Monthly Active Strategy Review & Insights

As of
August 15, 2021

Internal Use Only
Core Satellite
Prepared By
Robert Netzly, CEO

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

Our Inspire Core Satellite strategies lagged their benchmarks a bit in July to the tune of between 1% - 1.5%, depending on the specific model. However, taken in context of the strong YTD performance exceeding benchmarks by 5% - 8% we can confidently say that our Core Satellite active management strategy has produced favorable results for our clients.

Why did we see this performance?

During July, and much of the previous several months, our technical analysis driven methodology directed us to overweight the Consumer and Financials sectors as the satellites of Core Satellite models. Relative to the broad market, these sectors produced outperformance. Additionally, Inspire’s unique security selection within our sector stock portfolios also produced outperformance compared against the broader sector, which also added to the outperformance of Core Satellite models. Our Inspire Impact Score screening combined with the Inspire Select multi-factor stock selection process we employ to determine which limited number of stocks earn a spot in our portfolios have created outperformance for Core Satellite investors this year.

Are there any adjustments you plan to make to continue or correct this trend?

As we continue to monitor technical analysis signals, such as relative strength, money flow, and MACD, it appears that the consumer sector is losing steam relative to other sectors. As such, we have initiated a rotation out of consumer sector and into the healthcare sector, while maintaining our existing allocation to the financials sector. Healthcare sports a strong uptrend and improving indicators suggesting that it is coming into increased favor and could provide enhanced returns relative to the broad market going forward, in our opinion.

What are 3 things you are monitoring right now for these strategies and why?

We continue to watch our dashboard of technical analysis inputs to measure the relative strength of various sectors, increasing and declining momentum signals and where the money is flowing to alert us to opportunities for outperformance by favoring certain sectors over others in our Core Satellite portfolio weightings. 

Tactical Risk Management
Prepared By
Robert Netzly, CEO

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

Our Inspire Tactical Risk Management strategies trailed benchmarks in July roughly between 1.5% - 2.0%, depending on the specific model. However, taken in context of the strong YTD performance exceeding benchmarks by 2% - 7% we are pleased with the results that TRM has delivered to our clients.

Why did we see this performance?

There have been no tactical adjustments in TRM this year, and as such the portfolios have been fully allocated to their maximum exposure to our globally diversified portfolio of equities. We believe that the outperformance YTD has been driven by our Inspire Impact Score methodology which informs the security composition within our Inspire ETFs, and in our TRM Select models, additional benefit was delivered by the unique multi-factor Inspire Select security selection process which seeks to focus our stock portfolios on a smaller group of names which we see as poised for outperformance.

The lag in July seems to be a combination of our portfolio names taking a breather from their swift run up earlier in the year, combined with particular stagnation in our more conservative positions in the portfolios which are behaving more defensively as there is a concern that the stock market’s new highs may not be sustainable in the short term.

What are 3 things you are monitoring right now for these strategies and why?

Elevated Risk: Despite the robust historical gains, Tactical Risk Management is actually a more conservative approach to investing as it is designed to move assets to defensive positions, such as cash and bonds, when risk becomes elevated in the markets. In particular, we consider risk to be elevated when markets are at or near highs combined with structural fragility in the underpinnings of price movements. That means that TRM can, and sometimes does, move assets to defensive mode when markets are still going up, which can be frustrating to more aggressive investors but welcomed from more conservative investors who are happy to give up some gains to avoid potential losses on the horizon.

Money Flow: Though we expect stocks still have some gas in the tank to take values higher than present in the short term, our technical analysis of the markets at present suggests that stocks are nearer to a position of elevated risk than they were earlier this year, and our radar is on high alert for signs of cracks in the foundation. Specifically, we are keenly watching money flow indicators which can help us ascertain if prices are rising on increased dollars into the market or decreasing dollars into the market. When prices rise on decreasing flow of money into the market, in our view that is akin to walking on thin-ice and highly suggestive of an impending turn lower in stocks.

Divergence: Currently, we are seeing precisely this kind of bearish divergence between money flow and stock prices in the S&P 500, though it is still on a minor scale and nominal money flow is still at a respectable level. You can see the decline in money flow indicated by the blue circles on the successively lower peaks in money flow on the following chart.

With that backdrop, we are becoming increasingly cautious and watchful for a potential increase in risk indicated by a more exacerbated divergence between stock prices and money flow. If we see such an increased divergence, and data from other indicators confirm what we are seeing, it is likely that we would make a tactical shift in our TRM portfolios into either 50% or 100% defensive positions. For the meantime, we are happy to make hay while the sun is still shining and maintain our bullish footing.

CW Active Strategies
Prepared By
Robert Netzly, CEO
Inspire Faithward Large Cap Momentum ESG ETF (NYSE: FEVR)
Prepared By Matt Melott

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

During the month of July, FEVR returned 2.44% vs 2.43% S&P 500 and 0.94% USA Momentum Index.  Tech and health care led the way, both from an over weighting and outperformance of returns. Communication services was weak primarily because of companies that we cannot own having strong returns.

What are 3 things you are monitoring right now for these strategies and why?

Item 1: Inflation

As mentioned last month, inflation like many other managers is of high concern to us. Our view is that it is transitory as previously laid out, but there are risks and rewards with inflationary or deflationary pressures moving ahead. A datapoint challenging the transitory argument is the cargo shipping rate from Shanghai to LA, which is up 238% year-over-year. Expectations are that this will continue to rise as the holiday reserves continue to build and peak spending season begins. Just like lumber saw its steep rise and fall, we expect this shipping issue to be resolved once buying pressure is abated. We are revising our inflation outlook to remaining high in the short-term (referred to as “sticky”) but transitory in the intermediate.

Item 2: Spending Patterns

Continuing the purchasing season theme, we are watching how consumers spend their money. Child tax credits are rolling out; rent moratoriums are in limbo; federal student loan payments are pushed to January; and discretionary income might be pressured by higher prices. So far, we have not seen consumers move to a discount-mindset probably due to a cash flushed system. As we progress through Q3 and into year end, median incomes and government assistance will facilitate our view on where and how much people will spend.

Item 3: Politics and Fiscal Support

Headlines have been filled recently with ousted politicians and fights on further support. Thus far, fiscal support has been able to pass through the red tape, and monetary support continues to be another backstop. Moderate democrats continue to refine policy but show support in the end. If the tides change though, the economy is left to its own devices for support, which is never smooth transition. Jobs data must thread the needle with too strong of numbers potentially stopping support sooner and too weak of numbers leading to undermining consumer confidence. 

Inspire Faithward Mid Cap Momentum ESG ETF (NYSE: GLRY)
& Inspire Faithward Large Cap Momentum ESG ETF (NYSE: FEVR)
Prepared By
Matt Melott
Inspire Faithward Mid Cap Momentum ESG ETF (NYSE: GLRY)
Prepared By Matt Melott

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

During the month of July, GLRY returned -1.11% vs 0.28% S&P Midcap 400 and -2.44% S&P Small Cap 600. Weakness came in tech, health care, and real estate. Real estate is an underweight holding, with our one name underperforming due to difficulties persisting in employment. Consumer discretionary was a highlight as people returned to making large purchases and rentals.

What are 3 things you are monitoring right now for these strategies and why?

Item 1: Inflation

As mentioned last month, inflation like many other managers is of high concern to us. Our view is that it is transitory as previously laid out, but there are risks and rewards with inflationary or deflationary pressures moving ahead. A datapoint challenging the transitory argument is the cargo shipping rate from Shanghai to LA, which is up +238% year-over-year. Expectations are that this will continue to rise as the holiday reserves continue to build and peak spending season begins. Just like lumber saw its steep rise and fall, we expect this shipping issue to be resolved once buying pressure is abated.  We are revising our inflation outlook to remaining high in the short-term (referred to as “sticky”) but transitory in the intermediate.

Item 2: Spending Patterns

Continuing the purchasing season theme, we are watching how consumers spend their money. Child tax credits are rolling out; rent moratoriums are in limbo; federal student loan payments are pushed to January; and discretionary income might be pressured by higher prices. So far, we have not seen consumers move to a discount-mindset probably due to a cash flushed system. As we progress through Q3 and into year end, median incomes and government assistance will facilitate our view on where and how much people will spend.

Item 3: Politics and Fiscal Support

Headlines have been filled recently with ousted politicians and fights on further support. Thus far, fiscal support has been able to pass through the red tape, and monetary support continues to be another backstop. Moderate democrats continue to refine policy but show support in the end. If the tides change though, the economy is left to its own devices for support, which is never smooth transition. Jobs data must thread the needle with too strong of numbers potentially stopping support sooner and too weak of numbers leading to undermining consumer confidence. 

Inspire Tactical Balanced ESG ETF (NYSE: RISN)
Prepared By
Jacob Chandler

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

For the month of July, the Inspire Tactical Balanced ESG ETF (RISN) performed well and better than expected. We compare this active US large cap strategy to the S&P Target Risk Moderate Index. 

The fund outperformed the S&P Target Risk Moderate Index by 1.55% (according to Morningstar.com) for the month and we attribute this outperformance to the long-term treasury and gold holdings which individually outperformed the broader stock market indices.

What are 3 things you are monitoring right now for this strategy and why?

Long-Term US Treasury Holding

We continue to keep our eye on the long-term US treasury holding as the potential for higher interest rates may impact this holding at which case we would consider moving back into intermediate term treasuries for that portion of the fund.

Gold Allocation

We are also monitoring the 5% allocation to gold within the fund, we anticipate higher than expected inflation to arise in the near to mid-term future, however if this does not come to fruition, we may reduce this allocation. This has proved a good addition, helping to limit the overall volatility of the fund.

Broader US Large Cap Market

We are also monitoring the US large cap stock market as a whole to see if the trend/momentum begins to change direction. If this should happen, we anticipate that the long-term treasury and gold positions will help to offset any initial losses in the equity allocation within the fund. If the momentum continues in a downward direction, we will begin to reduce our allocation to equities and reposition those assets into more defensive asset classes adding to our treasury and gold holdings. If the FED continues its current policies and if the economy continues to recover from the recent shutdowns, we anticipate that the market could still continue to advance even in spite of historically high price to earnings ratios.

Issachar Fund
Prepared By
Dexter Lyons

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform)?

Issachar lost -0.27% for July, while the IQ Hedge Multi-Strategy Index lost -0.58%, so Issachar outperformed its Benchmark by losing less money.    

Why did we see this performance?

More sector rotation occurred in July, causing more whip-saw trades, resulting in a loss for July, but August is trending better than last month.

Are there any adjustments you plan to make to continue or correct this trend?

I have tightened my sell stops seeking to minimize losses and let the leaders run.

What are 3 things you are monitoring right now for these strategies and why?

Fed's balance sheet totals

I believe when the Fed decides to slow its bond purchases with "free money" created out of thin air, the market will experience a serious correction. I do not plan to ride through the next bear market or recession like most mutual funds are required to by prospectus. I plan to short stocks and make money while the market struggles through its next steep decline. 

Price & Volume

I am closely watching the Price & Volume of the major indexes. I believe the market is a bit extended and due for some backing and filling to digest recent earnings announcement gains, so I plan to act accordingly to the risk I perceive in the market.

Tax and spending legislation

I am watching how the market reacts to more tax and spending legislation. I believe the market will tell us if we can sustain more irresponsible spending or we have crossed the line, and I plan to do what it takes to avoid life-changing losses while maximizing gains.   

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