Q4 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 Estimated Composite Returns Q4 2017
4Q17 2017 YTD 2016 1 Year Since Inception1
GWS (gross) 2.97% 13.32% 8.50% 13.32% 6.65%
GWS (net) 2.82% 12.65% 7.85% 12.65% 6.01%
Benchmark 3.44% 15.42% 6.00% 15.42% 7.28%

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

For the 4th quarter of 2017, GWS continued its trend of posting positive returns for every month of 2017 and finished the year strong up an additional 2.82%1 net of fees. The current market environment, led by US Large Cap Technology, provided a boost to the tech concentrated benchmark which finished up 3.57% for the quarter.

1Preliminary estimate.

Reallocating Capital to Balance Risk

GWS Capital Allocation Changes Q4 2017
Asset Class October 2017 November 2017 December 2017
US Equities 24.29% 25.00% 23.86%
International Equities 22.57% 22.38% 22.41%
Inflation Hedge 22.49% 21.03% 23.26%
Fixed Income 30.65% 31.59% 30.47%

Our evaluation of market risk remained low during the 4th quarter. As a result, we maintained a below average allocation1 to Fixed Income in the GWS portfolio with an average allocation of 30.48% during the 4th quarter.

Volatility continued to be muted through the 4th quarter as it has been during all of 2017.

1Allocation averages calculated vs GWS target allocations from 7/2015-12/2017

Market Recap – Q4 2017

The 4th quarter provided meaningful return disparity for global markets. Major equity indexes had another strong quarter with US equities, represented by the Russell 3000 Index, leading the way with a return of 6.34%. International markets were not far behind, with the MSCI ACWI (x-US) posting a return of 5.00%.

Income based assets did not fare as well, with the US Treasury yield rising 0.07% during the quarter. This rise in rates limited the return of REITs, which posted a gain of 1.41% while Fixed Income was up modest 0.39%. The laggard of the group was MLPs, finishing the quarter down -0.95%.

All in all, this type of market environment does not highlight the benefits of diversification and provides challenges to those who pride themselves on not having overconcentration in their portfolios.

Q4 2017 Broad Market DataSource: FactSet. As of 12/31/17. See disclosures for index definitions.

What Helped/Hurt GWS Q4 2017 and YTD

For GWS, it was another uneventful and quiet quarter. Nine out of the twelve asset segments made positive contributions for the quarter. As was the case in the 3rd quarter, US Large Caps, Emerging and Developed markets were the three largest contributors to return while MLPs, US Treasuries and High Yield were the detractors. With that said, the impact of the detractors on the portfolio was minimal and resulted in a total of -0.08%.

The chart shows both the Q4 2017 contribution as well as the 2017 contribution for each asset segment in the GWS portfolio.

In Fixed Income, there was a meaningful difference in return among the segments. Corporate Bonds and Emerging Market Bonds were up 1.29% and 1.21% respectively, while both US Treasuries and High Yield finished the quarter down slightly at -0.28% and -0.04% respectively.

On a year-to-date basis, the contributors and detractors were much like we saw in the prior three quarters. International Equities were the biggest contributors with Developed and Emerging contributing a combined 5.66%. US Equities were the second largest contributor led by Large-Cap stocks which outperformed Small-Cap and Mid-Cap by a wide margin. MLPs were the only detractors on the year, finishing the year down -7.19% and detracting -0.45% from the composite return.

Q4 2017 Contribution to ReturnSource: FactSet. Contribution of Return calculated vs GWS Model for Q4 2017 and is as of 12/31/17.

Final Thoughts

In 2018, we expect a barrage of chatter with questions like “is this the top?” or “when should I reduce my equity exposure?”. The answer usually starts with “I think” which is when we tune out. The reality is, predicting the future is not a productive exercise. Additionally, we don’t know anyone who has been able to successfully predict every bear market.

The key is knowing how to respond when market risk changes. Our quantitative balanced-risk approach is constantly monitoring market risk and is centered around dynamically adjusting portfolio allocations as risk changes. No subjectivity. No emotions. No “I think” statements. We don’t stress about market tops or market bottoms because we know exactly how we will respond in any market environment.

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