ASSET ALLOCATION UPDATE

Today was asset allocation review day at Knights of Columbus Asset Advisors. We gathered our two fixed income portfolio managers, four equity portfolio managers, the head of quantitative research, and me to discuss our current asset allocation thoughts. Oh, we were also joined by Andrea Mackey, our Vice President of Marketing and Client Service to keep us on task. She did a great job as always!

When our team gathers, we focus on both quantitative and qualitative analyses to guide our discussion. Ted Mulrane, Director of Quantitative Research, commented that our Regime Model is illustrating less conviction in the equity market. For a point of clarification, our Asset Allocation Committee entered 2025 with a 3% underweight to stock and a 3% overweight to Core Bonds. Once we established our quant thinking, we did discuss a variety of other factors weighing on the markets. Essentially, most of the production statistics are showing some weakness and employment is also starting to break down. We noted that a few firms in the financial sector have announced layoffs and sometimes it just takes a little cover for other companies to enact their own workforce reductions. Overall, we think the equity markets represent less value than bonds and this is what drove our conversation.

Ultimately, after we deliberated, we decided to shift equities lower by an additional 2% and shift those assets into the Limited Duration strategy. The earlier shift into Core Bond was a decision to lighten up a little on equities and to take advantage of attractive levels in the bond market. We ended 2024 at 4.57% on the 10-year Treasury, rates peaked at 4.79% on January 14th and stand at 4.31% on March 25th¹ . Year to date, the Bloomberg 1000 has returned about -1.60% and Nasdaq is down nearly -5.22%¹. By contrast, our Core Bond fund was up 2.21% as of the close on March 24th¹.

We feel that shifting this next small move from stocks to bonds would be best served by being allocated to our Limited Duration strategy. The yield on the 2-year Treasury is only 30 basis points lower than the 10-year yield. If the next leg for the economy is stagflation, being underweight stocks and having a higher allocation to Limited Duration will provide a good hedge. If the inflation part of the equation breaks down and stocks decline, the overweight across our two fixed income strategies should perform well. Essentially, we remain a bit more constructive on bonds than stocks, but we remain in the camp that these are tactical shifts around the margins. Additionally, we do not recommend making a wholesale move out of stocks and into bonds or cash because we think that type of broad market timing is too risky. All of this said, the committee also felt strongly that if we saw a 10% move down from here, that would be a strong signal for us to reevaluate our position and to contemplate rebuilding our equity position.

More to come and we are always happy to discuss our views.

This commentary is not intended as customized or specific investment advice and is solely intended to express the market views of KoCAA investment teams

¹ Source: Bloomberg