Q3 2017 Investment Commentary

Strategy Overview

The team at Paritas Capital Management has developed an intuitive, common sense approach to investing. The goal of the Global Wealth Strategy (GWS) is to protect capital during periods of declining markets while capitalizing during market appreciation periods.

Our portfolio utilizes a proprietary, balanced risk, “all-weather” approach to increase the probability of producing consistent return streams over various market cycles. By systematically rebalancing using the risk metrics we analyze each month, the portfolio can adapt to changing market conditions to achieve the type of positive outcomes we are targeting over market cycles.

The Bottom Line

GWS Composite Returns Q3 2017
3Q17 2017 YTD 2016 1 Year Since Inception1
GWS (gross) 2.98% 10.02% 8.50% 9.85% 6.02%
GWS (net) 2.83% 9.53% 7.85% 9.19% 5.38%
Benchmark 3.44% 11.45% 6.00% 10.91% 6.45%

Preliminary estimate. Inception date: 7/1/2015. Benchmark: 60% MSCI ACWI/40% Barclays US Aggregate. 1Annualized.

For the third quarter of 2017, GWS had a positive net of fee return of 2.83% vs the Benchmark positive return of 3.44%.

In what felt like an instant replay of the previous quarter, continuing momentum in global stock markets helped GWS due to its overweight to global stocks during a low risk market environment.

Reallocating Capital to Balance Risk

GWS Capital Allocation Changes Q3 2017
Asset Class July 2017 August 2017 September 2017
US Equities 25.73% 25.11% 21.86%
International Equities 23.92% 23.10% 24.67%
Inflation Hedge 20.85% 21.97% 20.81%
Fixed Income 29.50% 29.82% 32.66%

Our current evaluation of market risk remained low during the third quarter. Additionally, the CBOE Volatility Index (^VIX), as reported by the Wall Street Journal, just finished its calmest quarter in history.

GWS continues to take advantage of this low risk environment. For example, the average allocation to international equities in the third quarter was 23.90%, well above the since inception average of 18.20%. Allocation to fixed income averaged 30.66% for the quarter compared to 40.39% since inception.

Allocation averages calculated vs GWS target allocations from 7/2015-9/2017

Market Recap – Q3 2017

The third quarter results looked much like the second quarter with major market indices continuing their streak of records highs and international equity markets, represented by the MSCI ACWI (x-U.S.), were once again the best performer producing a 6.16% return for the quarter.

US Equity markets produced another strong quarter with the S&P 500 Total Return Index up 4.48% which is the 8th consecutive quarter of positive advances for the index. The technology sector continues to drive equity market returns with the S&P 500 Information Technology Sector Index posting gains of 8.65% for the quarter and a whopping 27.36% for the year.

GWS was still able to capture a majority of the upside without having to expose investors to concentration risk like the Benchmark. For example, the S&P 500 Total Return Index has a 23.20% allocation to the Information Technology sector.

Source: FactSet. As of 9/30/17. See disclosures for index definitions.

What Helped/Hurt GWS This Quarter

Surprisingly, there were little changes in contributions between the second and third quarter. All of GWS’ asset class segments made positive contributions except for MLP’s. And once again, developed international equities were the biggest contributor while MLPs were the biggest detractor.

US Large Cap Stocks were the second largest contributor during the quarter. When combined with strong performances from both Mid and Small Cap stocks, they helped propel the US Equity asset class to second out of the portfolio’s four.

As for Fixed Income, Emerging Market Bonds were the best performer and largest contributor while US Treasuries were only slightly positive for the quarter. Despite having a below average allocation, Fixed Income still made a noticeable positive contribution for Q3.

Balancing the risk in a portfolio aims to ensure that no single asset class segment can have too big a positive or negative impact on the portfolio. By adapting to changing market conditions, GWS is expected to maximize wealth-building over the long term, while focusing on protecting capital.

Source: FactSet. Contribution of Return calculated vs GWS Model for Q3 2017 and is as of 09/30/17.

Important Disclosures

Index Definitions
Broad Market Returns
US Equities – Russell 3000 Total Return
International Equities – MSCI ACWI (x-us) Net Return
Fixed Income – Bloomberg Barclays US Aggregate
MLPs – Alerian MLP Total Return
REITs – MSCI US REIT Index

THIS DOCUMENT HAS BEEN PREPARED BY PARITAS CAPITAL MANAGEMENT, LLC (“PARITAS”) SOLELY FOR THE PURPOSES OF PROVIDING SUMMARY INFORMATION REGARDING PARITAS AND ITS GLOBAL WEALTH STRATEGY (“GWS”) COMPOSITE. THE INFORMATION CONTAINED HEREIN IS NOT, AND SHOULD NOT BE CONSTRUED, AS AN OFFER OR SOLICITATION OF AN OFFER TO BUY ANY FINANCIAL INSTRUMENT.  AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE DESCRIBED HEREIN HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (“SEC”), ANY STATE SECURITIES COMMISSION, OR OTHER ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OR THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE.

ANY REPRODUCTION, DISTRIBUTION, OR OTHER UNAUTHORIZED USE OF THIS DOCUMENT, AS A WHOLE OR IN PART, OR THE DISCLOSURE OF THE CONTENTS HEREOF, OTHER THAN TO THE RECIPIENTS FINANCIAL, TAX AND/OR LEGAL ADVISORS WITHOUT THE PRIOR WRITTEN CONSENT OF PARITAS IS PROHIBITED.

THE BENCHMARK INDEX REFERRED TO HEREIN IS A BLEND OF 60% MSCI ACWI INDEX AND 40% BARCLAYS US AGGREGATE BOND INDEX.  THE INDICES INCLUDED TO SHOW RELATIVE MARKET PERFORMANCE FOR THE PERIODS INDICATED ARE NOT NECESSARILY STANDARDS OF COMPARISON, SINCE INDICES ARE UNMANAGED, BROADLY BASED AND DIFFER IN NUMEROUS RESPECTS FROM THE GWS COMPOSITE.  MARKET INDEX INFORMATION WAS COMPILED FROM SOURCES THAT PARITAS BELIEVES TO BE RELIABLE. HOWEVER, PARITAS DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH DATA. 

AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE MAY NOT BE SUITABLE FOR ALL INVESTORS.  THIS MATERIAL HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT INTENDED TO PROVIDE, AND SHOULD NOT BE RELIED ON FOR, INVESTMENT, ACCOUNTING, LEGAL OR TAX ADVICE. 

INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL OF LOSS OF SOME OR ALL PRINCIPAL INVESTED.  INTERESTED PARTIES ARE ENCOURAGED TO REVIEW PARITAS’ FORM ADV PART 2, AS WELL AS PERTINENT PROSPECTUS/PRODUCT DESCRIPTIONS TO CONSIDER SUCH RISK PRIOR TO INVESTING.  THERE IS NO GUARANTEE THAT A DIVERSIFIED PORTFOLIO WILL ENHANCE OVERALL RETURNS OR OUTPERFORM A NON-DIVERSIFIED PORTFOLIO. DIVERSIFICATION DOES NOT PROTECT AGAINST MARKET RISK.  STOCK INVESTING INVOLVES RISK INCLUDING LOSS OF PRINCIPAL. PAST PERFORMANCE IS NO GUARANTEE OR PROMISE OF FUTURE SUCCESS.

A PRO FORMA 0.60% MANAGEMENT FEE WAS APPLIED TO THE GROSS PERFORMANCE OF THE GWS COMPOSITE TO ARRIVE AT NET PERFORMANCE.

THE SHARES OF EXCHANGE-TRADED FUNDS (“ETFS”) MAY TRADE AT PRICES AT, BELOW, OR ABOVE THEIR MOST RECENT NET ASSET VALUE. EQUITY SECURITIES WILL FLUCTUATE IN PRICE; THE VALUE OF INVESTMENTS IN ACCORDANCE WITH THE GWS COMPOSITE WILL THUS FLUCTUATE, AND THIS MAY RESULT IN A LOSS.  SECURITIES IN CERTAIN FOREIGN COUNTRIES MAY BE LESS LIQUID, MORE VOLATILE, AND LESS SUBJECT TO GOVERNMENTAL SUPERVISION THAN IN THE UNITED STATES.  THE VALUES OF THESE SECURITIES MAY BE AFFECTED BY CHANGES IN CURRENCY RATES, APPLICATION OF A COUNTRY’S SPECIFIC TAX LAWS, CHANGES IN GOVERNMENT ADMINISTRATION, AND ECONOMIC AND MONETARY POLICY.  EMERGING MARKET SECURITIES CARRY SPECIAL RISKS, SUCH AS LESS DEVELOPED OR LESS EFFICIENT TRADING MARKETS, A LACK OF COMPANY INFORMATION, AND DIFFERING AUDITING AND LEGAL STANDARDS. 

AN INVESTMENT IN BONDS CARRIES RISK. IF INTEREST RATES RISE, BOND PRICES USUALLY DECLINE.  THE LONGER A BOND’S MATURITY, THE GREATER THE IMPACT A CHANGE IN INTEREST RATES CAN HAVE ON ITS PRICE.  SELLING A BOND BEFORE IT REACHES ITS MATURITY MAY RESULT IN A LOSS UPON ITS SALE.  BONDS ALSO CARRY THE RISK OF DEFAULT, WHICH IS THE RISK THAT THE ISSUER IS UNABLE TO MAKE FURTHER INCOME AND PRINCIPAL PAYMENTS. OTHER RISKS, INCLUDING INFLATION RISK, CALL RISK, AND PRE-PAYMENT RISK, ALSO APPLY. HIGH YIELD SECURITIES (ALSO REFERRED TO AS “JUNK BONDS”) INHERENTLY HAVE A HIGHER DEGREE OF MARKET RISK, DEFAULT RISK, AND CREDIT RISK.

PARITAS CAPITAL MANAGEMENT, LLC IS A REGISTERED INVESTMENT ADVISOR WITH THE STATES OF CALIFORNIA, CONNECTICUT, MASSACHUSETTS, NEW JERSEY, NEW YORK, PENNSYLVANIA, AND TEXAS.

About the author: Douglas Hedley