On 5/23/19, for the second time this year, we reduced equity exposure in Fundamentum Tactical strategies in favor of fixed income securities. Using the Tactical Growth Fund strategy as a proxy, we are now underweight equities at 65%/35% vs. the neutral benchmark position of 70%/30% (MSCI ACWI Index/Bloomberg US Aggregate Index). The first reduction, which occurred earlier in the first quarter, came amid the 25% rally the S&P 500 Index enjoyed off the Christmas Eve lows to the end of April, a period which saw four consecutive months of gains for US equities to begin 2019. We have been emphasizing US equities over Emerging Market and Developed Non-US equities all year in our neutral-weighted equity exposure. This reduction on 5/23 was across most equity asset classes, US (LC Growth and small/mid-cap), Developed Non-US, and Emerging Markets. With the addition to Fixed Income, duration was added bringing it closer to a neutral position.
Fundamentum Tactical portfolios are built to participate and capture much of the upside capital markets provide, but we believe that providing some protection to drawdowns is our primary responsibility. Given changes we witnessed in May, we believe the risk/return potential now modestly skews to the downside, and risk was reduced in the tactical strategies as a result. Coming into the year, we identified three conditions or catalysts that we felt were needed to drive equities higher after the large Q4 declines. For most of this year, we (and most investors) felt that all three had been achieved. Namely, we felt we needed, 1) A different trajectory of monetary policy by the Federal Reserve, 2) Evidence that global economies, especially in China and in the Eurozone, would stabilize, and 3) Evidence that a trade pact with China would be achieved. Today, it appears that the better economic conditions in Europe seen earlier this year proved to be short-lived, and recently, trade talks with China have broken down, introducing new risks into capital markets. With the ongoing concern we have over the flat or inverted yield curve and with only modest expectations for earnings growth for the balance of 2019 (estimates that continue to be cut), removing these two catalysts were the primary reason for the moves taken to reduce risk. We continue to favor US equities over Non-US Equities as economic growth in the US continues to lead the world, and with modest inflationary pressures, current valuations are not overly demanding.
Fundamentum Investment Committee
Chad Roope, CFA-Portfolio Manager
Paul Danes, CFA - Investment Committee
Trevor Forbes - Investment Committee
Matt Dunn, CFA - Chief Compliance Officer
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