Market Insights


May 2020

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

We just recently had our First Quarter Board Meeting for the Knights of Columbus and I supplied an outlook to our Board of Directors. I thought for this month’s letter I would supply that outlook to our readers.

As humans, we all remember the last crisis, the Great Financial Crisis of 08-09 (“GFC”), more than anything before so at our shop we are focusing on that which we can control. For insurance related assets, we have focused on knowing our liquidity to protect the company and for all portfolios, we continue our focus on liquidity as well as investing in that which we know and not that which we hope will do well.

I gleaned the following from the last missive from Howard Marks of Oaktree Capital. He opined that, collectively, as investors and market participants, we all have the same data about the present and the same ignorance about the future.

The future is unknowable and is complicated by:
Greatest pandemic to reach us since the Spanish Flu.
Greatest economic catastrophe since the Great Depression.
Greatest oil price decline ever.
Greatest Central bank intervention of all time.

As we take this into account, we begin to draw the following insights.  The consensus view from market strategists is for a two to three quarter decline of cumulative growth between -2% to -6%. We believe this will be deeper, but shorter, than the GFC. The GFC saw nearly -1% decline in first quarter 2009 GDP. I suppose it only felt worse.

Corporate spreads widened significantly; however, we have seen spread narrowing as central banks have been quite active in supplying stimulus. Given the extremely low rates, even with some spread widening, we believe investment grade companies have been able to finance longer term debt at very attractive all-in levels.

Within equities, growth has outperformed value mainly because companies like Amazon and Netflix[1] (a position in the Large Cap Growth and U.S. All Cap Index funds as of April 30, 2020) have rallied and airlines, energy and cyclicals have been slammed. Further, we do believe that market action has been exacerbated both to the downside and back up from algorithmic trading[2].

I think it is important to remember that this is not an economic driven recession as much as it is a health driven recession so forward-looking estimates are all predicated on:

When do we reopen the economy?
When do we have a viable therapy?
When do we have a vaccine?

In our opinion, the longer we stay closed the harder it will be to recover, and we are at a critical point of weighing the risks of not reopening versus the health risks associated with reopening. Several states are already starting to reopen on a limited basis. We are acutely watching Germany as they are slated to partially reopen on May 1.  If Germany is successful, in our view, it could bode well for the U.S., if cases and deaths begin to spike again that could be a negative for America’s plans, it’s economy and the markets.

Interestingly enough, technically, we are in a bull market again because we had a 20% decline and a 20% recovery between the end of February through April of this year. You may not feel bullish, but technically speaking you are! We are estimating a fiscal deficit of about 18% given the stimulus. This level of fiscal deficit was last seen during WWII. We think the U.S. economy will recover more quickly from the Pandemic of 2020 than it did following WWII when America’s upward economic mobility did not regain its footing until the mid-1950’s.

What happens next is that the U.S. moves from a downturn in the economy to the rebuilding phase. The timing is difficult to forecast because this downturn was caused by a biological event not an economic one. While the economic decline has been rapid and steep, we believe the rebound will be slow and choppy, with greater volatility than the GFC of 2009. Our forecast is for a U-shaped recovery versus a V shaped recovery. We believe a good result takes the shape of a recovery of 90% to 95% of economic activity in a 24-month period. Again, U shape, not V shape.

In our view, this type of recovery is possible because there were no major domestic imbalances prior to the Pandemic. Unemployment was low, wages were growing, particularly at lower levels, interest rates were low, inflation was low, and consumer and business confidence was high though, some U.S. companies saw increased leverage on the balance of riskier and more cyclical companies.

Versus 2008, the Pandemic policy response has been more rapid involving less political fighting over issues of moral hazard. The Great Depression was as deep as it was because in our view:

First, there was no major policy response. Second, the Smoot Hawley tariffs exacerbated the duration of the weak economic cycle.

We also need to consider that the U.S. may be setting up for an inflationary period because all the stimulus that was put into play by the President and Congress to stabilize the economy has been based on the creation of new money to fund the projects thereby creating a deficit. We think the inflationary argument is tied to the targeted fiscal stimulus met by possible bank deregulation to get loans flowing.

If this occurs, we believe you will see a weaker dollar, and this could pave the easiest path to inflation. In our view, some inflation driving interest rates higher will be good for the economy, rampant inflation isn’t good for anyone.

We also believe that populism will continue to rise with greater calls to increase direct payments to U.S citizens, establishing a national minimum wage at or near $15 per hour, increased use of tariffs and a trend towards deglobalization.

  • We believe the deglobalization trend is a 3-5-year timeline that leads to more pharmaceuticals being manufactured domestically and a resurgence for U.S. manufacturing to have tighter control on the supply chain.
  • In our view, there are socioeconomic benefits for middle class and less educated from this change.
  • We also believe all of this comes at the expense of China’s prestige given the origin and handling of the virus.

One other key part of our outlook is that bear markets end with a recession they don’t start with one. Also, in 2009 right before the turn, in our view, there was no negative scenario that was negative enough, and any positive outlook was discounted as out of touch. We think we get to the other side, but the part that says this time is different is associated more with the biological aspect of the crisis rather than anything economic.

We believe that one key component signifying recovery will be how long it takes to get employment back up because 70% of America’s economy is consumer driven and companies may take a hard look at staffing levels as a result of the makeshift work environment foisted upon them due to the COVID-19 virus.

Open items we will be watching for:

  • The potential for disinflation due to oversupply of certain commodities such as oil. In the last week we have seen crude stockpiles increase in the U.S. by 20 million barrels.
  • In our view, the balance of disinflation likely outweighs any inflationary effects from supply disruptions.
  • We believe, the biggest wildcard is how demand reflates and that will be driven by a biological event, either a vaccine or a medication that severely lessens the virus coupled with robust testing.
  • The growth of this demand in our view will be seen in consumer spending and homebuilder sentiment.

To end on a positive note, on a global basis, there are dozens of drugs being tested and reviewed as potential therapies and another batch of potential vaccines under test, some already in human trials.  I am not predicting a vaccine quickly, but technology and need are hastening this process. I continue to believe in the human spirit and believe we will find a way forward.

Knights of Columbus Asset Advisors has been fully functioning from our home offices. We communicate daily as a whole group and much more frequently as teams. I am pleased to report we are functioning extremely well on this remote basis and are always available to speak if you would like to discuss the markets or your portfolio.

I wish you and your family safety and health in this most difficult time.

Until next month.



1 As of April 30, 2020, Netflix is owned in the Large Cap Growth Fund and the U.S. All Cap Index Fund and representing 1.68% and 0.79% of total portfolio holdings, respectively.

2 Algorithmic trading is a process for executing orders utilizing automated and pre-programmed trading instructions to accounts for variables such as price, timing, and volume.

 

Core Bond Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Core Bond Fund-I Shares 2.17% 1.49% 5.60% 3.81% 2.94%
Bloomberg Barclays US Aggregate Bond Index 1.78% 4.98% 8.93% 4.82% 3.39%
Lipper Core Bond Fund Average 2.50% 2.93% 5.79% 3.61% 2.64%
Lipper Percentile Rank 60% 48%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Core Bond Funds. Number of Funds in Category: 509 (1 Year) and 456 (3 Year). Gross Expense Ratio 0.84%, Net Expense Ratio 0.50%.

Limited Duration Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Limited Duration Fund-I Shares 1.85% -0.06% 0.99% 1.51% 1.23%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.63% 2.33% 4.53% 2.58% 1.91%
Lipper Short Investment Grade Debt Fund Average 1.85% -0.81% 0.12% 1.27% 1.23%
Lipper Percentile Rank 40% 43%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Short Investment Grade Debt Funds. Number of Funds in Category: 370 (1 Year) and 320 (3 Year). Gross Expense Ratio 0.82%, Net Expense Ratio 0.50%

Large Cap Growth Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Large Cap Growth Fund-I Shares 13.25% -3.73% -3.19% 7.52% 6.19%
Russell 1000 Growth Index 14.80% -1.39% 0.91% 11.32% 9.92%
Lipper Multi-Cap Growth Fund Average 14.57% -3.15% -5.20% 8.03% 6.58%
Lipper Percentile Rank 38% 49%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Growth Funds. Number of Funds in Category: 540 (1 Year) and 479 (3 Year). Gross Expense Ratio 1.05%, Net Expense Ratio 0.90%.

Large Cap Value Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Large Cap Value Fund-I Shares 11.88% -19.77% -18.13% -1.81% 1.40%
Russell 1000 Value Index 11.24% -18.49% -17.17% -2.18% 1.59%
Lipper Multi-Cap Value Fund Average 11.82% -20.68% -20.76% -4.32% -0.27%
Lipper Percentile Rank 32% 20%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Value Funds. Number of Funds in Category: 483 (1 Year) and 419 (3 Year). Gross Expense Ratio 1.06%, Net Expense Ratio 0.90%.

Small Cap Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 4/30/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Small Cap Equity Fund-I Shares 15.03% -22.51% -27.07% -6.65% -2.27%
Russell 2000 Index 13.74% -21.08% -23.99% -4.64% 0.10%
Lipper Small Cap Fund Average 13.44% -23.93% -26.46% -7.25% -1.56%
Lipper Percentile Rank 55% 44%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Small-Cap Core Funds. Number of Funds in Category: 916 (1 Year) and 837 (3 Year). Gross Expense Ratio 1.14%, Net Expense Ratio 1.05%.

International Equity Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
International Equity-I Shares 7.25% -19.14% -20.24% -1.79% -0.19%
FTSE All World Ex US Index 7.67% -17.46% -15.05% -1.60% -0.39%
Lipper International Multi-Cap Fund Average 7.22% -18.14% -16.22% -3.38% -1.75%
Lipper Percentile Rank 90% 19%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: International Multi-Cap Core. Number of Funds in Category: 411 (1 Year) and 361 (3 Year). Gross Expense Ratio 1.36%, Net Expense Ratio 1.10%.

Global Real Estate

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Global Real Estate-I Shares 9.91% -18.35% - - -
FTSE EPRA/NAREIT Developed Index 7.12% -23.23% - - -
Lipper Real Estate Average 8.13% -18.04% - - -
Lipper Percentile Rank - -

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Real Estate Classification. Number of Funds in Category: 258 (1 Year) and 228 (3 Year). Gross Expense Ratio 1.43%, Net Expense Ratio 1.00%.

Long-Short Equity Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
Long-Short Equity – I Shares 1.11% -8.66% - - -
HFRX Equity Market Neutral Developed Index -0.91% -8.64% - - -
Lipper Long-Short Average 5.58% -9.39% - - -
Lipper Percentile rank - -

*Lipper Percentile Rank is based on risk-adjusted performance.
Classification. Number of Funds in Category: 285 (1 Year) and 227 (3 Year)
Gross Expense Ratio 2.03%, Net Expense Ratio 1.70%.

U.S. All Cap Index Fund

One Month
(as of 4/30/20)
YTD
(as of 4/30/20)
1 Year
(as of 3/31/20)
3 Years
(as of 3/31/20)
Since Inception
(as of 3/31/20)
U.S. All Cap Index – I Shares 12.79% -11.23% - - -
Knights of Columbus U.S. All Cap Index 13.15% -11.23% - - -
Lipper Large Blend Average 12.60% -12.35% - - -
Lipper Percentile rank - -

*Lipper Percentile Rank is based on risk-adjusted performance.
Classification. Number of Funds in Category: 707 (1 Year) and 627 (3 Year).
Gross Expense 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, 3 year, and Since Inception periods 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 29, 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 EPRA/Nareit Developed Index – benchmark for Global Real Estate Fund – The FTSE EPRA/Nareit Developed Index is a free-float adjusted, market capitalization-weighted index designed to track the performance of listed real estate companies in developed countries worldwide. Constituents of the index are screened on liquidity, size, and revenue.

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 dollarweighted average maturities of less than three years. The Limited Duration Bond fund ranked 151 out of 370 funds measured for the one year ranking period and ranked 139 out of 320 funds measured for the three year ranking period as of March 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 306 out of 509 funds measured for the one year ranking period and ranked 218 out of 456 funds measured for the three year ranking period as of March 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 204 out of 540 funds measured for the one year ranking period ranked and 236 out of 479 funds measured for the three year ranking period as of March 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 155 out of 483 funds measured for the one year ranking period and ranked 83 out of 419 funds measured for the three year ranking period as of March 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 503 out of 916 funds measured for the one year ranking period and ranked 371 out of 837 funds measured for the three year ranking period as of March 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 370 out of 411 funds measured for the one year ranking period and ranked 68 out of 361 funds measured for the three year ranking period as of March 31, 2020.

Lipper Real Estate Classification – peer group for Global Real Estate
Funds that invest at least 25%, but less than 75%, of the equity portfolios in shares of companies engaged in the real estate industry that are strictly outside of the U.S. or whose securities are principally traded outside of the U.S.