Market Insights


February 2021

By: Tony Minopoli, President & CIO of Knights of Columbus Asset Advisors

Masks and Marxism. The concept for this month’s essay came to me when I was having a conversation with one of our Marketing Directors, Paul McMahon. We were speaking about all of the current events of the markets and politics. With so many year-end prognostications flying around, I said to Paul that we are really focused on the virus, vaccines, and herd immunity. I shared with him that we have an official spot in our house for clean masks and I am truly looking forward to the day when these masks are a thing of the past. Although, in the interim, I may need some more as Doctor Fauci has been calling for doubling up on face masks for added protection. In any event, at KoCAA, we remain optimistic that the combination of vaccines and herd immunity will allow the economy and our lives to regain some semblance of normalcy.

At the same time, we also discussed the concerns by conservatives and others that the U.S. is plunging into some form of socialism. There are a variety of people wanting to rethink a better form of capitalism, but every idea I have heard sounds like government control of the economy and that always means, in my opinion, picking of “winners” and “losers” generally by people that have never had to actually “make a payroll”. For the second notion of this month’s essay, Marxism, it was not my intent to focus on Marx per se, but rather on socialism in general. In my view, all of the approaches of government planned economies and all of the socialist methodologies that have been tried throughout history have notched exactly zero wins. From my perspective, the frightening part is that President Biden is using executive orders like they are free and has started by trying to rework the entire U.S. energy complex, first by striking down the Keystone XL pipeline. Green energy, in my view, is a noble endeavor, but it needs to earn a seat at the energy table by being cost effective and reliable, without the thumb of the government on the scale making it so. In any event, I would rather see government be smaller and focused on the major issues of the day, not micromanaging the economy.

This leads me to consider our country’s position on the road to economic recovery. I always start with employment because so much of our economy is predicated on consumer spending. At the end of December, the unemployment rate stood at 6.7%, the lowest since the start of the pandemic. At the same time, the underemployment rate stood at 11.7%, also the lowest level since the onset of COVID-19. These two statistics need to be taken in context with the labor participation rate which ended the year at 61.5%, down pretty significantly from 63.3% at the end of February 2020. This 1.8% difference, if added to unemployment, brings the real unemployment rate up to 8.5%. So, for all of the real and perceived improvement in the economy, I believe we still have a way to go from here.

We believe that we may see real improvement in both the unemployment rate and labor participation as the economy opens up. Travel, leisure, and restaurants were decimated by the virus. Further, we witnessed parents having to drop out of the labor force in order to care for their children given the unevenness and continuing fluidity of schools being open. If we do see a better virus situation, we believe these sectors will see a strong rebound and will help absorb many of the unemployed, as well as, bring people back into the labor force. As an interesting aside, I sit on the board of directors for a small startup in the travel industry that obviously suffered mightily during the early days of the pandemic. We are starting to see more economic activity and I am hopeful that this means a turn in the leisure, travel, and dining segments of our economy. 

What can go wrong? Beyond the job market issues, we also have to see consumers return to health. Some consumers are behind on major payments such as rent, mortgages, and outstanding debts. To be sure, the stimulus payments have been helpful, but they certainly haven’t solved all of the financial issues for many consumers. In our view, back to normalcy will be for the economy to open more meaningfully, for a greater proportion of the population to have either been vaccinated or for the population to have achieved herd immunity. Let the healing begin!

Where we are now? We like to review a number of economic releases in order to help us gauge the health of the economy. When looking at New Home Sales, the number of homes sold grew by nearly 1.6% in December, after declining over 12.5% in November. Across the board, we saw housing statistics rise in December. The first release of fourth quarter GDP showed 4.0% growth and this was a little behind expectations of 4.4% growth in the last quarter of the year. This brings 2020 Growth to -2.5% for the year and while negative, a far cry from the -33.1% downward move in GDP that occurred in the second quarter. Industrial Production, Capacity Utilization and Durable Goods Orders all improved in their last releases[1]. We continue to see “green shoots”, however, our enthusiasm is somewhat curbed by the new virus mutations and whether the existing vaccines will prove effective against these new strains. 

We have also been watching money supply and the savings rate for clues on the eternal “where do we go from here?” questions. First, M2 is a measure of the money supply that includes currency, deposits in checking and savings accounts, certificates of deposit and money market accounts. When we look at M2, we have seen fairly significant growth in 2020 from $15.4 trillion in February 2020 to $19.2 trillion at the end of December 2020[2]. This massive growth can be associated with federal stimulus payments and a major increase in the U.S. savings rate.

Essentially, M2 grew by an astounding 24.7% in 10 months and represents $3.8 trillion in additional savings. With a little rounding to $4 trillion (hey Congress throws around trillions like it is pocket change so a little latitude please!) and a U.S. economy of about $20 trillion, this “excess” savings level represents about 20% of our annual economic output. This is a driving reason why many pundits see the potential for a strong demand led economic recovery if vaccinations occur widely and herd immunity becomes a reality. The key is that this much potential spending can be inflationary, but we do not think inflation is a problem…yet. We are operating on the assumption that the existing economic slack will keep inflation at bay for now.

I could not end this month without a word about Game Stop and the Reddit situation. I am not going to rhapsodize about the win for the little guy or sticking it to hedge funds. I am going to say this this type of gang trading could be problematic because as I write this on February 1st at 12:30 PM, Game Stop is down about 21.5% from the Friday close. Yes, the short squeeze jacked up the price but at some point fundamentals matter and the last people in may bear the wrath of “is the price justified by the earnings”. You know the kind of stuff that concludes long term investing is inextricably linked to over the long haul. In my view, there will be more to this story, however, we, at KoCAA, continue to focus on long term investing. That said, the small cap indices were certainly moved by the trading in the short squeeze plays involving Game Stop, AMC and others.  These “gamed” securities are held in the index funds and ETFs that track the small indices which as a result, experienced gyrations as well.

In my 30 plus years of being in the markets as a professional it has never been boring, and it doesn’t look like it will be any time soon.

Until next month.

 



[1] For the period ending December 2020, Industrial Production improved from .47 (November 2020) to 1.57, while Capacity Utilization improved from 73.4 to 74.5 over the same period. Durable Goods Orders improved from November’s reading of 3.7 to December’s reading of 3.8.

Core Bond Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
1 Year
(as of 12/31/20)
5 Years
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Core Bond Fund-I Shares -0.38% -0.38% 7.20% 4.72% 3.91%
Bloomberg Barclays US Aggregate Bond Index -0.72% -0.72% 7.51% 4.44% 3.68%
Lipper Core Bond Fund Average -0.57% -0.57% 8.24% 4.59% 3.66%
Lipper Percentile Rank 82% 43%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Core Bond Funds. Number of Funds in Category: 505 (1 Year) and 414 (5 Year). Gross Expense Ratio 0.84%, Net Expense Ratio 0.50%.

Limited Duration Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
1 Year
(as of 12/31/20)
5 Years
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Limited Duration Fund-I Shares 0.10% 0.10% 3.33% 2.29% 1.94%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.03% 0.03% 3.33% 2.21% 1.94%
Lipper Short Investment Grade Debt Fund Average 0.16% 0.16% 3.57% 2.58% 2.14%
Lipper Percentile Rank 67% 66%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Short Investment Grade Debt Funds. Number of Funds in Category: 369 (1 Year) and 293 (5 Year). Gross Expense Ratio 0.82%, Net Expense Ratio 0.50%

Large Cap Growth Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
1 Year
(as of 12/31/20)
5 Years
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Large Cap Growth Fund-I Shares 0.54% 0.54% 33.32% 16.72% 13.90%
Russell 1000 Growth Index -0.74% -0.74% 38.49% 21.00% 17.83%
Lipper Multi-Cap Growth Fund Average -0.66% -0.66% 42.83% 18.84% 15.69%
Lipper Percentile Rank 58% 65%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Growth Funds. Number of Funds in Category: 507 (1 Year) and 406 (5 Year). Gross Expense Ratio 1.05%, Net Expense Ratio 0.90%.

Large Cap Value Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
1 Year
(as of 12/31/20)
5 Years
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Large Cap Value Fund-I Shares 0.23% 0.23% -0.28% 9.13% 7.10%
Russell 1000 Value Index -0.99%/td> -0.99% 2.80% 9.74% 7.43%
Lipper Multi-Cap Value Fund Average -0.22% -0.22% 2.72% 8.91% 6.51%
Lipper Percentile Rank 68% 43%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Value Funds. Number of Funds in Category: 581 (1 Year) and 462 (5 Year). Gross Expense Ratio 1.06%, Net Expense Ratio 0.90%.

Small Cap Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
1 Year
(as of 12/31/20)
5 Years
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Small Cap Equity Fund-I Shares 1.67% 1.67% 13.65% 9.69% 7.21%
Russell 2000 Index 5.03% 5.03% 19.96% 13.26% 9.91%
Lipper Small Cap Fund Average 2.66% 2.66% 9.24% 9.89% 7.23%
Lipper Percentile Rank 28% 51%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Small-Cap Core Funds. Number of Funds in Category: 899 (1 Year) and 726 (5 Year). Gross Expense Ratio 1.14%, Net Expense Ratio 1.05%.

International Equity Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
1 Year
(as of 12/31/20)
5 Years
(as of 12/31/20)
Since Inception
(as of 12/31/20)
International Equity-I Shares 0.76% 0.76% 13.79% 10.39% 7.13%
FTSE All World Ex US Index 0.22% 0.22% 11.52% 9.48% 6.26%
Lipper International Multi-Cap Fund Average -0.79% -0.79%/td> 8.09% 7.08% 4.71%
Lipper Percentile Rank 9% 1%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: International Multi-Cap Core. Number of Funds in Category: 370 (1 Year) and 280 (5 Year). Gross Expense Ratio 1.39%, Net Expense Ratio 1.10%.

Real Estate Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
QTD
(as of 12/31/20)
1 Year
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Real Estate-I Shares -0.81%/td> -0.81% 11.23% -0.91 3.22%
FTSE Nareit Equity REITs Index 0.10% 0.10% 11.57% -8.00 -7.00%
Lipper Real Estate Average -0.78% -0.78% 13.49% -8.18 -5.12%
Lipper Percentile Rank 15%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Real Estate Number of Funds in Category: 246 (1 Year) Gross Expense Ratio 1.43%, Net Expense Ratio 1.00%.

Long-Short Equity Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
QTD
(as of 12/31/20)
1 Year
(as of 12/31/20)
Since Inception
(as of 12/31/20)
Long-Short Equity – I Shares -0.22% -0.22% 3.97% -11.05% -10.13%
HFRX Equity Market Neutral Developed Index 0.99% 0.99% 3.15% -3.92 -4.24%
Lipper Long-Short Average -0.38% -0.38% 1.76% 7.47% 7.48%
Lipper Percentile rank 89%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Alternative Long/Short Equity Number of Funds in Category: 241 (1 Year) Gross Expense Ratio 2.03%, Net Expense Ratio 1.70%.

U.S. All Cap Index Fund

One Month
(as of 1/31/21)
YTD
(as of 1/31/21)
QTD
(as of 12/31/20)
1 Year
(as of 12/31/20)
Since Inception
(as of 12/31/20)
U.S. All Cap Index – I Shares -0.25% -0.25% 15.50% 21.52% 21.52%
Knights of Columbus U.S. All Cap Index -0.26% -0.26% 15.76% 22.31% 22.25%
Lipper Large Blend Average -0.42% -0.42% 14.20% 16.56% 16.56%
Lipper Percentile rank 21%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Core Number of Funds in Category: 660 (1 Year) Gross Expense Ratio 1.22%, Net Expense Ratio 0.25%.

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. Investment performance does not reflect the redemption fee; if it was reflected, the total return would be lower than shown. For performance data current to the most recent month end, please call 1-844-KC-FUNDS.

Fund performance for the 1 year, 5 year, and Since Inception periods are annualized. The inception date for Limited Duration, Core Bond, Large Cap Growth, Large Cap Value, Small Cap, and International are is February 27, 2015. 1 year and 5 year fund performance is not available for the Real Estate Fund, Long/Short Equity, or the U.S. All Cap Index since the inception dates of the funds are September 30, 2019, December 21, 2019, and December 31, 2019, respectively. Lipper percentile rank is omitted for the Real Estate Fund, Long/Short Equity, and U.S. All Cap Fund given performance is not yet available.

Effective July 21, 2020, the Knights of Columbus Real Estate Fund underwent a change in its Investment Objective and a name change to reflect the new investment strategy as detailed in The Funds’ Prospectus update of July 20, 2020. The Fund was formerly known as Knights of Columbus Global Real Estate Fund. Results prior to July 20, 2020, reflect the performance of the Fund's previous strategy.

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, 2021.

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.

FTSE Nareit Equity REITs Index – benchmark for Real Estate Fund – The FTSE Nareit Equity REITs Index contains all Equity REITs not designated as Timber REITs or Infrastructure REITs. Prior to December 2010, the index included Timber REITs and Infrastructure REITs.

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 – peer group 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 369 funds measured for the one year ranking period and ranked 195 out of 293 funds measured for the five year ranking period as of December 31, 2020.

Lipper Core Bond Classification – peer group 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 414 out of 505 funds measured for the one year ranking period and ranked 178 out of 414 funds measured for the five year ranking period as of December 31, 2020.

Lipper Multi-Cap Growth Classification – peer group 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 292 out of 507 funds measured for the one year ranking period ranked and 265 out of 406 funds measured for the five year ranking period as of December 31, 2020.

Lipper Multi-Cap Value Classification – peer group 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 399 out of 581 funds measured for the one year ranking period and ranked 199 out of 462 funds measured for the five year ranking period as of December 31, 2020.

Lipper Small-Cap Core Classification – peer group 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 252 out of 899 funds measured for the one year ranking period and ranked 370 out of 726 funds measured for the five year ranking period as of December 31, 2020.

Lipper International Multi-Cap Core Classification – peer group 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 370 funds measured for the one year ranking period and ranked 3 out of 280 funds measured for the five year ranking period as of December 31, 2020.

Lipper Real Estate Classification – peer group for Real Estate Fund
Funds invest primarily in equity securities of domestic and foreign companies engaged in the real estate industry. The Real Estate fund ranked 36 out of 246 funds measured for the one year ranking period as of December 31, 2020.

Lipper Alternative Long/Short Equity Classification – peer group for Long/Short Equity Fund
Funds that employ portfolio strategies combining long holdings of equities with short sales of equities, equity options or equity index options. The funds may be either net long or net short, depending on the portfolio manager’s view of the market. The Real Estate fund ranked 215 out of 241 funds measured for the one year ranking period as of December 31, 2020.

Lipper Multi-Cap Core Classification – peer group for U.S. All Cap Index 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. The Real Estate fund ranked 141 out of 660 funds measured for the one year ranking period as of December 31, 2020.