HORTER INVESTMENT MANAGEMENT, LLC

Weekly Commentary http://horterinvestment.com/ August 14, 2017

Stop us if you've heard this before, but active money managers are really bad at beating their benchmark indexes. A new report from S&P Dow Jones Indices shows that most managers in nearly every domestic equity category underperformed their respective benchmarks over the past decade, and fees made their bad per-formance even worse.

Net of fees, 84.6% of large-cap mutual fund managers lagged the Standard & Poor's 500 index the past 10 years, and 79.58% of large-cap institutional account managers fell behind the blue-chip index as well. If you overlook fees – something investors are in-creasingly unwilling to do – 68.16% of large-cap mutual funds and 69.20% of institutional accounts underperformed.

Things only get worse for midcap managers: 96.03% of mutual funds and 92.02% of institutional accounts underperformed the S&P MidCap 400® on a net basis. And more than 80% of small-cap managers, both in funds and in institutional accounts, lagged the S&P SmallCap 600 on a net basis.

One bright spot for U.S. stock investors: Large-cap value mutual funds. Only 46.73% underperformed their benchmark on a gross basis. That number rose to 64.49% net of fees. The odds of beating the benchmark increased for those funds and institutional accounts investing in small-cap international stocks.

"While managers outperformed on a gross-of-fees basis in this space, they failed to provide value after fees were accounted for," the report said. "This is to be expected, as access to smaller, less liquid foreign securities can be costly." Click here to read more

With Q2 earnings largely in the books (84% of S&P 500 firms have reported), today's chart provides some long-term perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates the dramatic nature of the earnings plunge during the financial crisis as well as the recovery that followed -- a recovery that took earnings from levels not seen since the Great Depression to a new record high. More recently, S&P 500 inflation-adjusted earnings have recov-ered a majority of its 2015 to mid-2016 decline.

Index Performance (through 8/11/17): The S&P 500 + 9.04% S&P 400 Mid Cap + 3.04% The Russell 2000 + 1.26% MSCI Emerging Markets +22.59%

As you can see the Russell 2000 and the S&P 400 Mid-Cap Indexes (Medium Size Companies) are “significantly” underperforming the S&P 500 (500 Stocks) and the Emerging Markets. This is very unusual to see a lack of conviction in the global & domestic stock markets. -Drew

QUOTE OF THE WEEK

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

- Warren Buffett

S&P: Managers Still Faring Miserably vs. Indexes

Managers of mutual funds, since they always have to be 80% invested in the stated objectives of the prospectus; struggle to beat the indexes with no associated expenses. --Drew

Earnings have surpassed the 2008 Credit Bubble and the Dot Com Bubble of 1999. What lies ahead? Can it continue? Will technology help? -Drew

The Tail of 3 Stock Markets for 2017!!

Term of the Week:

Beta

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in com-parison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market

returns. Beta is also known as the beta coefficient.

Taking a comprehensive look at the overall current stock market, you can see the chart below representing eight ma-jor indices and their returns through the week ending August 11, 2017. In a truly diversified portfolio, the portfolio’s total return is determined by the performance of all of the indi-vidual positions in combination – not individually.

So, understanding the combined overall performance of the indices below, simply average the 8 indices (excluding the BofA Merrill Lynch US High Yield Master II Index) to get a better overall picture of the market. The combined average of all 8 indices is 11.32 % year to date.

Taking a comprehensive look at the overall current stock market

Market Perspectives (through 8/14/2017) 60/40 Allocation: 6.5 % YTD (60% S&P 500/40% Barclays US Aggregate Bond Index)

S&P 500: 9.04% YTD Barclays Agg: 2.71% YTD

WEEKLY MARKET SUMMARY

Global Equities: Tensions between the United States and North

Korea caused a spike in stock market volatility and sent global equity

markets lower during weekly trading. The S&P finished with its worst

weekly loss since March, down roughly -1.4% for the week. Small

Cap stocks fared even worse, declining -2.7%, the biggest weekly loss

since February of 2016. Developed international and emerging mar-

kets were both down over -2% for the week.

Fixed Income: Safe-haven assets attracted inflows, driving down the

yield on the Benchmark US 10 Year Treasury Note to 2.19%. High

yield bond spreads spiked 3.92%, their highest level since April

21st. Inflows for the weekly period ended August 9th were positive

for high yield bond mutual funds and ETFs at $124 million, although

selling was heavy Thursday and Friday, particularly in the high yield

ETFs.

Commodities: US benchmark West Texas Intermediate (WTI) prices

continue to flirt with the $50 mark but seem unable to hold at the

pivotal price point. WTI ended the week around $48.78, despite a

sharp decline in domestic crude inventories of 6.5 million bar-

rels. Gold prices surged as investors pivoted to "risk-off" positions,

reaching a two-month high.

Jobs data gets a JOLT: The Labor Department's Job Openings and

Labor Turnover Survey (JOLTS), closely monitored by the Fed as an

indicator of job market health, showed US job openings at a record

high in June. Job openings outpaced hirings, suggesting that compa-

nies are having difficulty finding workers with the necessary skills to

fill vacancies.

WEEKLY ECONOMIC SUMMARY

Inflation Subdued: Consumer Price Index data was weak in July, rising

just 0.1% to follow up a flat June. Producer prices unexpectedly fell in

July, down -0.1% month over month. The lack of inflation resulted in

a shift in investor expectations for a December rate hike from the

Fed. Last week the markets were pricing in a 50% likelihood of a rate

hike, those odds have now fallen to around 36%. As of Friday after-

noon, investors were actually pricing in a small 2.6% chance that the

Fed cuts rates in December.

2017 - Year of the IPO Bust? Two of the more high profile IPOs this

year, social media company Snapchat (SNAP) and meal-delivery ser-

vice Blue Apron (APRN), saw their lofty valuations come crashing back

to earth after earnings have failed to deliver. Since the June 30th

IPO, Blue Apron shares are down over 45%. Shares of Snapchat,

which went public March 3rd, are down over 55%.

Retail continues to struggle: Shares of struggling retailer JC Penney

(JCP) fell over -26% during the week on earning news. Fellow depart-

ment store Macy's (M) fell more than -11%. Kohl's Corp. (KSS) beat

earnings estimates, but shares were dragged down over -7% on con-

cerns over retail sector weakness.

Moderate Risk

HIM #12 100% long treasuries HIM #9 20% long S&P /80% alternative equity mutual fund HIM #8 100% QQQ HIM #22 100% Mutual Fund HIM #14 75% Long Bond Mutual Fund and 25% Cash HIM #10 98% invested, 2% cash HIM #15 100% invested HIM #11 75% (15) stocks/25% cash HIM #21 25% long real est/75% real estate mutual fund

Dow Jones - Week Ending

Low Risk

HIM #7 100% short and intermediate-term treasury bonds HIM #2 25% municipal bonds/75% municipal bond mutual fund HIM #1 15% high yield/85% high-yield Mutual fund HIM #6 10% short duration/75% high yield/10% strat inc/5% deb HIM #3 29% convertibles /29% dividend equities/14% powershares 14% Income Builder Fund/14% cash HIM #20 100% cash HIM #19 50% MBS/50% real estate mutual fund HIM #23 100% high yield

Current Model

Allocations

Last Week’s Manager Moves

HIM # 22 – 100% Mutual Fund on

8/11

HIM #14 – 75% Long Bond Mutual

Fund and 25% Cash on 8/11

HIM # 20— 100% Cash on 8/10

In utilizing an approach that seeks to limit volatility, it is important to keep perspective of the activity in multiple asset classes. At Horter Investment Management we seek to achieve lower risk with higher returns. More specifically, we seek to achieve superior risk-adjusted returns over a full market cycle to a traditional 60% equi-ties / 40% bonds asset allocation. We do this by implementing global mandates of several tactical managers within different risk buckets.

For those investors who are unwilling to stomach anything more than minimal downside risk, our goal is to provide a satisfying return over a full market cycle compared to the Barclays Aggregate Bond Index.

At Horter Investment Management we realize how confusing the financial markets can be. It is important to keep our clients up-to-date on what it all means, especially with how it relates to our pri-vate wealth managers and their models.

We are now in year nine of the most recent bull market, one of the longest bull markets in U.S. history. At this late stage of the market cycle, it is extremely common for hedged managers to underper-form, as they are seeking to limit risk. While none of us know when a market correction will come, even though the movement and vol-atility sure are starting to act like a correction, our managers have been hired based on our belief that they can accomplish a satisfying return over a full market cycle, -- while limiting risk in comparison to a traditional asset allocation approach.

At Horter we continue to monitor all of the markets and how our managers are actively managing their portfolios. We remind you there are opportunities to consider with all of our managers. Hope-fully this recent market commentary is helpful and thanks for your continued trust and loyalty.

Chart of the Week:

The Chart of the Week this week is a double chart show-ing S&P 500 index (purple) in the top panel and the CBOE Volatility index (blue) in the lower panel. The chart shows that in 2017 that volatility has spiked before during sell offs (highlighted with orange lines and circles) but as you can see each dip preceded a rally to new highs in the S&P 500. This doesn't mean that every time the market sells off it will immediately be followed by a rally, but fundamentals are still sound, and geopolitical concerns over North Korea is just a catalyst for a long over-due pause

Summary

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