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Markets In Motion - July 2017

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Macro Backdrop

The first half of 2017 surprised investors who expected the “Trump reflation rally” to drive interest rates higher and US equity market outperformance. This thesis quickly crumbled, along with hopes for a speedy implementation of the Trump administration’s policy agenda, causing interest rates to reverse course and foreign equities to outperform. Our protfolios were well-positioned for this head-fake, with an allocation to long duration US Treasuries and large international equity allocations. As a result, all of our portfolios have significantly outperformed their benchmarks year-to-date, and our JAforlines Global Tactical Allocation mutual fund (RMAIX) has achieved a 5-star rating from Morningstar.*

Looking to the second half of the year, another challenge faces investors: the impending unwind of the Federal Reserve’s massively inflated balance sheet. Janet Yellen has charted a fairly steady course towards tighter policy this year, despite disappointing economic data in the first half. We expect US economic growth to accelerate in the second half, which should strengthen her resolve to follow through with balance sheet reduction as advertised.

In addition, the ECB has signaled its intention to taper its asset purchases. ECB Chairman Draghi even said recently that “the threat of deflation is gone and reflationary forces are at play.” Together, the world’s two most powerful central banks have signaled that the global reflation which began in mid-2016 remains in place. We have therefore reduced duration across our portfolios in order to protect against another move upwards in interest rates.

  • We are avoiding foreign currency fixed income to benefit from higher US dollar interest rates. We expect spreads between US dollar and foreign currency interest rates to narrow, and therefore will benefit by concentrating all of our fixed income exposure in US dollar denominated holdings.
  • We are avoiding long duration fixed income in our portfolios. Interest rates should rise in the second half of the year as economic growth accelerates and global central banks step away from the “extraordinary measures” they employed during the financial crisis.
  • We have exposure to five US equity sectors: financials, technology, biotech, energy, and aerospace & defense. Financials benefit directly from a higher interest rate environment in the US, as well as a more favorable tax and regulatory environment which is likely to develop. The pace of disruption of old industries by new products and processes has continued to accelerate, and technology and biotech give us exposure to this process of creative destruction. Revived economic growth will support global energy markets, and energy equities are under-owned by asset allocators, creating an excellent buying opportunity. Global military spending will increase in coming years, as US hegemony fades and a multi-polar world emerges—the aerospace and defense industry will be a beneficiary.
  • The immediate threat of populist and nationalist politicians in Europe has subsided. Regaining power are centrists determined to implement reforms necessary to ensure the long-term stability of the Eurozone. This will support European equites, benefitting our positions in Eurozone equities and the European financial sector.
  • Japanese equities are supported by the Bank of Japan’s ongoing aggressive monetary easing. The Bank of Japan is likely to be the last major central bank maintaining an aggressively easy policy stance, which should support Japanese equities and put downward pressure on the Yen.
  • Emerging market equities benefit from positive capital inflows and represent attractive relative value. We expect global capital flows to remain supportive and emerging market equities to continue to “catch up” after years of underperformance.
  • Gold’s status as an alternative currency should support it as geopolitical risks and policy uncertainty remain
    elevated. Furthermore, as an asset with low correlations to most others, it helps lower overall portfolio volatility.

Recent GTA Portfolio Changes

  • After taking advantage of an opportunity in long duration US treasuries earlier this year, we have exited the position for a profit. We expect economic growth to accelerate in the second half and the Fed and ECB to pursue hawkish biases. This will ignite a resumption of the global reflation which began in mid-2016.
  • A steeper yield curve will be supportive of the financial sector, so we have increased our position in the US financial sector.
  • Accelerating economic growth will support energy markets, so we have initiated a position in the US energy sector, which is under-owned by asset allocators.
  • Accelerating US economic growth will support the dollar, so we have shifted some of our European equity exposure to a currency-hedged vehicle.

 


JFG Team
JAForlines, LLC
Investment Management
AdvisorRelations@jaforlines.com
www.jaforlines.com

As of 7/13/2017.

*The American Independence JAForlines Global Tactical Allocation Fund Class I received a 5-Star rating for the 3-year period ending June 30, 2017 out of 247 funds.
1Individual account allocations may differ slightly from model allocations.
2Some Emerging Markets allocation overlaps with regional allocations.
3Excludes GTA’s 7% alternative and cash positions.
4Contains international exposure

Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market. Some products/services may not be offered at certain broker/dealer firms.

The investment descriptions and other information contained in this Fact Sheet are based on data calculated by JAForlines Global (JFG) and other sources including Morningstar Direct. This summary does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. This report should be read in conjunction with JFG’s Form ADV Part 2A and Client Service Agreement, all of which should be requested and carefully reviewed prior to investing.

The JFG Global Tactical Allocation Composite (“Composite”) was created on 1/1/2004. The JFG Global Tactical Conservative Composite (“Composite”) was created on 1/1/2004. The JFG Global Tactical Income Composite (“Composite”) was created on 9/1/2012. The JFG Global Tactical Growth Composite (“Composite”) was created on 2/1/2015.

Composite returns are calculated gross of investment management fees, net of investment trading expenses and underlying fund costs but does not reflect the effect of income taxes on the investment returns. Actual performance results will be reduced by fees including, but not limited to, investment management fees and other costs such as custodial, reporting, evaluation and advisory services. Performance reflects the reinvestment of dividends, income and capital appreciation. Composite returns are calculated monthly using the time weighted total rate of return methodology. Monthly returns are geometrically linked to calculate quarterly and annual returns. As fees are deducted quarterly, the compounding effect will be to increase or decrease their impact by an amount directly related to gross portfolio performance, and dependent on direction, magnitude, and order of returns. For example, on a portfolio with a 2% annual fee, if gross performance is 10%, and performance is equally distributed across all four quarters, the compounding effect of the fees will result in net annual performance of 7.81%. Performance presented prior to June 1, 2009 was generated while affiliated with a prior firm. The investment decision-making process has remained intact and has been applied consistently since inception. The calculation methodologies have been consistent over time. No leverage, derivatives, or shorts are used. Past performance is not indicative of future results. A copy of the verification letter is available upon request.

There can be no assurance that the purchase of the securities in this portfolio will be profitable, either individually or in the aggregate, or that such purchases will be more profitable than alternative investments. Investment in any JFG Global Tactical Portfolio, or any other investment or investment strategy involves risk, including the loss of principal; and there is no guarantee that investment in JFG’s Portfolios, or any other investment strategy will be profitable for a client’s or prospective client’s portfolio. Investments in JFG’s Portfolios, or any other investment or investment strategy, are not deposits of a bank, savings and loan or credit union; are not issued by, guaranteed by, or obligations of a bank, savings and loan, or credit union; and are not insured or guaranteed by the FDIC, SIPC, NCUSIF or any other agency. The composite strategy provides diversified exposure to various asset classes such as equities, fixed income, and alternatives utilizing liquid exchange traded products.

The Blended Benchmark Growth is a benchmark comprised of 65% MSCI ACWI, 25% Citi World Government Bond Index, & 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Citi Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Blended Benchmark Growth returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly into an index. A more detailed description of the benchmark's constituents is available upon request. 


The Blended Benchmark Moderate is a benchmark comprised of 50% MSCI ACWI, 40% Citi World Government Bond Index, & 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Citi Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Blended Benchmark Moderate returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly into an index. A more detailed description of the benchmarks constituents is available upon request.

The Blended Benchmark Conservative is a benchmark comprised of 35% MSCI ACWI, 55% Citi World Government Bond Index, & 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Citi Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Blended Benchmark Moderate returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly into an index. A more detailed description of the benchmarks constituents is available upon request.

The Blended Benchmark Income is a benchmark comprised of 90% Barclay’s Global Aggregate Bond Index, & 10% MSCI ACWI, rebalanced monthly. The Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: the US Aggregate (USD300mn), the Pan-European Aggregate, the Asian-Pacific Aggregate, and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY). A component of the Multiverse Index, the Global Aggregate Index was created in 2000, with index history backfilled to January 1, 1990. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Blended Benchmark Income returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly into an index. A more detailed description of the benchmark's constituents is available upon request.

JFG is a New York based Registered Investment Advisor. JFG specializes in separately managed accounts, Collective Investment Funds for retirement accounts, private label funds for select Independent Registered Investment Advisors and sub-advised mutual funds.

 

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