Market Insights


March 2019

By: Tony Minopoli, CIO of the Knights of Columbus

When I was a young boy I often accompanied my father to Sorrento Importing, our local “go to” place for all things Italian. Near the deli counter there was a collection of Yankee memorabilia and posters for the meat purveyors whose products were sold in the store. As a young boy, I always chuckled at one poster that claimed the company made products with only real ingredients and not “phony baloney”. That memory hit me recently when I was reviewing some ESG1 based fixed income portfolios that had clearly ventured into the realm of “phony baloney”.

When one invests in a KoCAA product we believe in truth in advertising. Our equity funds are style consistent and our core bond fund only purchases investment grade bonds2 - it doesn’t hold derivatives, emerging market debt or foreign currency exposures. There is nothing wrong with these market segments, but we feel there is something wrong, for example, with a bond fund that has nearly 20% in common stock. I guess I feel you can’t have “Faith Based Investing” as your tag line and not have your funds truly representative of the style they claim to follow.

I’m not sure if anyone else feels better, but I do! So this brings me to my second topic of the month: asset allocation. Every February we go through the ritual of collecting historical market data from several research organizations to assist in our asset allocation models. We are happy to say we have completed the annual ritual and the results were some nipping and tucking but not a major sea change. Because we expect inflation to be tame and we have had an increase in short rates and some spread widening, we have a more favorable outlook for fixed income, particularly regarding core bonds. Our outlook for domestic large cap and small cap markets remains unchanged, while our outlook for international equity and REITs has improved. Generally, we think the selloff in international equities and REITs was overdone and, as a result, we think there is a little return premium to be garnered.

Several clients have expressed a desire for us to provide a more tactical view, with full recognition of our “we are not market timers” mantra. With that disclaimer firmly in place we offer the following tactical thoughts for 2019. We believe that investors should be neutral with respect to their long term asset allocation weights between stocks and bonds. We think the pullback returned stocks to a reasonably valued status, but we do not think stocks are cheap. Given the flatness of the yield curve, for bond holdings, we think it could be advantageous to overweigh the font end of the curve. The reason for this view is that the yield give up is slight relative to what it was when the curve was much steeper. Further, if we see wage growth or an increase in productivity we could see pressure on longer term rates. Within equities, we are slightly biased to international over domestic small cap. The reason for this tilt is that international stocks were under some pressure last year and we believe this gives them a little more room for a snap back.

Overall, we remain constructive on the economy. GDP3 for the fourth quarter was reported at 2.6% and brings 2018 growth to 3.1% as reported on Bloomberg as year over year percentage change for Real GDP. The 3.1% GDP growth for 2018 is still subject to change as there will be two more reviews of this statistic and there is the possibility for a revision. While unemployment has remained low, we are seeing underemployment begin to creep up and wage growth also remains comfortably below 4.0% as the February 19 Average Hourly Earnings statistic quoted by the Bureau of Labor Statistics grew 3.5% of the period from 2/2018 to 2/2019.

Political uncertainty and discord remains extremely high. Several Democratic members of Congress are calling for an investigation into basically everything Trump and in our view, this is simply widening the gulf between the two parties. Currently, the pool of Democrats running for President is getting larger and there appears to be a strong move to the left, with a few exceptions. However, with Venezuela crumbling beneath the weight of socialist policies (socialism is still batting zero) some candidates are embracing liberalism while saying they are not socialists.

A little hint for the left, if you want to please the hard left to get the nomination, you better have a strategy to convince the rest of us as to why you are not going to wreck the U.S. economy and what made us the most prosperous country in history. I always chuckle when people try to pin Bernie down as to how we pay for all of this “free” stuff. He’s harder to contain than mercury!

I come from an immigrant family and am first generation American. My family endured discrimination when it was perfectly okay to discriminate against Italians and Catholics. My family prospered through hard work, sacrifice and a focus on education or entering the trades and I still believe that our economy can do more to help lift people up than to sadly believe failed socialist policies will somehow work here when they have never worked anywhere else. As Margaret Thatcher famously said, “the trouble with Socialism is that you eventually run out of other people’s money”. I’m hoping that we can find a hero and bring the two sides together. Our country and our economy will be better for it.

Until next month.


 

1 ESG stands for Environmental, Social, and Governance. ESG is a generic term used in capital markets and by investors to evaluate corporate behavior and to determine the future performance of companies.

2 The Fund invests primarily in U.S. issuers and investment grade securities, but may hold securities that are rated below investment grade (“high yield” or “junk bonds”).

3 GDP, or the United State Gross Domestic Product as issued by the Bureau of Economic Analysis.


 

Core Bond Fund

One Month
(as of 02/28/19)
1 Year
(as of 12/31/18)
3 Years
(as of 12/31/18)
Since Inception
(as of 12/31/18)
Core Bond Fund-I Shares 0.21% -0.72% 2.29% 1.60%
Bloomberg Barclays US Aggregate Bond Index -0.06% 0.01% 2.06% 1.45%
Lipper Core Bond Fund Average 0.07% -0.69% 1.99% 1.18%
Lipper Percentile Rank 54% 28%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Core Bond Funds. Number of Funds in Category: 506 (1 Year) and 442 (3 Year).
Gross Expense Ratio 1.04%, Net Expense Ratio 0.50%.

Limited Duration Fund

One Month
(as of 02/28/19)
1 Year
(as of 12/31/18)
3 Years
(as of 12/31/18)
Since Inception
(as of 12/31/18)
Limited Duration Fund-I Shares 0.20% 1.13% 1.31% 1.00%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.16% 1.60% 1.24% 1.05%
Lipper Short Investment Grade Debt Fund Average 0.32% 1.03% 1.67% 1.19%
Lipper Percentile Rank 46% 67%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Short Investment Grade Debt Funds. Number of Funds in Category: 357 (1 Year) and 317 (3 Year).
Gross Expense Ratio 1.01%, Net Expense Ratio 0.50%

Large Cap Growth Fund

One Month
(as of 02/28/19)
1 Year
(as of 12/31/18)
3 Years
(as of 12/31/18)
Since Inception
(as of 12/31/18)
Large Cap Growth Fund-I Shares 3.73% -4.99% 7.40% 5.36%
Russell 1000 Growth Index 3.58% -1.51% 11.15% 8.77%
Lipper Multi-Cap Growth Fund Average 4.57% -2.95% 8.41% 5.84%
Lipper Percentile Rank 65% 64%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Growth Funds. Number of Funds in Category: 543 (1 Year) and 487 (3 Year).
Gross Expense Ratio 1.34%, Net Expense Ratio 0.90%.

Large Cap Value Fund

One Month
(as of 02/28/19)
1 Year
(as of 12/31/18)
3 Years
(as of 12/31/18)
Since Inception
(as of 12/31/18)
Large Cap Value Fund-I Shares 3.00% -8.69% 6.52% 4.07%
Russell 1000 Value Index 3.20% -8.27% 6.95% 4.15%
Lipper Multi-Cap Value Fund Average 2.81% -11.42% 5.63% 2.62%
Lipper Percentile Rank 23% 32%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Value Funds. Number of Funds in Category: 409 (1 Year) and 345 (3 Year).
Gross Expense Ratio 1.33%, Net Expense Ratio 0.90%.

Small Cap Fund

One Month
(as of 02/28/19)
1 Year
(as of 12/31/18)
3 Years
(as of 12/31/18)
Since Inception
(as of 12/31/18)
Small Cap Equity Fund-I Shares 5.16% -15.61% 4.00% 1.63%
Russell 2000 Index 5.20% -11.01% 7.36% 3.79%
Lipper Small Cap Fund Average 4.68% -12.67% 5.86% 2.79%
Lipper Percentile Rank 76% 78%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Small-Cap Core Funds. Number of Funds in Category: 967 (1 Year) and 823 (3 Year).
Gross Expense Ratio 1.33%, Net Expense Ratio 1.05%.

International Equity Fund

One Month
(as of 02/28/19)
1 Year
(as of 12/31/18)
3 Years
(as of 12/31/18)
Since Inception
(as of 12/31/18)
International Equity-I Shares 0.81% -12.43% 6.87% 2.83%
FTSE All World Ex US Index 1.91% -13.87% 4.89% 1.20%
Lipper International Multi-Cap Fund Average 1.98% -15.07% 2.48% -0.06%
Lipper Percentile Rank 15% 1%

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: International Multi-Cap Core. Number of Funds in Category: 385 (1 Year) and 337 (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. 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 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, 2019.

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 165 out of 357 funds measured for the one year ranking period and ranked 212 out of 317 funds measured for the three year ranking period as of December 31, 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 274 out of 506 funds measured for the one year ranking period and ranked 125 out of 442 funds measured for the three year ranking period as of December 31, 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 355 out of 543 funds measured for the one year ranking period ranked and 314 out of 487 funds measured for the three year ranking period as of December 31, 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 95 out of 409 funds measured for the one year ranking period and ranked 111 out of 345 funds measured for the three year ranking period as of December 31, 2018.

Lipper Small-Cap Core Classification – benchmark for Small Cap Fund
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 734 out of 967 funds measured for the one year ranking period and ranked 641 out of 823 funds measured for the three year ranking period as of December 31, 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 56 out of 385 funds measured for the one year ranking period and ranked 1 out of 337 funds measured for the three year ranking period as of December 31, 2018.