 Index 3.46% 4.99% 24.60% 7.62%
Lipper Small Cap Fund Average 2.49% 3.49% 20.89% 6.62%
Lipper Percentile Rank 32%

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

 

International Equity Fund

Information as of 06/30/17 One Month YTD 1 Year
(as of 06/30/17)
Since Inception
(as of 06/30/17)
International Equity 0.76% 14.98% 25.00% 4.80%
FTSE All World Ex US Index 0.24% 14.16% 20.87% 3.69%
Lipper International Multi-Cap Fund Average 0.11% 14.08% 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.