OCTOBER 2023 MARKET INSIGHTS

The Federal Reserve Bank of San Francisco expects excess savings to be entirely depleted by the end of the third quarter. This is consistent with what we are reading from other economists across the street. The report notes the rise of household wealth that surged during the pandemic. It’s also a tale of two consumers, with the higher income earnings benefiting more from the rise in household wealth due to the runup in valuations while the lower income consumer is plagued by rising interest costs.

This tale of two consumers has some interesting information. While the latest data suggests household wealth accumulation has accelerated beyond its pre-pandemic rate, not all households have equally benefited from this growth in net worth. Lower income households, for example, are less likely to own property or have a stake in the equity market, precluding them from benefiting from this massive run up in valuations, and growing the divide between asset holders and non-asset holders. According to Federal Reserve Bank of St. Louis, the top 10% hold near 70% of the wealth, while the bottom 50% holds less than 3%.

As a result, many Americans are increasingly turning to temporary supports to maintain a more robust level of spending. Credit card debt, for example, has jumped over 16% in the last year with total household debt reaching $17.1 trillion, a new record high^[1]. The number of 401k hardship withdrawals have also picked up, rising 36% in the second quarter alone. Additionally, with the unknown final impact from the trillions in pandemic stimulus, trillions more in additional fiscal support is making its way into the system. While government assistance is not the ideal way to create a sustainable, growing economy, it will aid in continuing to artificially prop up investment and the consumer.

With 3Q GDP looking increasingly likely to come in above trend, investors have already turned their attention to the downside risks in 4Q. The fourth quarter looks like it might start with a number of headwinds. These headwinds are likely temporary, but it is hard to yet know if the impacts will have more than a temporary impact on the economy.

One economic headwind is the restart of federal student loan repayments that are due to resume in October. The magnitude of student loan forbearance is estimated to be at most 0.4% of disposable income, which works out to about a 0.2% impact on growth. Moreover, the residual headwind will likely be drawn out over the next four quarters because of the 12-month transition back into borrowers making payments, and it is expected to cause a drag of 0.1-0.2% on annualized 4Q GDP growth.

We have also been watching the UAW (United Auto Workers) strike that started a few weeks ago and it has been estimated that the GDP growth drag from the strike is about 1.6-2.1% on an annualized basis due to lost production. We have kicked the can on the government shutdown until November and a recent Bank of America research report posited that a shutdown would take about 0.1% off GDP per week, although some of that would be made up when furloughed workers are back paid after the shutdown ends.

A third item worth watching is that energy prices were up 5.6% in the August CPI^[2]. Based on the trend in gas prices, we could see a further increase in September. Economists believe the impact of higher energy prices, though meaningful to us individually as energy makes up nearly 4% of the consumer basket, will be small^[2]. Our elected officials are trying to use policy to crush fossil fuels. This is concerning because renewables are neither abundant enough nor reliable enough to power the economy. Rising energy prices will act as another “tax” for people on the lower rungs of the economic ladder and can also serve as an economic headwind. We are closely watching credit card payments to identify any significant shift to credit card usage for nondiscretionary spending.

At their last meeting, The Federal Reserve decided to maintain the current Federal funds rate (without an increase or decrease), but their updated economic projections as expressed by Chairman Powell indicate that “higher for longer” is something we should become accustomed to as we enter 2024. The Fed is estimating that the year end 2024 Fed Funds rate will be 5.1%, and this is up from a prediction of 4.6% in June.

While commercial real estate pricing has been trending down since the start of this interest rate cycle, these extended projections of lasting high rates could accelerate further price discovery, especially in the context of the dramatic increase in loan maturities coming due in Q4 2023 and early 2024. We are witnessing some loan extensions occurring in the market as well as some investors handing over keys in the office sector. Indeed, we are all seeing marketing material for “opportunity funds” in the office sector. The work from home phenomenon is decimating many cities. Restaurants and other services cannot survive on episodic office appearances and companies are deciding that if some people will work remotely on a permanent basis they can diminish their office footprint. We are cautiously watching other sectors in commercial real estate to see if office weakness spills into other segments. The tricky issue at this moment is that without activity, there are few comparable transactions, which is making price discovery in the office sector difficult.

We will continue to focus on the ability to truly avert a government shut down as well as a resolution to the UAW strike. The Fed is closely monitoring the tea leaves for any indication that inflation is meaningfully abating, but these signs have not been forthcoming.

Until next month.

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, 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 February 27, 2015. 5-year fund performance is not available for the Real Estate Fund, Long/Short Equity, or the U.S. All Cap Index since the funds’ inception dates are September 30, 2019, December 21, 2019, and December 31, 2019, respectively.

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, 2024.

Benchmark Definitions

Bloomberg 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 US Aggregate Bond Index – benchmark for Core Bond Fund
The Bloomberg 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.

Bloomberg®, Bloomberg 1-3 Year U.S. Government/Credit Index and Bloomberg US Aggregate Bond Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Knights of Columbus Asset Advisors. Bloomberg is not affiliated with Knights of Columbus Asset Advisors, and Bloomberg does not approve, endorse, review, or recommend any Knights of Columbus Funds. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Knights of Columbus Funds.

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 200 out of 378 funds measured for the one-year ranking period and ranked 175 out of 307 funds measured for the five-year ranking period as of June 30, 2023.

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 359 out of 516 funds measured for the one-year ranking period and ranked 260 out of 456 funds measured for the five-year ranking period as of June 30, 2023.

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 478 out of 652 funds measured for the one-year ranking period ranked and 493 out of 580 funds measured for the five-year ranking period as of June 30, 2023.

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 228 out of 660 funds measured for the one-year ranking period and ranked 338 out of 581 funds measured for the five-year ranking period as of June 30, 2023.

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 599 out of 701 funds measured for the one-year ranking period and ranked 532 out of 619 funds measured for the five-year ranking period as of June 30, 2023.

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 327 out of 337 funds measured for the one-year ranking period and ranked 204 out of 267 funds measured for the five-year ranking period as of June 30, 2023.

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 132 out of 248 funds measured for the one-year ranking and ranked 28 out of 230 funds measured for the three-year ranking period as of June 30, 2023.

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 170 out of 222 funds measured for the one-year ranking and ranked 99 out of 199 funds measured for the three-year ranking period as of June 30, 2023.

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 139 out of 660 funds measured for the one-year ranking period and ranked 100 out of 588 funds measured for the three-year ranking as of June 30, 2023.