Jens Jensen

March 20, 2023

February 2023 - CST Portfolio Review

Jens Jensen

March 20, 2023

Market Review

Global equities declined in February after a strong start to the year. There were large regional performance differentials with Emerging Markets hit hard while Europe remained resilient. In the US, almost all S&P 500 sectors fell. Technology was comparatively strong while Energy was amongst the weakest sectors with investors eyeing potential cost pressures.

Fixed Income was also down on the month in aggregate as the yield on the 10-year Treasury note climbed by 40 basis points to 3.92 percent, the highest level since mid-November. Shorter-term rates rose by less, with the 3-month Treasury yield rising by 18 bps to 4.88 percent, the highest level since the middle of 2007. The shape of the yield curve remained deeply inverted, an ominous sign as this has historically been one of the most reliable recession predictors.

At the Federal Open Market Committee (FOMC) meeting on February 1st, Fed Chair Jerome Powell reaffirmed that a slowdown in inflation is underway, and that the Fed’s 2% target is achievable, but stronger than expected economic data and a very tight labor market warrant a hawkish stance. The Fed followed through with a 25 bps increase in the Federal Funds Rate. Minutes from the meeting showed that while almost all members agreed to slow the pace of rate hikes, the consensus was that rates may need to rise further than was initially assumed in order to bring inflation under control. As a result, February was marked by financial markets pricing in the likelihood of a higher-for-longer interest rate regime. By February 28th, the market was pricing in a terminal rate of 5.41%.

A stubbornly tight labor market is of particular concern to the FED as it makes their job of controlling inflation much more difficult. The chart below shows the steep rise in JOLTS nonfarm job openings vs. the number of unemployed workers. The ratio reached record highs during the economic reopening, signaling that demand for labor has outpaced supply and workers feel emboldened to seek out better job opportunities, resulting in elevated labor market churn and upward pressure on wages and prices.

Portfolio Review

Equities

In Equities, our position in GSIE (Goldman ActiveBeta INTL ETF) helped performance in large part due to an overweight to Western Europe. Our rotation from JEPI (JP Morgan Premium Income ETF) to BAUG and BFEB (U.S. Equity Buffered ETFs) also helped returns. However, our position in GEM (Goldman ActiveBeta EM ETF) detracted from performance as countries such as Brazil, China and South Korea underperformed.

Moving forward, we are near-term cautious on equities but medium-term bullish. We expect elevated volatility and prefer low-beta defensive exposure to U.S. equity via buffered ETFs.

Fixed Income

In Fixed Income, our short duration profile helped performance relative to the longer duration benchmark. As yields rose in expectation of higher-for-longer Fed policy, our short duration positions such as IBHY (iBonds HY 2023 ETF) and IBDP (iBonds IG 2024 ETF) outperformed. On the negative side, (EDD) Morgan Stanley EM Domestic Debt Closed End Fund hurt returns as did our position in IVOL (Interest Rate Volatility and Inflation Hedge) due to continued yield curve inversion.

We are moderately underweight fixed income as we move into March. While we believe inflation has peaked, it remains high, therefore eroding real returns. We are taking advantage of higher yields primarily through our bond laddering approach using diversified target-term fixed income ETFs.

Alternatives

Our position in gold (GLD) detracted from performance in February. We anticipate market volatility, and despite recent price action, we expect gold will act as a defensive real asset offering an attractive risk-reward profile.

Detractors from Performance

Contributors to Performance

Emerging Market Sovereign Debt (EDD)
Interest Rate Volatility and Inflation Hedge (IVOL)
Emerging Market Equity (GEM)

International Developed Equity (GSIE)
Innovator U.S. Equity Buffered ETFs (BFEB and BAUG)
Laddered iBond ETFs

Overweight

UnderWeight

Gold

Fixed Income

Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.

The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Jens Jensen

February 9, 2023

January 2023 - CST Portfolio Review

Jens Jensen

February 9, 2023

market review

Markets got off to a strong start in 2023. The S&P 500 rose 6.3% in January, while international stocks performed even better, with the MSCI All-Country World Index ex-US up 8.9%. Additionally, bond yields fell, leading the US Aggregate Bond index to rally by 3.3%.

Inflation and the path of the Fed’s interest rate hikes remained top of mind for investors in January. Despite some economic data suggesting a forthcoming recession, markets rallied based on expectations that the Federal Reserve will “pivot” in the second half of 2023 (i.e., reverse course from contractionary to expansionary monetary policy by lowering interest rates). Interestingly, this runs in contrast to the Fed’s own rhetoric and projections which remain hawkish. The disconnect between the market and the Fed can be seen in the futures pricing of the terminal rate. On January 31st, the market anticipated a Fed Funds terminal rate of 4.9%. The FOMC’s own projections as measured by the dot plot stood at 5.1%:

Equities

In Equities, our modest overweight to Emerging Markets via GEM (Goldman ActiveBeta EM ETF) helped performance. EM had an excellent month on the back on China’s re-opening. The weakening of the US dollar has been an additional catalyst. The DXY index, a weighted average of the dollar's value against six major currencies, has been in an uptrend for over 10 years. However, it declined 1.35% in January and is down 10.5% from the September 2022 peak. As the dollar continues to weaken, we think Emerging Markets, and International equities more broadly, may be entering a period of relative strength versus the US.

Our US equity exposure hurt performance relative to the global benchmark. Our value and defensive posture via IWD (US Russell 1000 Value ETF) and JEPI (US Premium Income ETF) hurt in the face of risk-on sentiment and lower yields that propelled growth and mega-cap stocks.

Moving forward, we are near-term neutral on equities but medium-term bullish. We are equal weight US equities but are selective and will continue to be defensive with our exposures.

Fixed Income

In Fixed Income, our short duration profile hurt performance relative to the longer duration benchmark. The US 10-yr yield stood at 3.9% on Dec 30 and by Jan 31st it had fallen to 3.5%. A such, short duration positions such as iBonds HY 2023 ETF (IBHY) and iBonds IG 2024 (IBDP) lagged. At the same time, Morgan Stanley EM Domestic Debt Closed End Fund (EDD) helped returns. Also, we recently entered a position in 2028 IG iBonds (IBDT) to extend our bond ladder, capture attractive yields and increase duration. IBDT helped returns.

The core of our Fixed Income portfolio continues to be a held to maturity, bond laddering strategy using diversified, low-cost, fixed income ETFs. These target-term funds combine the defined maturity and regular income of a traditional bond with the liquidity and diversification of an ETF. Holding these funds to maturity delivers a more predictable yield to maturity while reducing interest rate and re-investment risks.

We are moderately underweight fixed income as we move into February. While we believe inflation has peaked, it remains high, therefore eroding real returns. We are taking advantage of higher yields primarily through our bond laddering approach.

Alternatives

Our position in gold (GLD) posted positive returns on the month but did not perform as well as stocks or bonds. We anticipate volatility in the markets, and a defensive real asset such as gold offers an attractive risk-reward profile. We are underweight energy and industrial commodities but will be monitoring the technicals for signs of strength. We are bullish on the asset class in the medium term.

Detractors from Performance

Contributors to Performance

2023 High Yield iBonds (IBHY)
2024 Investment Grade iBonds (IBDN)
US Equity Premium Income ETF (JEPI)

Emerging Market Equities (GEM)
International Developed Equity (GSIE)
Emerging Market Sovereign Debt (EDD)

Underweight

Overweight

Fixed Income
Alternative Strategies

Cash
Gold

Jens Jensen

January 20, 2023

2022 Year in Review

Jens Jensen

January 20, 2023

2022 Market Recap

If there was one clear, dominant force that drove markets in 2022 it was the rate of inflation. Its surge to 40-year highs led the Fed to an unprecedented series of interest rate increases that quickly reversed the secular trend of ultra-low rates and easy money. The Fed’s benchmark lending rate jumped from 0%-0.25% at the beginning of the year to 4.25%-4.5% by year-end, far exceeding market expectations. Combined with post-COVID normalization of fiscal stimulus and the Fed’s quantitative tightening, the bond market cratered and stocks were sent into bear market territory. The MSCI All-Country World Index was down -18.4% in 2022, and the US aggregate bond index was down -13.0%.

High correlations between asset classes amplified portfolio pain, as there were very few places to hide. In fact, 2022 was one of only five calendar years in the past 100 years in which both U.S. Treasuries and the S&P 500 finished with negative returns. 2022 also saw increased volatility. The S&P 500 produced 46 daily moves of 2% or more in either direction, the most since the 2008-09 financial crisis.

Geo-politics played an outsized role in the markets this year as Russia’s war with Ukraine, two key commodity producers, sent energy prices through the roof. Owing to their dependence on Russian natural gas, Europe felt these price increases most acutely and may well fall into recession in 2023.

In Asia, China’s zero-COVID policy exacerbated global stagflation. The world’s second largest economy saw its growth rate fall to 3% in 2022, the second slowest pace since 1970. A massive property slump and regulatory tightening on the Internet and E-commerce industry were additional catalysts that pushed the MSCI China index down -43% (year-to-date) by the end of October.

Needless to say, 2022 was a historically bad year for balanced portfolios. The Accuvest multi-asset class CST portfolios were not immune to the pain felt in financial markets, but they significantly outperformed the blended benchmark of the MSCI All-Country World Index and the US Aggregate Bond Index.

As we move into 2023, we believe there is room for optimism. We advise investors to stay the course and keep long-term investment objectives and opportunities in mind. As we have written in a previous blog post entitled “Long-term Asset Class Assumptions: Markets Presenting Attractive Entry Points”, expected returns are significantly higher than they were just 12 months ago.

2022 Performance Review by Asset Class

Equities:

In equities, we were wary of sky-high valuations coming into the year, especially in the US. As such, we were overweight value stocks, particularly those with high dividend yields that could provide a welcome source of income. This served portfolios well as rising interest rates forced a revaluation of expensive growth stocks (investors began to prefer immediate and predictable profits to speculative earnings and growth in the distant future). Value stocks held up well in 2022 while expensive growth stocks were decimated.

In terms of Sectors, we maintained an underweight to the Consumer Discretionary and Technology sectors, preferring defensives such as Consumer Staples and Healthcare. Energy was one of the few positive performers this year, and a healthy weight in portfolios improved returns. Finally, we maintained a modest US overweight until late in the year, which helped performance (especially in the first half of the year as US Dollar strength reduced returns for US investors in international stocks).

While we were underweight Emerging Markets, exposure to this market segment was a pain point. Positions in the Emerging Market Internet and E-Commerce theme (EMQQ) and a brief mid-year rotation into MSCI China ETF (MCHI) detracted from returns.

Contributors to Equity Performance

Energy Sector
US Value
US Premium Income ETF

Detractors from Equity Performance

Emerging Market Internet and Ecommerce Thematic
ActiveBeta Emerging Market Equities
US Factor Rotation ETF

Equity Overweights

US Equities
Value Style Factor
Consumer Staples Sector

Equity Underweights

Technology Sector
Western European Equities
Japanese Equities

As we move into 2023, we are medium term bullish on equities and hold an equally weighted allocation to the asset class. We are particularly bullish on international stocks where a peak in the US dollar may usher in a long-awaited period of outperformance and relative strength (compared to the United States). Recent price action is beginning to confirm this investment thesis. Accordingly, equity portfolios have rotated towards an overweight allocation to International Developed and Emerging Market equities. Across all regions, we continue to favor high quality companies with strong pricing power trading at reasonable valuations.

Fixed Income:

In Fixed Income, our active tilt towards short-duration bonds contributed to outperformance against the fixed income benchmark in 2022. We positioned portfolios to take credit risk rather than interest rate risk and this was rewarded. On average, the Accuvest CST portfolios maintained a BBB+ Bloomberg composite credit rating and between 2.5 and 3 years of modified duration. In contrast, the US Aggregate Bond index is AA rated with 6.5 to 7.0 years of modified duration.

Shorter duration investments such as JP Morgan Ultra-Short Income ETF (JPST), iShares iBonds Investment Grade Target Term 2022 ETF (IBDN) and iShares iBonds High Yield Target-Term 2023 ETF (IBHC) helped deliver fixed income outperformance and capital preservation. Investments in Emerging Market Sovereign Debt (EDD) weighed on returns as investor risk appetite fell and the US dollar strengthened. The Interest Rate Volatility and Inflation Hedge ETF also detracted from performance as the yield curve inverted.

Contributors to Fixed Income Performance

Detractors from Fixed Income Performance

JPM Ultra-Short Income ETF
Investment Grade Target-Term 2022 ETF
High Yield Target-Term 2023 ETF

Emerging Market Sovereign Debt
Interest Rate Volatility and Inflation Hedge ETF
iBonds Investment Grade 2026 Target-Term ETF

Fixed Income Overweights

Fixed Income Underweights

Emerging Market Debt
Corporate Debt
Treasury Inflation Protected Securities (TIPS)

Government Debt
Duration
Securitized Debt

Currently, we are moderately underweight fixed income coming into the new year. Inflation is peaking but it remains elevated, therefore eroding real returns. Yields have risen to attractive levels, and we are moving portfolios towards this opportunity by extending the maturities of investment grade bonds. We continue to maintain a lower-volatility short duration profile compared to the benchmark, but portfolios are very well positioned to produce high income and predictable returns out to 2028.

Alternatives:

Our ability to be tactical and move into alternatives reaped rewards in 2022. Years of underinvestment across the commodity complex and accelerating inflation provided an excellent investment opportunity for real assets in 2022. Commodities ended up performing exceptionally well, particularly in 1H 2022 when uncertainty surrounding inflation and shortages from the war in Ukraine supported demand and prices. Portfolios benefited from exposure to a diversified commodity ETF (ticker PDBC) and a disciplined trend following approach to manage risk and harvest gains as commodity prices peaked. As a result, commodities helped us outperform the benchmark in 2022.

Currently, we are underweight commodities but continue to monitor trends for signs of price strength. We see value in this asset class but expect volatility over the medium term.

Jens Jensen

January 6, 2023

Long-term Asset Class Assumptions: Markets Presenting Attractive Entry Points

Jens Jensen

January 6, 2023

Long-term asset class assumptions: markets presenting attractive entry points

At the end of each year, many Wall Street institutions and research firms publish their “Long-Term Capital Market Assumptions” reports. Among other things, these reports contain long-term (5+ years), annualized forecasts for asset class returns, risk, and correlations.

Asset class assumptions are not an exact science. In fact, in the short run, these forecasts will almost certainly prove incorrect. But in the long run, they can provide significant value for the development of strategic asset allocations. History has shown that resilient multi-asset class portfolios are constructed with an eye toward expected returns, expected risk, and the interaction between asset classes.

Accuvest has compiled forecasts from many of the largest institutions in order to come to average annualized return and risk figures. Importantly, when designing a policy portfolio to weather the highs and lows of the coming market cycle, investors should consider a “robust” portfolio, rather than an “optimal” one.

Long-term expected returns and standard deviations are shown below:

Forecasts provided by JP Morgan, State Street, BlackRock, Research Affiliates, Invesco, BNY, Morningstar

Market Downturn Has Improved Expected Returns

Compared to last year’s expectations, this year’s capital market assumptions are significantly improved.

In late 2021, return assumptions were below the historical average. At the time, equity market valuations were rich, interest rates were pushing down on the zero lower bounds, inflation was accelerating, and global economic activity was peaking. Now, after a historically bad year for balanced portfolios, lower valuations, higher yields, and the accompanying unwind of many policy dislocations mean that markets now offer excellent long-term return potential.

The chart below shows the difference between last year’s and this year’s return expectations:

Portfolio Implications

The increase in expected returns has many implications for portfolios:

In fixed income, policy rates have normalized and bonds are once again a plausible source of income and diversification. Higher risk-free rates translate to improved credit return forecasts as investment-grade bonds now offer the highest yields in more than 10 years. To take advantage, Accuvest’s preferred approach is a held-to-maturity, laddered bond strategy. This approach allows portfolios to “lock in” and “extend out” attractive yields. Furthermore, by holding to maturity, portfolios can deliver predictable income while mitigating the risks of rising rates and re-investment.

In equities, projected returns have risen sharply. We anticipate that margins will likely recede from today’s levels but will not reverse completely to their long-term average. Absent a severe recession, the re-valuation of equities in 2022 presents investors with an attractive entry point to an asset class with attractive historical returns. Importantly, international developed and emerging market equities are expected to perform better than their U.S. counterparts. There are many reasons why, but the fact that international valuations are significantly lower than the US plays a significant role. In fact, emerging markets are approximately half the price of U.S. equities. Additionally, the U.S. dollar is more overvalued than at any time since the 1980s. Should the US dollar weaken, the FX impact on international stocks will be a significant component of the higher forecasted returns.

Finally, alternatives continue to offer appealing diversification benefits and long-term capital appreciation potential. Hedge Funds, Commodities, Private Equity, and Venture Capital all have positive expected returns, albeit with a higher risk profile. Alternatives have become significantly more affordable and accessible in recent decades and we believe that more exposure for traditional portfolios is warranted.

Remain Optimistic

The underlying patterns of economic growth and consumption are stable. Global demographic trends are positive, productivity is increasing and the assumptions that underpin asset returns – cycle-neutral real cash rates, default and recovery rates, and margin expectations – remain favorable.

It has been a difficult year for balanced portfolios, but we advise that clients remain invested, stay optimistic and accept price volatility to achieve their long-term investment goals. For investors sitting on the sidelines, the market is once again presenting attractive entry points across asset classes.

Jens Jensen

December 16, 2022

CST 50 - November 2022 Portfolio Review

Jens Jensen

December 16, 2022

Asset Allocation

Global stocks and bonds delivered strong performance in November as investors responded positively to a better-than-expected U.S. inflation report. The October CPI report showed prices rising 0.4% over one month and 7.7% over the trailing 12-months. This data revealed slowing inflation and may be an indication that inflation has peaked. The market now expects the Fed funds rate to top out around 5.00% by May of next year.

The MSCI All-Country World Index was up 8.34% in November, higher than the S&P 500’s 5.56%. For the first time in a long time, it was emerging market stocks that were the strongest performers. Emerging markets were supported by a weakening U.S. dollar and signs that China may begin to loosen its restrictive zero COVID policy. Within the US, cyclical sectors such as materials, industrials, and financials outperformed.

Lower inflation expectations have helped push the 10-year U.S. Treasury yield down by over 0.50%, to end the month at 3.57%. Consequently, the U.S. Aggregate Bond index was up 3.81%. In the face of impending economic weakness, the price of oil declined, and WTI Crude ended the month at $80.55 per barrel.

Security Selection

In equities, exposure to emerging market stocks and international developed stocks contributed positively to performance. However, our equity portfolio’s underperformance versus the global equity benchmark was due to our modest U.S. overweight. Our positions in U.S. Factor Rotation ETF (FCTR) and U.S. Premium Income ETF (JEPI) were positive on the month but did not keep up with either the S&P 500 or the ACWI.

In Fixed Income, our active tilt towards short-duration bonds contributed to underperformance against the longer maturity fixed income benchmark. We are monitoring interest rates closely and will be quick to add duration into fixed income portfolios should a confirmed downtrend materialize.

Detractors from Performance

Contributors to Performance

U.S. Factor Rotation
U.S. Equity Premium Income
Russell 1000 Value

ActiveBeta Emerging Market Equity
ActiveBeta International Equity
Emerging Market Sovereign Debt

Underweight

Overweight

Emerging Markets
Technology Sector
Long Duration Fixed Income

Consumer Staples Sector
U.S. Value
Treasury Inflation Protected Securities (TIPS)

Strategic Allocation Rationale

Asset Allocation:

As we move into December, we are equal weight equities and cash. We are underweight fixed income and commodities.

Equities:

We are near-term neutral on equities and maintain an equal weighting to the asset class. In the medium-term we are bullish, particularly on international stocks where a peak in the US dollar may usher in a period of relative strength. We are overweight US equities but are selective and defensive with our exposures. We continue to favor quality and companies with pricing power.

Fixed Income:

We are moderately underweight fixed income. Inflation is peaking but it remains elevated, therefore eroding real returns. Yields have risen to attractive levels, and we prefer to take advantage using a hold-to-maturity approach. We continue to maintain a short duration profile. We are monitoring the US 10-year treasury yield closely, and should a confirmed downtrend emerge we intend to add duration to the portfolio.

Alternatives:

We are underweight commodities but will be monitoring the technicals for signs of strength. We are bullish on the asset class in the medium term.

Portfolio Changes Since Last Month

Decreased

Increased

N/A

N/A

Jens Jensen

November 15, 2022

CST 50 - October 2022 Portfolio Review

Jens Jensen

November 15, 2022

Asset Allocation

Equities rose in October, with the All-Country World Index up 6.3%. Fixed Income fell as interest rates continued to grind higher. The US Aggregate Bond index was down -1.3%.

2022 has been a historically bad year for fixed income. As of October 31st, the year to date return for the US Aggregate Bond index was -15.5%. The US liquid investment grade bond index was down -21.8% and long-term treasuries were down a full -34.1%. The Fed has embarked on one of the fastest and most aggressive rate hiking cycles in history. On October 31st 2022 the 10-year treasury yield was hovering above 4%, a far cry from the rock bottom levels at the height of the pandemic in 2020, when 10 year yields briefly dipped below 0.5%.

Equities have also had a difficult year, but bounced back in October as better-than-feared earnings results fueled a rally in U.S. stocks. Of the 52% of S&P 500 companies reporting through October, 71% beat analyst estimates, according to FactSet.

During the month of October, our portfolios were, on average, marginally underweight fixed income and equities due to a small allocation to commodities.

Security Selection

In equities, exposure to value stocks via the Russell 1000 Value ETF (IWD) contributed to outperformance against the global equity benchmark. Value stocks have continued to show relative strength versus growth stocks, and we will remain overweight until we see confirmed signs of a change in leadership. In Fixed Income, our active tilt towards short duration bonds in a rising rate environment continues to contribute to outperformance against the longer maturity fixed income benchmark.

Detractors from Performance

Contributors to Performance

Multi-Factor EM Equity ETF
EM Internet & E-Commerce Theme
Underweight to Equities

Interest Rate Volatility and Inflation Hedge Fixed Income ETF
US Large Cap Value
US Factor Rotation ETF

Underweight

Overweight

Long Duration Fixed Income
Large Cap Equities
Government Debt

Consumer Staples Sector
US Value
Treasury Inflation Protected Securities (TIPS)

Strategic Allocation Rationale

Asset Allocation:

As we move into November, we are equal weight equities and cash. We are underweight fixed income and commodities.

Equities:

We are near-term neutral on equities but medium-term bullish. We are overweight US equities but are selective and defensive with our exposures. We continue to favor quality and companies with pricing power.

Fixed Income:

We are moderately underweight fixed income. While we anticipate an imminent peak in inflation, it remains high, therefore eroding real returns. Nevertheless, yields have risen to very interesting levels, and we prefer to take advantage using a hold-to-maturity approach. We maintain a short duration profile.

Alternatives:

We are underweight commodities but will be monitoring the technicals for signs of strength. We are bullish on the asset class in the medium term.

Portfolio Changes Since Last Month

Decreased

Increased

Commodities

Ultra Short Income ETF

Jens Jensen

October 13, 2022

CST 50 - September 2022 Portfolio Review

Jens Jensen

October 13, 2022

Asset Allocation

Equities and fixed income fell in September, with the All-Country World Index down -9.39% and the US Aggregate Bond index down -4.14%.

At the September FOMC meeting, fresh off the back of a hotter than expected August YoY CPI print of 8.3%, the FED announced a 75 basis point increase in the target fed funds rate. Chairman Powell’s rhetoric was clearly hawkish, and the adjustments to the FED’s dot plot projections came as a surprise to economists. Investors took it as a sign that the central bank appears to be willing to drive the economy into a recession in order to tackle persistent inflation.

On average, during the month of September, our portfolios were equal weight equities and cash, underweight fixed income and overweight commodities.

Security Selection

In equities, exposure to defensive, income producing stocks via JPM Premium Equity Income Fund (JEPI) contributed to outperformance against the global equity benchmark. In Fixed Income, in the face of rising interest rates, our active tilt towards short duration bonds continues to contribute to outperformance against the longer maturity fixed income benchmark.

Detractors from Performance

Contributors to Performance

Multi-Factor EM Equity ETF
EM Internet & E-Commerce Theme
Diversified Commodities

JPM Equity Premium Income ETF
US Factor Rotation ETF
Laddered Investment Grade Credit

Underweight

Overweight

Technology Sector
Western European Equities
Government Debt

Consumer Staples Sector
US Value
Treasury Inflation Protected Securities (TIPS)

Strategic Allocation Rationale

Asset Allocation:

As we move into October, we are equal weight equities and cash. We are overweight commodities and underweight fixed income.

Equities:

We are geographically diversified and selective with our US exposures, favoring quality and companies with pricing power. As interest rates rise and economic growth slows we see better risk/reward in US Value compared to US Growth. In the near-term we are cautious on equities and in the medium-term we are bullish.

Fixed Income:

We are underweight fixed income as high inflation continues to erode real returns and interest rates continue to rise. We favor High Yield and EM Debt. We maintain a short duration profile.

Alternatives:

We are overweight commodities as we see a systemic supply and demand imbalance in the asset class.

Portfolio Changes Since Last Month

Decreased

Increased

Long Maturity Investment Grade Corporate Bonds
S&P 500

Ultra Short Income ETF
US Value Equity

Jens Jensen

September 9, 2022

CST 50 - August 2022 Portfolio Review

Jens Jensen

September 9, 2022

Asset Allocation

Markets fell in August as fears of a hawkish Federal Reserve returned to the fore. At the Jackson Hole symposium, Chairman Powell emphasized that there is much more work to do to ensure that demand is not contributing to excessive inflationary pressures, and that policymakers are willing to risk some pain to growth, employment and corporate profits to achieve their goals. Both stock and bond markets sold off on the news.

The All-Country World Index was down -3.64% on the month. Similarly, the prospect of higher-for-longer interest rates saw the US Aggregate Bond index fall by -3.04%.

On average, during the month of August, our portfolios were equal weight equities and cash, underweight fixed income and overweight commodities.

During the month of July, our portfolios were equal weight equities, underweight fixed income and overweight cash.

Security Selection

In equities, exposure to the Emerging Markets Internet & E-Commerce theme (EMQQ) contributed to outperformance against the global equity benchmark. In Fixed Income, our active tilt towards short duration bonds and a satellite position in Emerging Market debt contributed to outperformance against the longer maturity fixed income benchmark.

Detractors from Performance

Contributors to Performance

Multi-Factor International Equity ETF
Interest Rate Volatility & Inflation Hedge Theme

EM Internet & E-Commerce Theme
US Value
Emerging Market Debt

Underweight

Overweight

Technology Sector
Western European Equities
Government Debt

Consumer Staples Sector
US Value
Treasury Inflation Protected Securities (TIPS)

Strategic Allocation Rationale

Asset Allocation:

Moving into September, we are equal weight equities and cash. We are overweight commodities and underweight fixed income.

Equities:

We are geographically diversified and selective with our US exposures, favoring quality and companies with pricing power. As economic growth slows and the Federal Reserve increases interest rates, we see better risk/reward in US Value compared to US Growth. In the near-term we are cautious on equities and in the medium-term we are bullish.

Fixed Income:

We are underweight fixed income as high inflation continues to erode real returns and interest rates continue to rise. We favor High Yield and EM Debt. We maintain a short duration profile.

Alternatives:

We are overweight commodities as we see a systemic supply and demand imbalance in the asset class. However, we are monitoring the price action closely for signs of weakness.

Portfolio Changes Since Last Month

Decreased

Increased

Enhanced Cash

Commodities

Jens Jensen

August 15, 2022

CST 50 - July 2022 Portfolio Review

Jens Jensen

August 15, 2022

Asset Allocation

After a difficult first half of the year both Equities and Fixed Income rebounded strongly in July. The All-Country World Index was up 7.07% and the US Aggregate Bond index was up 2.54%. Price action in the markets suggests that investors see inflation peaking and the Federal Reserve teeing up a policy pivot - from hawkish to dovish.

During the month of July, our portfolios were equal weight equities, underweight fixed income and overweight cash.

Security Selection

In equities, exposure to the Emerging Markets Internet & E-Commerce theme (EMQQ) contributed to underperformance against the global equity benchmark. In Fixed Income, our active tilt towards short duration bonds and a satellite position in Emerging Market debt contributed to underperformance against the longer maturity fixed income benchmark.

Detractors from Performance

Contributors to Performance

EM Internet & E-commerce
Emerging Market Debt
Overweight Cash

US Equity Exposure
US Factor Rotation ETF
iBonds: Investment Grade Target-Term 2026

Underweight

Overweight

Technology Sector
Western European Equities
Government Debt

Consumer Staples Sector
US Value
Short Term Corporate Debt

Strategic Allocation Rationale

Asset Allocation:

Moving into August, we are equal weight equities and fixed income. We are underweight cash and commodities.

Equities:

We are geographically diversified and are selective with our US exposures, favoring quality and companies with pricing power. Recession is not our base case as corporate profitability remains strong, the consumer's balance sheet is healthy and inflation is peaking. In the near-term we are cautious and in the medium-term we are bullish.

Fixed Income:

High inflation continues to erode real returns and elevated interest rate volatility warrants caution. However, due to the large increase in yields this year, we see opportunities in the asset class and have increased our exposure to neutral. We favor High Yield and EM Debt, and are opportunistically adding to 2-to-6 year corporate bonds.

Alternatives:

We are short term bearish on commodities, but persistent imbalances across the commodity complex give us reason to believe that the asset class can still warrant a place in portfolios. We will be closely monitoring for signs of strength, and will add if an opportunity presents itself.

Portfolio Changes Since Last Month

Decreased

Increased

Cash Allocation

Fixed Income Allocation
Fixed Income Duration
Chinese Equity Exposure

Jens Jensen

July 5, 2022

CST 50 - June 2022 Portfolio Review

Jens Jensen

July 5, 2022

Asset Allocation

June capped off a very difficult first half of 2022 in which both Equities and Fixed Income have re-valued significantly. Notably, the S&P500 bear market has been valuation-driven rather than earnings driven. Year-to-date through Q2 of 2022, the S&500 price-to-earnings multiple has dropped by 27% while earnings have grown 6.7%.
Our portfolios were equal weight equities, underweight fixed income and overweight commodities. After posting stellar gains in the first five months of the year, commodities struggled in June, prompting a sell signal in our portfolios.

Security Selection

In equities, exposure to the Emerging Markets Internet & E-Commerce theme (EMQQ) contributed to outperformance against the global equity benchmark. In Fixed Income, our active tilt towards short, held to maturity bonds contributed to outperformance performance against the longer maturity fixed income benchmark.

Detractors from Performance

Contributors to Performance

US Factor Rotation
Emerging Market Debt
Commodities

EM Internet & E-commerce
US Equity Premium Income ETF
iBonds: Investment Grade 22' and High Yield 23'

Underweight

Overweight

Technology Sector
Asia Pacific Equities
Government Debt

Western Europe
Financial Sector
Short Term Corporate Debt

Strategic Allocation Rationale

Asset Allocation:

We have a preference for Equities and Cash. We maintain our underweight to Fixed Income, and the recent price action in Commodities markets has prompted us to take profits on our position in diversified commodities.

Equities:

Recession is not our base case as corporate profitability remains strong, the consumer's balance sheet is healthy and inflation peaks. In the near-term we are cautious and in the medium-term we are bullish. We are geographically diversified and are selective with our US exposures, favoring quality and value stocks over growth stocks.

Fixed Income:

We remain underweight Fixed Income as high inflation continues to erode real returns and elevated interest rate volatility warrants caution. While we continue to favor shorter maturities, the historic rise in yields year-to-date now presents opportunities to increase duration. We are opportunistically adding to 2-to-6 year corporate bonds.

Alternatives:

Recent weakness has prompted us to take profits on our positions in Commodities. We are short term bearish, but persistent imbalances across the commodity complex give us reason to believe that the asset class can still warrant a place in portfolios. We will be closely monitoring for signs of strength, and will add if an opportunity presents itself.