Market Insights


July 2020

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

As we have now completed the second quarter, we are taking stock of where the economy is with respect to economic activity and the COVID-19 virus. We saw a very steep decline in the market as a result of COVID-19 and are looking at both the timing and speed of the recovery. As a first impression, we start from the basis that this was not a typical recession so it will not likely be followed by a typical recovery.

I heard an interesting quote on a call a few weeks ago that said the economy took an elevator down and will take a staircase back up. Regular readers know that I have taken a very keen view on understanding the impact of employment on the economy as a whole. Certainly, the employment elevator descended many floors when one considers that we were at 50-year lows on unemployment earlier this year. When COVID-19 hit, unemployment spiked to over 14% in April and has since started taking the stairs back up as unemployment declined to 13.3% in May. We are closely evaluating the trajectory of unemployment and job creation because as these factors become more positive, there should be an increase in consumer spending, which should lead to economic prosperity. At this time, we believe this will be a slow climb back and we may see double digit unemployment exist into 2021.

As I pen this on July 1st, ADP just released their monthly statistic on job creation which reported 2.4 million new jobs in June versus an expected 2.9 million jobs. Certainly, this represents a slowing of job creation, however, the May statistic was significantly adjusted from a loss of 2.8 million jobs to a gain of 3.1 million jobs, a reversal of 5.9 million new jobs in the month of May. To say the employment situation is fluid is the ultimate understatement. While it is encouraging to see this these many jobs were created, the recent surge in coronavirus cases has forced many states to reconsider their plans for allowing businesses to re-open which may slow the economic recovery. In my view, the duration of this recent surge is going to have a significant impact on the recovery, and we will be watching to see how the virus progresses over the next several months.

All of the economic forecasting going on is serially dependent on the path of the virus as we evaluate new cases and hospitalizations. There is continuing speculation about the second wave that is typical in most pandemics. Further, we are a long way away from herd immunity which is considered to be achieved when approximately 60% of the population has had the virus. Barring herd immunity, our next positive step will come from a vaccine and this is likely not happening until at least 2021 on a widespread basis. It should be noted that it may take significantly longer to develop an effective vaccine, no one really knows for sure.

There continues to be an enormous amount of news about the virus and some of it is very conflicting. Italian researchers have cited that the virus appears to be both mutating and weakening. This insight was based on an analysis of nasal swabs where the viral load was measured and appears to be less potent than earlier in the year. Some states in the U.S. are reporting declining cases and some are showing spikes. We think the virus will guide public policy which in turn will drive the employment picture which will ultimately drive the vigor of the economic recovery. 

The markets fared pretty well in the second quarter represented by the S&P 500 Index and Bloomberg Barclays Aggregate Bond Index which returned 20.5% and 2.9%, respectively. We think as we move into the third quarter, the markets will begin to discount an eventual presidential winner and start looking for clues from the Democratic led House and the Republican led Senate. The impact of social unrest on both the economy and the election cannot be understated and as the next few months unfold we will begin to see if there is progress on this front. 

From an economic standpoint, earlier this year, as we saw unemployment decline over virtually every socioeconomic group and wage growth accelerate, particularly for lower paid workers, we believed that this was the economic growth that would power earnings. In our view, this wage growth was needed and would hopefully translate into corporate growth in order to support the somewhat lofty valuations that were brought in to 2020. Because the economy was fairly strong entering this year, many investors (including KoCAA) believed that we could accelerate quickly out of this malaise with the most significant wildcard being the progression of the virus and the impact it has on employment. 

I want to finish this month’s commentary with a brief comment on active management. As the continued acceptance of indexing grows, the S&P 500 now has 5 names (six stocks with the two share classes of Google/Alphabet) which represent nearly 22% of the benchmark. This is not the type of concentration one would expect a portfolio to have because as an investor, you are one bad news release from meaningful correction in your portfolio.  That said, the amount of liquidity that continues to flow into index products and exchange traded funds (ETFs) causes an indiscriminate increasing demand for the largest names. The investment process behind these passively managed products is that managers buy the biggest names which consequently appreciated the most, irrespective of valuations. I don’t think we would ever win a finals presentation if that were our stated philosophy. But such is the state of the market when this type of thinking is embraced. The unwinding of this index fascination could be painful for the biggest names if their earnings do not support their lofty valuations.

The last point of the month is the U.S. savings rate which spiked last month and has come back down a bit. In times of stress, consumers will conserve cash because of the uncertainty of the future. The benefit to the economy is that when sentiment improves the savings can be unleashed to drive economic activity. Again, this will be an atypical recovery because it is/was an atypical recession. We are balancing our tea leaf reading between virus/vaccine reporting and typical economic news. I continue to have an exceedingly interesting job, but I long for a little boredom!

Until next month.



 

Core Bond Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Core Bond Fund-I Shares 1.36% 3.37% 6.74% 4.70% 3.65%
Bloomberg Barclays US Aggregate Bond Index 0.63% 6.14% 8.74% 5.32% 3.78%
Lipper Core Bond Fund Average 1.23% 5.40% 7.82% 4.82% 3.47%
Lipper Percentile Rank 80% 65%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Core Bond Funds. Number of Funds in Category: 515 (1 Year) and 470 (3 Year). Gross Expense Ratio 0.84%, Net Expense Ratio 0.50%.

Limited Duration Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Limited Duration Fund-I Shares 0.90% 1.65% 3.01% 2.53% 1.84%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.20% 2.88% 4.20% 2.87% 2.04%
Lipper Short Investment Grade Debt Fund Average 0.98% 1.41% 2.75% 2.42% 1.94%
Lipper Percentile Rank 50% 51%

*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 335 (3 Year). Gross Expense Ratio 0.82%, Net Expense Ratio 0.50%

Large Cap Growth Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Large Cap Growth Fund-I Shares 4.08% 8.60% 17.73.19% 15.20% 10.87%
Russell 1000 Growth Index 4.35% 9.81% 23.28% 18.99% 14.58%
Lipper Multi-Cap Growth Fund Average 4.03% 9.90% 17.46% 16.00% 11.66%
Lipper Percentile Rank 43% 49%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Growth Funds. Number of Funds in Category: 545 (1 Year) and 493 (3 Year). Gross Expense Ratio 1.05%, Net Expense Ratio 0.90%.

Large Cap Value Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Large Cap Value Fund-I Shares -0.69% -17.07% -8.70% 2.25% 4.13%
Russell 1000 Value Index -0.66% -16.26% -8.84% 1.82% 4.09%
Lipper Multi-Cap Value Fund Average 0.37% -17.40% -10.51% 0.18% 2.67%
Lipper Percentile Rank 32% 23%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Value Funds. Number of Funds in Category: 526 (1 Year) and 475 (3 Year). Gross Expense Ratio 1.06%, Net Expense Ratio 0.90%.

Small Cap Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Small Cap Equity Fund-I Shares 2.64% -15.73% -12.54% -1.02% 2.03%
Russell 2000 Index 3.53% -12.98% -6.63% 2.01% 4.43%
Lipper Small Cap Fund Average 2.39% -17.83% -12.24% -1.28% 2.28%
Lipper Percentile Rank 52% 47%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Small-Cap Core Funds. Number of Funds in Category: 914 (1 Year) and 847 (3 Year). Gross Expense Ratio 1.14%, Net Expense Ratio 1.05%.

International Equity Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
International Equity-I Shares 4.99% -11.44% -6.56% 1.40% 2.87%
FTSE All World Ex US Index 4.48% -10.65% -3.99% 1.64% 2.53%
Lipper International Multi-Cap Fund Average 3.35% -11.43% -5.45% -0.40% 1.19%
Lipper Percentile Rank 68% 14%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: International Multi-Cap Core. Number of Funds in Category: 398 (1 Year) and 351 (3 Year). Gross Expense Ratio 1.36%, Net Expense Ratio 1.10%.

Global Real Estate

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Global Real Estate-I Shares 4.92% -13.82% - - -
FTSE EPRA/NAREIT Developed Index 2.70% -20.93% - - -
Lipper Real Estate Average 2.32% -14.70% - - -
Lipper Percentile Rank - -

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Real Estate Classification. Number of Funds in Category: 250 (1 Year) and 226 (3 Year). Gross Expense Ratio 1.43%, Net Expense Ratio 1.00%.

Long-Short Equity Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
Long-Short Equity – I Shares 1.00% -9.46% - - -
HFRX Equity Market Neutral Developed Index 1.92% -5.01% - - -
Lipper Long-Short Average 1.63% 4.23% - - -
Lipper Percentile rank - -

*Lipper Percentile Rank is based on risk-adjusted performance.
Classification. Number of Funds in Category: 267 (1 Year) and 216 (3 Year)
Gross Expense Ratio 2.03%, Net Expense Ratio 1.70%.

U.S. All Cap Index Fund

One Month
(as of 6/30/20)
YTD
(as of 6/30/20)
1 Year
(as of 6/30/20)
3 Years
(as of 6/30/20)
Since Inception
(as of 6/30/20)
U.S. All Cap Index – I Shares 2.62% -3.63% - - -
Knights of Columbus U.S. All Cap Index 2.63% -3.23% - - -
Lipper Large Blend Average 1.79% -5.78% - - -
Lipper Percentile rank - -

*Lipper Percentile Rank is based on risk-adjusted performance.
Classification. Number of Funds in Category: 685 (1 Year) and 612 (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 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 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 dollar-weighted average maturities of less than three years. The Limited Duration Bond fund ranked 185 out of 369 funds measured for the one year ranking period and ranked 170 out of 335 funds measured for the three year ranking period as of June 30, 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 515 funds measured for the one year ranking period and ranked 306 out of 470 funds measured for the three year ranking period as of June 30, 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 236 out of 545 funds measured for the one year ranking period ranked and 242 out of 493 funds measured for the three year ranking period as of June 30, 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 170 out of 526 funds measured for the one year ranking period and ranked 107 out of 475 funds measured for the three year ranking period as of June 30, 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 477 out of 914 funds measured for the one year ranking period and ranked 396 out of 847 funds measured for the three year ranking period as of June 30, 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 272 out of 398 funds measured for the one year ranking period and ranked 49 out of 351 funds measured for the three year ranking period as of June 30, 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.