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Market Insights - August 2021

Posted on August 25, 2021 in: Market Insights

Market Insights - August 2021

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

Last month, I start musing about the Federal Reserve’s (“Fed”) call that inflation would be transitory. As an investor, and an analyst at heart, we are trained to be curious and to ask questions. In a case where the Fed says inflation will be transitory, the obvious question is to look at the other side of the argument. As I began to ponder the outcomes that could cause inflation to be more fundamental, the markets, in my view, started focusing less on growth and more on growth being slower than everyone expected and less on the direction of inflation.

As this lower growth mindset started to take root, we started to see action in the bond market. During July, the 10-Year Treasury had its’ highest close on July 1st with a yield of 1.46% and its’ low for the month of 1.19% on July 19th. As I write this essay on August 2nd, the yield on the 10-year is 1.17%. This does not seem very inflationary.

There are a few items at work that, I believe, are serving to keep yields lower and perhaps prove the Fed’s notion of transitory inflation. It is true that inflation is still showing acceleration with the most recent results for CPI[1] and CPI ex food[2] standing at 5.4% and 4.5%, respectively, year over year at the end June 2021, the highest increase since last summer for both statistics. We are watching to see how these year over year comparisons look as we get deeper into the third and fourth quarters when we will be comparing inflation figures of 2021 with the economy that was beginning to reopen in 2020.

The slack in the labor market remains and we are seeing a deceleration in the absorption of people back into the economy as evidenced by the unemployment rate during 2021 that began at 6.3% for January and was 5.9% in the last print in late June 2021. Underemployment[3] continues to improve from the 11.1% rate reported in January 2021to 9.8% in the most recent release in June 2021.

We continue to see the labor participation rate[4] stagnate; we ended 2020 with a participation rate of 61.5% and the most recent release in June 2021 only showed improvement to 61.6%. There are many theories as to why labor participation is not improving, including government stimulus checks and childcare issues, which mainly impact women, that are keeping the level of participation from improving.

I think we must also look at the recent uptick in Covid cases and the transmissibility of the Delta variant as also being factors influencing the economy. In Connecticut, residents have been very compliant with the adoption of the vaccine and as a result, mask wearing, and social distancing became less prevalent.

COVID-19 and the Delta Variant

Now that the number of new Covid cases is increasing, there is significant concern that the Covid protocols will be coming back and, if this resurgence of the virus continues to get worse, in my view, we could be facing economic lockdowns again. However, we believe the likelihood of lockdowns is low because they did not exactly prove to be the panacea they were thought to be when initially enacted in 2020.

Returning to the transitory nature of inflation, the potential for a longer-term increase in Covid cases could have a negative impact on the economy. As people are concerned with a growing number of cases and the potential for lockdowns, we believe, this could impact consumer and commercial spending. This morning, the ISM Manufacturing Index[5] was released, and the index fell to 59.5 for July 2021 from 60.6 last month. Perhaps it is more instructive that the consensus view from economists was for manufacturing index to expand to 61.0. For the ISM Manufacturing Index, any reading above 50 indicates an expanding economy and the decline we saw this month indicates that manufacturing is expanding at a declining rate. This will be something that will require watching to see if this is a blip in the trend or the start of the new trend. At KoCAA, we are among the consensus that believe the delta variant, though significant, will not derail the economy as the population becomes more immunized and the likelihood for serious illness or death declines.

The Infrastructure Bill and Congress

We are also watching the infrastructure bill wind its way through Congress and it is sadly amusing for me to watch how the definition of “infrastructure” is being contorted to meet the definitions of the day. I always thought of infrastructure as roads, bridges, airports, seaports, railways, dams, etc. However, we now have “human infrastructure” that is being discussed which is, I believe, frankly nothing more than social engineering. I am hopeful that the focus on traditional infrastructure is what is passed because traditional infrastructure spending is precisely what is really needed.

We continue to believe that sectors and companies that benefit from further economic reopening and expansion will be well suited for both equity returns and stable payments for bond holders. That is not to say that these segments will not bear some volatility, however, at KoCAA we remain patient, long term investors and we believe that those companies benefitting from a continued positive growth will be well rewarded. We do believe that the kinks in the supply chain and generally increasing wages have the potential to be inflationary. Whether the inflation bout is transitory will be more closely tied to improvements in the employment market, continued wage increases and people spending much of what they saved during covid. As the mentioned earlier, the year-over-year inflation comparisons will be more important in the months ahead. Powell may be right that inflation is transitory, but we will be analyzing the economy and portfolios to be sure we are as well positioned as possible.

Until next month.


 

[1] Consumer Price Index – a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.

[2] Consumer Price Index ex Food – a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services; food is considered relatively volatile and excluded to give a more accurate statistic.

[3] Underemployment – a measure of employment and labor utilization in the economy that looks at how well the labor force is being used in terms of skills, experience, and availability to work

[4] Labor Participation Rate – the percentage of the civilian noninstitutional population 16 years and older that is working or actively looking for work.

[5] ISM Manufacturing Index – a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms.

Core Bond Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
1 Year
(as of 6/30/21)
5 Years
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Core Bond Fund-I Shares 1.24% 0.47% 2.52% 3.56% 3.47%
Bloomberg Barclays US Aggregate Bond Index 1.12% -0.50% -0.33% 3.03% 3.12%
Lipper Core Bond Fund Average 0.98% -0.13% 1.62% 3.32% 3.19%
Lipper Percentile Rank     22% 34%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Core Bond Funds. Number of Funds in Category: 500 (1 Year) and 416 (5 Year). Gross Expense Ratio 0.80%, Net Expense Ratio 0.50%.

Limited Duration Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
1 Year
(as of 6/30/21)
5 Years
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Limited Duration Fund-I Shares 0.20% 0.35% 1.64% 2.00% 1.81%
Bloomberg Barclays Government/Credit 1-3 Year Index 0.17% 0.17% 0.44% 1.88% 1.79%
Lipper Short Investment Grade Debt Fund Average 0.15% 0.62% 2.73% 3.20% 2.04%
Lipper Percentile Rank     67% 70%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Short Investment Grade Debt Funds. Number of Funds in Category: 374 (1 Year) and 293 (5 Year). Gross Expense Ratio 0.80%, Net Expense Ratio 0.50%

Large Cap Growth Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
1 Year
(as of 6/30/21)
5 Years
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Large Cap Growth Fund-I Shares 2.51% 12.91% 35.73% 19.53% 14.47%
Russell 1000 Growth Index 3.30% 17.58% 42.50% 23.66% 18.59%
Lipper Multi-Cap Growth Fund Average 1.99% 13.58% 43.32% 22.17% 16.63%
Lipper Percentile Rank     85% 68%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Growth Funds. Number of Funds in Category: 508 (1 Year) and 411 (5 Year). Gross Expense Ratio 1.00%, Net Expense Ratio 0.90%.

Large Cap Value Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
1 Year
(as of 6/30/21)
5 Years
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Large Cap Value Fund-I Shares 1.03% 21.36% 44.43% 13.39% 9.65%
Russell 1000 Value Index 0.80% 17.98% 43.68% 11.87% 9.52%
Lipper Multi-Cap Value Fund Average 0.35% 19.38% 47.78% 12.34% 9.20%
Lipper Percentile Rank     58% 29%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Value Funds. Number of Funds in Category: 642 (1 Year) and 519 (5 Year). Gross Expense Ratio 1.03%, Net Expense Ratio 0.90%.

Small Cap Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
1 Year
(as of 6/30/21)
5 Years
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Small Cap Equity Fund-I Shares -1.89% 15.51% 58.80% 13.51% 9.41%
Russell 2000 Index -3.61% 13.29% 62.03% 16.47% 11.91%
Lipper Small Cap Fund Average -1.68% 18.59% 60.78% 13.36% 9.99%
Lipper Percentile Rank     58% 47%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Small-Cap Core Funds. Number of Funds in Category: 859 (1 Year) and 710 (5 Year). Gross Expense Ratio 1.14%, Net Expense Ratio 1.05%.

International Equity Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
1 Year
(as of 6/30/21)
5 Years
(as of 6/30/21)
Since Inception
(as of 6/30/21)
International Equity-I Shares -1.96% 10.54% 44.87% 13.55% 8.58%
FTSE All World Ex US Index -1.52% 7.93% 36.79% 11.66% 7.30%
Lipper International Multi-Cap Fund Average 0.14% 9.85% 33.87% 9.91% 6.06%
Lipper Percentile Rank     3% 1%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: International Multi-Cap Core. Number of Funds in Category: 353 (1 Year) and 275 (5 Year). Gross Expense Ratio 1.33%, Net Expense Ratio 1.01%.

Real Estate Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
QTD
(as of 6/30/21)
1 Year
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Real Estate-I Shares 4.75% 21.63% 9.67% 33.52% 11.41%
FTSE Nareit Equity REITs Index 4.81% 27.82% 12.02% 38.02% 6.33%
Lipper Real Estate Average 4.10% 24.90% 11.34% 35.24% 8.96%
Lipper Percentile Rank       65%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Real Estate Number of Funds in Category: 246 (1 Year) Gross Expense Ratio 1.34%, Net Expense Ratio 1.00%.

Long-Short Equity Fund

  One Month
(as of 7/31/21)
YTD
(as of 7/31/21)
QTD
(as of 6/30/21)
1 Year
(as of 6/30/21)
Since Inception
(as of 6/30/21)
Long-Short Equity – I Shares 0.73% 8.65% 0.84% 5.96% -2.47%
HFRX Equity Market Neutral Developed Index -0.91% 1.54% -0.05% 3.65 -1.41%
Lipper Long-Short Average 0.46% 9.75% 3.95% 21.51% 10.58%
Lipper Percentile rank       84%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Alternative Long/Short Equity Number of Funds in Category: 234 (1 Year) Gross Expense Ratio 2.17%, Net Expense Ratio 1.73%.

U.S. All Cap Index Fund

  One Month
(as of 6/30/21)
YTD
(as of 6/30/21)
QTD
(as of 6/30/21)
1 Year
(as of 6/30/21)
Since Inception
(as of 6/30/21)
U.S. All Cap Index – I Shares 1.81% 18.35% 8.68% 46.57% 25.89%
Knights of Columbus U.S. All Cap Index 1.83% 18.56% 8.67% 47.16% 26.60%
Lipper Multi-Cap Core Average 1.80% 16.76% 7.40% 41.56% 21.73%
Lipper Percentile rank       18%  

*Lipper Percentile Rank is based on risk-adjusted performance. Lipper Category: Multi-Cap Core Number of Funds in Category: 650 (1 Year) Gross Expense Ratio 1.46%, 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-(866) 693-1644.

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.

HFRX Equity Market Neutral Index – benchmark for Long/Short Equity Fund HFRX Equity Market Neutral Index The HFRX Equity Market Neutral Index employs sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale. These can include both Factor-based and Statistical Arbitrage/Trading Strategies.

Knights of Columbus U.S. All Cap Index – benchmark for U.S. All Cap Index Fund Knights of Columbus U.S. All Cap Index Adheres to the United States Conference of Catholic Bishops’ Socially Responsible Investment Guidelines. Consists of all common stocks and real estate investment trusts in the Solactive US Broad Market Index excluding companies that are determined by Institutional Shareholder.

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 251 out of 374 funds measured for the one year ranking period and ranked 206 out of 293 funds measured for the five year ranking period as of June 30, 2021.

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 112 out of 500 funds measured for the one year ranking period and ranked 143 out of 416 funds measured for the five year ranking period as of June 30, 2021.

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 434 out of 508 funds measured for the one year ranking period ranked and 280 out of 411 funds measured for the five year ranking period as of June 30, 2021.

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 375 out of 642 funds measured for the one year ranking period and ranked 151 out of 519 funds measured for the five year ranking period as of June 30, 2021.

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 496 out of 859 funds measured for the one year ranking period and ranked 337 out of 710 funds measured for the five year ranking period as of June 30, 2021.

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 9 out of 353 funds measured for the one year ranking period and ranked 4 out of 275 funds measured for the five year ranking period as of June 30, 2021.

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 161 out of 246 funds measured for the one year ranking period as of June 30, 2021.

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 Long/Short fund ranked 196 out of 234 funds measured for the one year ranking period as of June 30, 2021.

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 U.S. All Cap Index fund ranked 117 out of 650 funds measured for the one year ranking period as of June 30, 2021.

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