Market Insights

February 2018

By: Tony Minopoli, CIO of the Knights of Columbus

Typically, I devote this monthly essay to dissecting the previous month’s market action while trying to provide our perspectives on political issues that could have a meaningful impact on the market. That was the plan again this month, until the events of last week occurred. While the Dow is the typical headline index, we are generally more focused on the S&P 500 given the broader collection of stocks in that index. For the week, the Dow fell 1,096 points, or 4.1%, and the S&P fell 111 points or 3.9%. At the same time, we saw the 10-Year Treasury yield rise from 2.70 on Jan. 26 to 2.84% on Feb. 2. While meaningful, this 14-basis-point rise was largely viewed more as what could come than what had actually happened.

Last week we saw several economic releases that certainly weighed on market sentiment and, for the moment, we need to separate the stock and bond markets from the economy. The jobs release last week showed an increase of 200,000. This was another data point that illustrates the economy is still growing. We also saw annual wage growth hit 2.9% year-over-year and certain areas in the country have extremely tight labor markets, thus indicating higher wages will be needed to attract and retain the best workers. The bond market reacted to the continuing strength of the labor market and then reacted even more to the strength of the growth in wages. This shows there is some inflation in the system and that the Fed will be more likely to follow their often-quoted goal of raising rates three times this year, despite holding rates steady at the most recent meeting.

What’s an investor to do?

To decide on a course of action, one must first answer another question: what has changed in my particular situation? This is the same question you need to ask whether you are tasked with overseeing a pension fund or an endowment or simply managing your personal assets. If nothing has changed, there is little reason to overreact. Saying to yourself, “I’m uncomfortable and I want out” is fair enough, but it is the easy decision. However, finding the seminal moment or event that will lead you back in is infinitely more difficult and is why we strongly advocate against attempting to time the market. Legendary stock investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” It is for this reason that we are not seeking to make material changes to the various portfolios under our care.

I am acutely interested in seeing if a correction or a more typical level of volatility in the market changes the debate on active versus passive management. That passive management is an accepted strategy is an understatement. However, I am often amazed that I get the most quizzical looks when I ask, “Would you like to invest in a strategy that is always fully invested, generally in the largest stocks in its market segment, and continues to overweight stocks that have gone up most with no regard to what the companies do, the quality of their earnings or their future prospects?” This is traditional indexing in a nutshell. We have been in an unprecedented period of low market volatility that has created the perfect environment for index and momentum strategies. There is an old saying, “You only learn who has been swimming naked when the tide goes out.” While I really don’t want to see what they are wearing, I am interested to see if they choose a different boat!

I want to shift gears to politics for a moment. Regular readers know that I have promised not to turn this column into a political commentary piece and that political events are only discussed when they have a direct and meaningful impact on the capital markets. I think we are in that moment right now. We just had the potential for a long government shutdown when the Democrats decided to fight a continuing resolution to fund the government using the Deferred Action for Childhood Arrivals (DACA) and the Dreamers as the hills on which to wage their political battle. I find it interesting that when former President Obama was in office, the Democrats always said America pays its bills. It appears they should have added the tagline, “when it is politically expedient.” In any case, we are heading for another showdown on funding the government, with immigration being the lever. Immigration seems to be getting more political as it becomes the card the Democrats want to play in the midterm elections.

The current budget battle along with the memorandum released by the Republicans on the Foreign Intelligence Surveillance Act (FISA) has turned into a good old-fashioned political fight. The Democrats argue they too have a memo that offers other facts and the Republicans say it was a lack of facts that allowed the surveillance of President Trump’s former campaign adviser Carter Page to begin with. The partisanship is impacting the fight on immigration and because some immigration agreement will be needed to pass a budget resolution, we are in for uncertainty. If that uncertainty leads to questioning economic growth, we have the concern for greater volatility in the markets.

I have read some comparisons with other corrections but I think we need to keep this correction in perspective; as of Friday, the stock market is still UP over 3% in 2018. Markets correct, and that is a fact of investing life. The key is to understand your investment goals, time horizon, and cash flow needs, and to make sure that you have an asset allocation structure that addresses those goals. While bumps and bruises could ensue in the short term, we believe this continues to be the appropriate recipe for long-term investing.

Until next month.

 

Core Bond Fund

Information as of 01/31/18 One Month YTD 1 Year
(as of 12/31/17)
Since Inception
(as of 12/31/17)
Core Bond Fund-Institutional -1.00% -1.00% 4.55% 2.43%
Bloomberg Barclays US Aggregate Bond Index -1.15% -1.15% 3.54% 1.96%
Lipper Core Bond Fund Average -0.95% -0.95% 3.56% 1.83%
Lipper Percentile Rank 11%

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

Limited Duration Bond Fund

Information as of 01/31/18 One Month YTD 1 Year
(as of 12/31/17)
Since Inception
(as of 12/31/17)
Limited Duration Bond Fund-Institutional -0.20% -0.20% 1.37% 0.95%
Bloomberg Barclays Government/Credit 1-3 Year Index -0.27% -0.27% 0.84% 0.85%
Lipper Short Investment Grade Debt Fund Average -0.13% -0.13% 1.68% 1.24%
Lipper Percentile Rank 60%

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

Large Cap Growth Fund

Information as of 01/31/18 One Month YTD 1 Year
(as of 12/31/17)
Since Inception
(as of 12/31/17)
Large Cap Growth Fund 6.47% 6.47% 26.71% 9.28%
Russell 1000 Growth Index 7.08% 7.08% 30.21% 12.64%
Lipper Multi-Cap Growth Fund Average 7.13% 7.13% 28.04% 9.29%
Lipper Percentile Rank 60%

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

Large Cap Value Fund

Information as of 01/31/18 One Month YTD 1 Year
(as of 12/31/17)
Since Inception
(as of 12/31/17)
Large Cap Value Fund 4.23% 4.23% 15.79% 8.98%
Russell 1000 Value Index 3.87% 3.87% 13.66% 8.90%
Lipper Multi-Cap Value Fund Average 4.06% 4.06% 15.28% 8.09%
Lipper Percentile Rank 41%

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

Small Cap Equity Fund

Information as of 01/31/18 One Month YTD 1 Year
(as of 12/31/17)
Since Inception
(as of 12/31/17)
Small Cap Equity Fund 4.18% 4.18% 15.38% 8.51%
Russell 2000 Index 2.61% 2.61% 14.65% 9.56%
Lipper Small Cap Fund Average 2.42% 2.42% 12.56% 8.65%
Lipper Percentile Rank 20%

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

International Equity Fund

Information as of 01/31/18 One Month YTD 1 Year
(as of 12/31/17)
Since Inception
(as of 12/31/17)
International Equity 5.44% 5.44% 30.98% 8.82%
FTSE All World Ex US Index 5.48% 5.48% 27.47% 7.10%
Lipper International Multi-Cap Fund Average 4.96% 4.96% 25.23% 6.07%
Lipper Percentile rank 3%

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.