Market Insights

March 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.

February was pretty interesting on a number of fronts. The S&P 500 Index ended the month at a level of 2,364 after having ended January at 2,281 and on a pure price change basis, this represents a change of 3.6%. The 10 year Treasury started the month at 2.47%, ended at 2.39% and saw a high of 2.49% on February 15 and a low of 2.31% on February 24. Indeed, the bond market has a lot on its mind, but is meandering in a fairly tight range.

I think that the broad market is still trying to figure out what this unconventional president will mean over the short, intermediate and long term. The news continuously reminds us that several members of the president’s cabinet have yet to be confirmed, National Security Advisor Michael Flynn resigned, and now Attorney General Jeff Sessions is under some scrutiny. I am not going to start pontificating about politics, except to focus on the fact that the market and most people would like to have some clarity and this volatility among key cabinet members and advisors does not do much to provide that certainty.

Keeping in the political realm for the moment, President Donald Trump’s first address to Congress was, in my opinion, the most presidential he has appeared since Election Day. My personal frustration is that we are not quite 50 days into the presidency and his opposition seems most engaged to keep things in flux. This also carries to what I see as Trump’s axis of agenda items: tax reform, infrastructure spending and regulatory reform. During the recent address, the president announced a $1 trillion spend on infrastructure building that would have a blend of public and private financing. I remember when I was in business school that one of my economic professors always espoused from the standpoint of economic efficacy, that $1 spent on infrastructure employed many more people than $1 spent on defense hardware. Nevertheless, President Trump promised a 10% increase in the defense budget as well. I will end the political part of this commentary on a trite saying, the devil WILL be in the details!

We are seeing stronger inflation in the economy with a headline CPI of 2.5% year over year ending January. At the same time, the core rate of inflation over the last twelve months rose 2.3%. I would like to recall my own prediction that the Federal Reserve (Fed) would not do anything until June because I think it is now much more likely that we may see some action in March. The reason that the rate hike is more possible now is because these higher inflation numbers provide a degree of cover for the Fed to hike rates 25 basis points in March. As many readers may know, the Fed’s preferred inflation measure is the Core Personal Consumption Expenditures (PCE) Index and that inflation gauge is up 1.7% year-over-year, while headline PCE is up 1.9%, not deflationary for sure, but certainly below the 2.0% target rate. Perhaps this is the opportune time to become an economist so I can espouse economic prognostications on one hand and the other! I think the market is looking for an increase and I’m rapidly beginning to believe that is what they will get from the Fed.

Unemployment ticked up 10 basis points to 4.8% and underemployment moved up 20 basis points to 9.4% as of the latest reading in January. How shocking though that this happens to coincide with a 20 basis point increase in the labor participation rate to 62.9%. This is up 50 basis points from the near term low of 62.4% from September 2015, but still markedly lower than the 67.3% all time high we saw in January 2000. While average hours worked has held steady, average hourly earnings have increased 2.4% over the last year and are positive in each of the last 12 months. As individuals that have been outside of the labor force are seeing increased opportunities and a general level of wage increases, they are being lured off the sidelines and rejoining the labor pool. Animal spirits may finally be coming alive.

Many are concerned that the stock market has risen about 11%, as measured by the S&P 500, since Election Day. This is certainly a very impressive run and will either be precarious, or not, depending on what comes next. I recently heard an estimate that if President Trump and Congress can reduce corporate taxes to 25%, this alone would add enough profit to lower price/earnings ratios to a more comfortable level. Further, regulatory relief will lower operating costs and corporations surely benefit from an increase in the labor pool and higher wages because of the increased personal spending that most assuredly would come along with higher labor participation rates.

All is certainly not flashing green because some of the economic releases have been a little lighter than hoped. Some of the construction statistics have been a little less than robust. The first reading of first quarter gross domestic product that comes out in March, though lagging in time, will be a strong indication of where our economic footing is with respect to expectations. Further, what the Fed decides to do in March will be important. However, I feel the language released from the next meeting will be important because it will set the tone for the Fed’s view going forward. I do not think the Fed is about to shun the “data dependent” cloak they have been wrapped in so long. This will be a case of what is said and how it is said. The word parsing will happen in significant detail moments after the release of the Fed minutes. As a self-confessed data wonk, trust me, I will be right in there with them!

Until next month.

 

Core Bond Fund

Information as of 02/28/17 One Month YTD 1 Year
(as of 12/31/16)
Since Inception
(as of 12/31/16)
Core Bond Fund-Institutional 0.71% 1.12% 3.12% 1.29%
Bloomberg Barclays US Aggregate Bond Index 0.67% 0.87% 2.65% 1.11%
Lipper Core Bond Fund Average 0.68% 1.01% 3.00% 1.62%
Lipper Percentile Rank 39%

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

 

Limited Duration Bond Fund

Information as of 02/28/17 One Month YTD 1 Year
(as of 12/31/16)
Since Inception
(as of 12/31/16)
Limited Duration Bond Fund-Institutional 0.20% 0.40% 1.42% 0.72%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.16% 0.35% 1.28% 0.85%
Lipper Short Investment Grade Debt Fund Average 0.32% 0.60% 2.00% 1.68%
Lipper Percentile Rank 72%

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

 

Large Cap Growth Fund

Information as of 02/28/17 One Month YTD 1 Year
(as of 12/31/16)
Since Inception
(as of 12/31/16)
Large Cap Growth Fund 3.05% 7.03% 2.90% 0.81%
Russell 1000 Growth Index 4.15% 7.66% 7.08% 4.12%
Lipper Multi-Cap Growth Fund Average 3.43% 7.54% 2.81% 0.61%
Lipper Percentile Rank 44%

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

 

Large Cap Value Fund

Information as of 02/28/17 One Month YTD 1 Year
(as of 12/31/16)
Since Inception
(as of 12/31/16)
Large Cap Value Fund 2.68% 4.02% 14.32% 5.45%
Russell 1000 Value Index 3.59% 4.33% 17.34% 6.40%
Lipper Multi-Cap Value Fund Average 3.01% 4.26% 15.81% 7.89%
Lipper Percentile Rank 67%

Gross Expense Ratio 1.54%, Net Expense Ratio 0.90%.

 

Small Cap Equity Fund

Information as of 02/28/17 One Month YTD 1 Year
(as of 12/31/16)
Since Inception
(as of 12/31/16)
Small Cap Equity Fund 0.93% 0.18% 15.53% 4.94%
Russell 2000 Index 1.93% 2.33% 21.31% 6.90%
Lipper Small Cap Fund Average 1.53% 1.89% 20.56% 12.27%
Lipper Percentile Rank 84%

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

 

International Equity Fund

Information as of 02/28/17 One Month YTD 1 Year
(as of 12/31/16)
Since Inception
(as of 12/31/16)
International Equity 1.03% 4.25% 6.42% -1.62%
FTSE All World Ex US Index 1.74% 5.22% 5.12% -2.55%
Lipper International Multi-Cap Fund Average 1.20% 4.54% 1.51% -5.95%
Lipper Percentile rank 7%

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.