Market Insights


August 2018

I wrote several months ago that Knights of Columbus Asset Advisors had passed the all-important three year milestone. After some champagne flowed and we discussed where we had been and where we aspire to go we got back to the business of managing the General Account for the insurance business of the Knights of Columbus as well as the various products we manage within Knights of Columbus Asset Advisors.

On July 12 and 13 we conducted our first ever client symposium in New Haven. The focus of our gathering was to bring together current diocesan clients and prospects to discuss our products and contemporary issues in the investment world relating to diocesan investments. The conference was less a commercial for KOCAA and more bringing together the Chief Investment Officers from all of our sub advisors and a number of KOCAA investment professionals to discuss the current state of our various markets and our outlooks.

The symposium also allowed for time to discuss contemporary issues facing the retirement plans of Dioceses as well as management strategies for their Deposit & Loan Funds. For the uninitiated, many dioceses offer a savings program whereby the parishes with excess funds put them on deposit with their diocese and the diocese uses that pool of money to make loans to other parishes within the diocese. The funds not used for loans are generally invested in certificates of deposit or other fixed income instruments to provide a rate of return to the depositors. Because Chancery offices are not banks, this deposit and loan function is sometimes run at a loss, run inefficiently or just a major point of consternation for some dioceses. We used our experience to try and shine some light on best practices to raise the quality of management in Deposit & Loan strategies for our attendees.

Humbly, we received very strong feedback from our attendees on the sessions and the time for socializing and fellowship afforded within the schedule. We plan to make this an annual event open across all client types so I hope others will be able to join us.

Since last I sat and put pen to paper, President Trump had his summit in Helsinki with Vladimir Putin. The rebukes were pretty strong as Trump was viewed by many as cozying up to Putin while bashing the U.S. intelligence apparatus. Of course this meeting came on the heels of President Trump’s NATO meeting where he slammed our allies for not spending enough on defense. The political fallout only means more rancor from all sides and continues to have politics front and center in our collection of market concerns. Interestingly enough though, on the day of the Trump-Putin summit, July 16, 2018, the Dow Jones Industrial Average increased 0.18% and the S&P 500 finished down 0.10% so the equity markets were not overly excited. The bond market did not react harshly either as the yield on the 10-year Treasury increased about 2 basis points. Of course this all happened on a day when retail sales figures were released and were in line, or above expectations, while the retail sales figures from last month were all revised meaningfully higher; we think that the bond market was probably more concerned about inflation than politics. We also saw a tremendous print of 4.1% for second quarter Gross Domestic Product (“GDP”)1 and also a 20 basis point upward revision for first quarter GDP growth to 2.2%. This first reading of second quarter GDP brings the annual Real GDP growth rate to 2.8%. There is certainly some concern that this growth rate is transitory. However, we believe the consumer remains strong and with the continued strength in the labor market we might see extended innings in this rally.

I have discussed how economic expansions do not die of old age and how it typically takes an exogenous shock to bring about the end of an expansion. One shock we worry about is the onset of inflation. Inflation, as measured by the Consumer Price Index (“CPI”)2, has clearly risen off the lows with a most recent reading for the month of June 2018, of 2.9%, the highest reading since February 2012. The strength of the employment market and a general upward trend in energy prices have both contributed to an increased expectation of future inflation. With inflation up modestly, the Fed is not overly concerned with the economy overheating. However, the benign attitude towards inflation can change quickly if the numbers show that inflation is heating up and creating concern at the Fed.

From outside of the U.S., the potential for a trade war, in our opinion, could certainly provide a strong enough shock to derail the current economic expansion. Recently, the U.S. and the European Union have jointly announced they would work together to solve the trade issues. Both Canada and Mexico have signaled a desire to solve the NAFTA disputes and it feels as though China and the U.S. may come to the table. After being viewed as too cozy with Putin, President Trump and his administration have recently been striking a more aggressive posture against Russia with respect to meddling in elections and the annexation of Crimea. Our domestic political situation will also come more into focus as we move towards the midterm elections in November. The Democrats seem to be pushing as far left as possible and the Republicans want to be shown as the party of sensibility, despite all of the various factions within the Republican Party and their varying attitudes towards the President.

We are most focused on a resolution for the trade war, and an inflationary environment that doesn’t spook the Fed, while we remain watchful during these months leading up to the Midterm elections.

Until next month.


1Real Gross Domestic Product is the monetary value of all finished goods and services produced in the United States during a specific time period as measured by the Bureau of Economic Analysis.
2The Consumer Price Index (C.P.I), calculated by the U.S. Bureau of Labor Statistics, is a measure of average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

 

Core Bond Fund

One Month
(as of 7/31/18)
1 Year
(as of 6/30/18)
3 Years
(as of 6/30/18)
Since Inception
(as of 6/30/18)
Core Bond Fund-I Shares 0.00% -0.28% 2.16% 1.52%
Bloomberg Barclays US Aggregate Bond Index 0.02% -0.40% 1.72% 1.17%
Lipper Core Bond Fund Average 0.13% -0.52% 1.60% 1.05%
Lipper Percentile Rank 27% 16%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Core Bond Funds. Number of Funds in Category: 520 (1 Year) and 457 (3 Year).
Gross Expense Ratio 1.04%, Net Expense Ratio 0.50%.

Limited Duration Fund

One Month
(as of 7/31/18)
1 Year
(as of 6/30/18)
3 Years
(as of 6/30/18)
Since Inception
(as of 6/30/18)
Limited Duration Fund-I Shares 0.20% 0.34% 0.83% 0.78%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.05% 0.21% 0.71% 0.75%
Lipper Short Investment Grade Debt Fund Average 0.20% 0.58% 1.12% 1.07%
Lipper Percentile Rank 61% 67%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Short Investment Grade Debt Funds. Number of Funds in Category: 340 (1 Year) and 290 (3 Year).
Gross Expense Ratio 1.01%, Net Expense Ratio 0.50%

Large Cap Growth Fund

One Month
(as of 7/31/18)
1 Year
(as of 6/30/18)
3 Years
(as of 6/30/18)
Since Inception
(as of 6/30/18)
Large Cap Growth Fund-I Shares 1.69% 21.63% 11.47% 10.13%
Russell 1000 Growth Index 2.94% 22.51% 14.98% 13.01%
Lipper Multi-Cap Growth Fund Average 2.10% 20.60% 11.46% 10.31%
Lipper Percentile Rank 40% 52%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Growth Funds. Number of Funds in Category: 526 (1 Year) and 469 (3 Year).
Gross Expense Ratio 1.34%, Net Expense Ratio 0.90%.

Large Cap Value Fund

One Month
(as of 7/31/18)
1 Year
(as of 6/30/18)
3 Years
(as of 6/30/18)
Since Inception
(as of 6/30/18)
Large Cap Value Fund-I Shares 4.40% 10.60% 9.58% 7.79%
Russell 1000 Value Index 3.96% 6.77% 8.26% 6.98%
Lipper Multi-Cap Value Fund Average 3.47% 8.41% 7.65% 6.48%
Lipper Percentile Rank 20% 16%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Value Funds. Number of Funds in Category: 377 (1 Year) and 315 (3 Year).
Gross Expense Ratio 1.33%, Net Expense Ratio 0.90%.

Small Cap Fund

One Month
(as of 7/31/18)
1 Year
(as of 6/30/18)
3 Years
(as of 6/30/18)
Since Inception
(as of 6/30/18)
Small Cap Equity Fund-I Shares 1.05% 13.85% 8.06% 8.36%
Russell 2000 Index 1.74% 17.57% 10.96% 10.50%
Lipper Small Cap Fund Average 1.74% 13.99% 9.37% 8.94%
Lipper Percentile Rank 55% 76%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Small-Cap Core Funds. Number of Funds in Category: 985 (1 Year) and 814 (3 Year).
Gross Expense Ratio 1.33%, Net Expense Ratio 1.05%.

International Equity Fund

One Month
(as of 7/31/18)
1 Year
(as of 6/30/18)
3 Years
(as of 6/30/18)
Since Inception
(as of 6/30/18)
International Equity-I Shares 1.77% 13.20% 8.56% 7.25%
FTSE All World Ex US Index 2.50% 7.58% 5.59% 4.84%
Lipper International Multi-Cap Fund Average 2.25% 6.01% 4.56% 4.07%
Lipper Percentile Rank >1% >1%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: International Multi-Cap Core. Number of Funds in Category: 416 (1 Year) and 329 (3 Year).
Gross Expense Ratio 1.56%, 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 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.

Consumer Price Index – The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services.

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 184 out of 325 funds measured for the one year ranking period and ranked 184 out of 282 funds measured for the three year ranking period as of June 30, 2018.

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 63 out of 512 funds measured for the one year ranking period and ranked 60 out of 444 funds measured for the three year ranking period as of June 30, 2018.

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 281 out of 486 funds measured for the one year ranking period ranked and 252 out of 440 funds measured for the three year ranking period as of June 30, 2018.

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 60 out of 350 funds measured for the one year ranking period and ranked 59 out of 302 funds measured for the three year ranking period as of June 30, 2018.

Lipper Small-Cap Core Classification – benchmark for Small Cap 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 159 out of 991 funds measured for the one year ranking period and ranked 585 out of 812 funds measured for the three year ranking period as of June 30, 2018.

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 5 out of 420 funds measured for the one year ranking period and ranked 9 out of 330 funds measured for the three year ranking period as of June 30, 2018.