2021 REVIEW AND OUTLOOK...2021/06/30 · Small/Mid Cap Composite Update Portfolio Updates The ACM Small/Mid Cap portfolio returned 6.65% net of fees for the second quarter 2021, compared

Q22021 REVIEW AND OUTLOOK

Provided Quarterly By ACM Investment CommitteeJune 30, 2021

Dr. Charles Lieberman, CIODavid LiebermanDr. JoAnne FeeneyKevin KellyDr. Alan Greenspan, Senior Economic Advisor

David Ruff, CFA®Randall Coleman, CFA®Paul Broughton, CFA®Kevin Strauss, CFA®

www.advisorscapital.com10 Wilsey SquareRidgewood, NJ 07450Phone: 201-447-3400

An Investment Advisory Firm

INSIDE THIS ISSUE

05 MACROECONOMIC OVERVIEW

08 GROWTH UPDATE

07 SMALL/MID CAP UPDATE

09 U.S. DIVIDEND UPDATE

11 INCOME WITH GROWTH UPDATE

12 BALANCED UPDATE

14 FIXED INCOME UPDATE

17 GLOBAL GROWTH UPDATE

17 GLOBAL DIVIDEND UPDATE

17 INTERNATIONAL ADR UPDATE

03 INFRASTRUCTURE AND PRODUCTIVITY

2021 REVIEW AND OUTLOOK | Q2 P3

Competition with China| Dr. Alan Greenspan, Senior Economic Advisor

As we enter what may be remembered as our first post-COVID summer in the United States, the domestic landscape seems to be settling into a far less chaotic rhythm. Encouraging vaccination numbers have seen mask mandates disappearing. Businesses that were concerned with simply being open only a year ago are now turning toward increasing capacity limits. But while the home front seems back on track, the foreign policy challenges facing America are as pressing as ever. Recent cyberattacks have disrupted America’s oil infrastructure and meat production, and conflicts in the Middle East have flared anew. However, as I wrote in my August newsletter of last year, I believe the defining foreign policy issue facing America in the coming decades will be China.

Shortly after his inauguration, President Biden acknowledged that his administration is prepared for “extreme competition” with China. Biden has ratcheted up the stakes by arguing in essence that China seeks to challenge the liberal democratic order established by the U.S. and its Western allies following World War II. Just last week, Biden’s Asia Czar Kurt Campbell said that “the period that was broadly described as engagement (with China) has come to an end.” Campbell points to policies under Chinese President Xi Jinping as largely responsible for this shift from engagement to competition.

While Biden’s main objective of competition with China is clear, some core planks of his policy, including trade and military strategy remain undefined. Several China experts said that overall, much of Biden’s policy, while different in tone from the Trump administration’s, remains vague. He has kept in place for now Trump’s controversial tariffs on Chinese goods. Average U.S. tariffs on imports from China are currently at 19.3 percent, and cover 66.4 percent of Chinese exports to the U.S. These tariffs are more than six times higher than before the trade war began in 2018.

In an ideal world, I am an advocate of a free and open market. However, the proponents of tariffs are warranted in arguing that action to address China’s trade-distorting practices is necessary. At the same time, as Secretary of State Tony Blinken has said, it’s important that the tariffs are not “doing more harm to us than the country they’re being wielded against.” The tariffs, along with China’s retaliatory tariffs on U.S. imports, have jeopardized American jobs, increased costs for businesses, raised consumer prices and impeded access to medical products


Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was appointed chairman by four different presidents.

desperately needed during the pandemic. Many analysts argue that the Biden administration’s goal should be to minimize these costs to U.S. workers, companies, and consumers, while maintaining pressure on China to improve its behavior. That will require carefully picking and choosing which tariffs to lift and how.

Trade war aside, competition in science and technology is another major focus of the US-China relationship. President Xi recently called for China to accelerate efforts to become self-reliant when it comes to science and technology. Meanwhile in the U.S., the Senate is considering the U.S. Innovation and Competition Act (USICA), a $250 billion bill to boost U.S. science and technology. It is a widely-backed attempt to put new economic pressure on China while helping to give the U.S. an edge in producing high-power computer chips and other cutting-edge tools seen as critical to the digital age. Just last week, the Senate integrated the Trade Act of 2021 into the USICA in an effort to combat China’s

manufacturing imbalances, threats to free and fair trade, and illicit activity which undermine America’s leadership in innovation.

The Biden administration has a complicated road to navigate with respect to U.S.-China relations. I am optimistic they will hammer out a plan which keeps in mind the ultimate goal of keeping our economy growing, bolstering our technological independence, and remaining competitive with China.


Macroeconomic Overview

The economy and markets continued to gain from the reopening and the receding number of pandemic cases. Second quarter growth is expected to be exceptionally strong when it is reported at the end of July. Job growth has picked up meaningfully, despite the reluctance of many workers return to work, which has increased wage inflation. The Fed (and markets) hope this will prove transitory. In this environment, stocks continued their solid performance in June and, surprisingly, bonds also performed quite well, despite the strength in growth and wage increases.

The unwillingness of many workers to accept jobs is moderating the pace of the recovery. That’s extraordinary, given that second quarter GDP may approach 10% at an annual rate, which is scheduled to be reported as the end of July. Labor scarcity, despite an unemployment rate officially measured at 5.9%, is driving up wage rates and preventing business from satisfying demand. Posted job openings exceed 9 million, roughly equal to the total number of people counted as unemployed. There are bottlenecks all over the place, but it is the tightness of the labor market that is the singular common factor behind these outcomes.

Blame for the scarcity of labor, in rising order of importance, is attributed to ongoing caution with regard to Covid 19, the supplemental $300 in weekly unemployment insurance benefits, and the inability of some workers to return to work until schools reopen. Inoculations continue to increase, even if the pace has slowed, so that factor is clearly fading in importance. Ever larger fractions of the population are increasingly comfortable or willing to venture out. Restaurants, stadiums, and concerts are full. Hotel and airline occupancy are rising rapidly. The constraints are all on the ability of firms to supply goods and services caused by their inability to hire enough labor to meet demand.

The labor bottleneck may endure until shortly after Labor Day, when schools are widely expected to reopen fully and the extra unemployment insurance benefit expires, removing a strong financial incentive for workers to stay at home. However, roughly 40% of the population lives in states that will have terminated the extra insurance benefit before the end of July, so hiring should remain solid even before then.

The strong rebound in economic growth has fueled a strong rise in corporate profits and analysts keep raising their projections. S&P 500 earnings are now projected at around $200 in 2021 and roughly $220 for next year, so the S&P is now trading around 21.7 times this year and below 20 times next year’s expected earnings. Those aren’t cheap valuations, but they aren’t expensive either, especially given the low level of interest rates. So, we expect the ongoing stock market rally seen in June to continue for the visible future. It won’t be until the Fed starts to withdraw the punch bowl, because inflation is picking up, that stocks may face some stronger headwinds. Right now, equity investors still have the wind at their backs.

Investors appear to have fully accepted the Fed’s characterization of transitory inflation, or how else to explain the rally in bond prices in June? They could be proven correct, although there are obvious reasons for concern. Once workers are given more generous pay packets, it is virtually impossible to take them back. So, there is considerable risk that these higher labor costs flow through into price increases on a sustained basis. Moreover, as firms compete to get scarce labor, wage increases are likely to continue and could accelerate. If wages (and prices) keep rising after Labor Day, the markets will demand that monetary policy becomes less accommodative.

Dr. Charles LiebermanCO-FOUNDERCHIEF INVESTMENT OFFICER

Dr. JoAnne FeeneyPARTNER PORTFOLIO MANAGER


Despite the strength in the economy and the rise in labor costs and inflation, bond yields declined. The Fed monthly $120 billion bond buying exceeded the Treasury’s debt issuance in the second quarter. U.S. interest rates remain well above yields available in the major sovereign debt markets of Europe or Japan, so we continue to attract international capital flows. Still, we doubt that the rally in the bond market can be sustained.

INVESTMENT PHILOSOPHY + STRATEGY

Founded in 1998, ACM views the markets with a two tiered process, utilizing a top-down view of the business cycle, coupled with a bottom-up,

fundamental value based analysis.


Small/Mid Cap Composite Update

Portfolio Updates The ACM Small/Mid Cap portfolio returned 6.65% net of fees for the second quarter 2021, compared to the Russell 2500 Index gain of 5.44%. The Strategy outperformed by 121 basis points despite lower quality stock leadership in the benchmark. Small/Mid Cap invests in companies with lower levels of debt in their capital structure but on average, “junkier”, or higher financially leveraged companies performed best. Below average debt levered companies in the Russell 2500 gained 4.08%, compared to higher levered companies which returned 6.15% for the three months.

Best Sectors Consumer Discretionary (+14.85%) Health Care (+14.55%)

Worst Sectors Consumer Staples (-10.58%) Communication Services (-0.61%)

Best Stocks Pool Corp (+33.10%) QTS Realty Trust (+25.81%)

Worst Stocks Cannae Holdings (-14.41%) Exagen (-14.34%)

Leading swimming pool distributor, Pool Corp, delivered a blowout earnings report with quarterly revenues exceeding $1 billion for the first time. This reflects 57% year-over-year growth. The company benefits from the surge in new home sales and greater pool usage by homeowners. QTS Realty Trust gained due to Blackstone’s announced acquisition of the company at a 24% premium. With little appreciation potential to the deal price and low probability of an enhanced competitive bid, we sold the position. A mildly disappointing earnings report put Cannae Holdings on the defensive, but there has been little change in the fundamentals. Driven by legendary investor William Foley, the company’s enterprise value is at a significant discount to the value of its investments which includes stakes in Dun & Bradstreet, Ceridian, and Paysafe. Exagen’s stock price has generally been under pressure since issuing more shares in late March. We believe the autoimmune diagnostic company enjoys a bright outlook with its best-in-class tests for lupus and other hard-to-diagnose diseases.

Key Trades During the Quarter In addition to the QTS sale mentioned above we purchased Castel Biosciences.

Health Care name, Castle Biosciences (CSTL), is a leading dermatology diagnostics company using genomic information for the diagnosis and treatment of dermatology disorders such as psoriasis (PSO), atopic dermatitis (AD), and skin cancers including melanoma. Current therapy treatments for PSO and AD can be prohibitively expensive. Topical steroid treatment and therapies can cost patients more than $40,000 per year. Patients have little choice, however, since a significant proportion of PSO patients can develop psoriatic arthritis with irreversible joint damage if not treated. CSTL therapy guidance tools help clinicians avoid these expensive, less efficacious forms of treatment.


Growth Composite Update

Portfolio UpdatesWe continue to position the Growth Strategy for exposure to “smart cyclicals” and secular growth, but have added further international exposure to be able to capture more of that third wave (although most of our U.S. selections have substantial international exposure and should also benefit). Among the cyclicals, Synchrony Financial (SYF) saw its second quarter of double-digit appreciation (+19% in 2Q) as consumers started building higher credit card balances again. The rest of our financials selections, however, pulled back as interest rates fell. In Health Care, Bruker (BRKR) gained another 18% in 2Q (after rising 19% in 1Q) as its orders and sales benefited from the reopening of academic and national labs. And Medtronic (MDT) is also finally benefiting as the return of patients (as COVID eases in the US) drives demand for its medical devices higher. Other cyclicals mostly took a break after the first quarter’s surge (e.g., Lennar Corp, Borgwarner Inc., Caseys General Stores, and Walmart De Mexico), but we expect the second phase of recovery to provide material tailwinds in the fourth quarter and through 2022.

Secular growth positions in the Info Tech sector mostly bounced back in 2Q after the rise in rates pushed multiples lower in 1Q. Stone Co (STNE) resumed its appreciation, so clients are benefiting from the trim we completed in January near the peak and the addition we made in late March near the trough. Apple (AAPL) also resumed its appreciation after investors realized the company’s 2021 offerings in phones, watches, and services all have the capacity to keep earnings growth elevated for longer. Cybersecurity provider, Palo Alto (PANW), was among the best performers in the sector (+15%) after new ransomware attacks boosted forecasts for sales and profits. And continued strength in the use of digital payments made PayPal (PYPL) the strongest performer (+20%). Growth also benefited from strength in Comm Services where Alphabet (GOOG) and T-Mobile (TMUS) both rose double-digit percentages and our latest addition, Sea LTD (SE- added in mid-April), rose over 9%; these were partly offset by BAIDU’s (BIDU) decline in the quarter as big tech in China faces regulatory scrutiny (which has continued in July).

Our additions during the first half of 2021 raised our secular growth exposure in Health Care, Communication Services, Consumer, and Info Tech and these started delivering positive returns early in our planned holding period in almost all cases. BioNTech (BNTX) was the leader here, more than doubling since we added it in late March. Crispr (CRSP) has been more volatile, but was still up over 10% through the end of 2Q. We expect much more from all of these. In 2Q, we added Alibaba (BABA) in Consumer Discretionary and Splunk (SPLK) in Info Tech. Think of BABA as the Amazon of China (but much cheaper and with a little PayPal thrown in). We added BABA in late May after regulatory actions by the Chinese government pushed shares down substantially from the prior peak and gave us an attractive entry point. More regulatory actions have since made those shares even more attractive, but nevertheless, the outlook for growth in users, rising personal incomes, and further digital payments transformation in China all create a strong earnings trajectory for BABA which should eventually turn into strong share appreciation. Splunk, added at the end of the quarter, is a “data to everything platform” and collects structured and unstructured data from the vast world of consumer (including autos), business, and industrial devices. It processes and analyzes that data using proprietary algorithms and so provides its tens of thousands of customers with actionable insights for security and event management, business operations, and to guide customer product and service development. It is also shifting


from a licensing approach to a subscription model and this creates more predictable revenues and profits, and should (eventually) boost margins. SPLK is the market leader in IT Operations software and has room to gain further share. Its combined opportunities and end market growth point to annual earnings growth potential over 30% for the next several years.

We sold two Health Care positions, AbbVie (ABBV) and Becton Dickenson (BDX), after our latest research indicated they would likely be slower growth companies and after having added BNTX and CRSP to Health Care. We also sold Hartford Financial (HIG) after it surged on the heels of a possible acquisition by another insurer. That surge pulled forward anticipated share appreciation and we expect the stock to underperform our growth targets from here.

The combined effects of the decline in interest rates, the reversal in the reopening trade, and the concerns around slowing growth combined to push ACM’s Private Growth Composite up 7.0% (gross of fees) in 2Q, slightly behind the S&P 500 (up 8.5%). Longer term (gross) performance is tracking ahead of the benchmark at 1-year, 3-year, and 5-year intervals. We have added more aggressive growth stocks over the past year and this has raised the Composite’s 12-month forward price-to-earnings ratio, although it remains a bit below the S&P’s. We are still adhering to the strategy of finding growth at a reasonable price (GARP) and are maintaining exposure to a diversified mix of fundamental and market drivers.

12-Month Forward P/E:• PrivateGrowthat19.96

• S&P500at21.3

Estimated dividend yield for new accounts: 0.73%

U.S. Dividend Composite Update

Portfolio UpdatesThe ACM U.S. Dividend portfolio composite gained 5.83% net of fees during the second quarter 2021. This compares favorably to other dividend-based benchmarks like the WisdomTree U.S. Quality Dividend Growth Index (+5.00%) and WisdomTree LargeCap Dividend Index (+5.70%). The S&P 500 Index (+8.55%) benefited from the price surge in low yielding and non-dividend paying stocks. Bottom quartile dividend yielding stocks and the 117 non-dividend payers in the S&P 500 returned 12.20% for the quarter compared to the 4.35% return provided by stocks with an above-average dividend yield.

Best Sectors Real Estate (+15.95%) Financials (+9.72%)

Worst Sectors Communication Services (+1.55%) Energy (+1.63%)

Best Stocks Bentley Systems (+38.10%) Pool Corp (+33.10%)

Worst Stocks Flutter Entertainment (-17.06%) Utz Brands (-11.74%)

Surging demand for residential pool products helped Pool Corp’s latest quarterly earnings double analyst estimates. Bentley’s stock price appreciated with sentiment improving towards the engineering software company’s outlook as investors anticipate


greater infrastructure spend in the U.S. and globally. Flutter Entertainment paused after an impressive climb, reaching a new high in March. Investors were unnerved at the delay of the planned IPO and CEO exit of Flutter’s key FanDuel division. Utz missed earnings estimates due to bad weather and internal software system challenges related to acquisitions. These developments do not affect our investment thesis nor intrinsic value estimates and we believe both investments are still attractive.

Key Trades During the Quarter During the quarter we purchased Stanley Black & Decker, STORE Capital, Tencent Holdings, and Williams Companies. We sold Rockwell Automation and Nike. Rockwell added value to the portfolio gaining 83.52% or 37.56% annualized from the date of its addition to the portfolio in June 2019. The company holds a strong position providing robotic controls and software to industrial clients, but we note recent operating metrics have not kept up with peers. Given the relatively rich share price this is concerning. Thus, we believe the recent underperformance versus the company’s industry group may continue.

Nike has developed a strong brand with worldwide reach. This includes China, one of the company’s most important markets, representing a meaningful proportion of sales at approximately 16%. Unfortunately, pledges by Nike and other Western brands not to use Xinjiang cotton resulted in a Chinese consumer boycott of their products. While it isn’t clear what the long-term ramifications will be, there is clearly a negative impact on recent sales and we fear this may lead to a more permanent loss of market share in this key market.

STORE Capital is a real estate investment trust. The company’s moniker stands for Single-Tenant Operational Real Estate. In other words, STORE does not invest in office space or shopping malls, but focuses on point-of-sale business locations where tenants generate their revenue and profits. This includes restaurants, specialty retail stores, supermarkets, and educational centers. Management identifies properties positioned to be more Amazon-proof. For example, owning a car wash property should be less susceptible to the increasingly digitized economy. Focusing on middle-market, non-investment grade tenants the company receives better net lease yields versus peers but controls risk by researching each individual property, using unit-based cash flow analysis and other assessments to identify higher-quality investment opportunities. This approach of greater selectivity in a universe of higher-yielding tenants positions STORE more as a tenant partner, helping to establish a stronger tenant relationship with more reliable rent collection. We note the company’s impressive contract stability with occupancy persistently running over 99%. Further, STORE enjoys a superior negotiating position, providing for longer leases and faster rent hikes. The REIT yields near 4% and we expect regular dividend increases going forward.

Stanley Black & Decker (SWK) is all things tools with notable namesake brands along with DeWALT, Bostich, Mac Tools, and Craftsman to name a few. We look for several secular growth drivers to power the company’s stock price in the future. The boom in new and pre-owned home sales propels SWK’s revenues from the do-it-yourself home improvement crowd seeking to enhance their homes and gardens. This should provide a long-lasting tailwind.

Tencent Holdings (TCEHY) is a China-based Internet services provider and investment company. Notable offerings include communication and social networking applications -- Weixin/WeChat and QQ; mobile payment system – WeChat Pay and Tenpay; and multiple leading online/mobile games such as Honor of Kings and League of Legends. The company’s platform offers extensive content including applications, news, videos, music, comics, and literature. Most of these offerings rank first in their category.


Tencent also offers extensive business services to smaller China enterprises including crucially important cloud solutions. Like Apple and Facebook, Tencent has created a nonlinear business model where the company is not only paid by users or advertisers for the many games, services, and applications, but also from vendors who happily pay Tencent for the right to offer their mini programs on Tencent’s platform. With 1.2 billion and 800 million users on WeChat and QQ, respectively, developers and service providers have little choice but to pursue distribution on the company’s ubiquitous network.

Williams Companies stores, processes, and transports natural gas and natural gas liquids throughout the US. Although placed in the Energy sector, the company reflects Utility sector-like characteristics with approximately 50% of earnings generated from long-contract, rate-regulated pipelines. Already yielding over 6% we believe ramping free cash generation supports a growing dividend in the coming years.

U.S. Dividend 12-month Dividend Yield: 1.64% iShares Core S&P 500 ETF 12-month Dividend Yield: 1.29%.

Income with Growth Composite Update

Portfolio UpdatesIncome with Growth eked out a negligible gain in June, even as its benchmark declined almost 2%. The decline in the benchmark was in sharp contrast with the broad S&P 500, which had a solid June. Investors seem to have favored investments that performed well during the pandemic, such as growth, technology and bonds, and stepped back from reopening plays, like value, financials, industrials, and materials, at least for the moment. It is a bit unusual to see these two measures deviate so much from one another.

Energy and REITs continued their strong runs in June and BDCs also tacked on some additional gains. Energy corporations gained more than 4% in June, but MLPs gained around 5.5% and energy remains the strongest performing sector of 2021, after a poor performance in 2020. Excess inventories of crude and energy products have largely been worked off, so oil prices continued their ascent. Energy remains an unloved sector, but the strength of the rally may force fund managers into this previously ignored sector.

REITs also gained more than 4% for the month. BDCs eked out a modest gain of around 0.5%. All three of these sectors showed gains every month in the first half of the year. Both groups were very weak during the pandemic, as investors feared that activity would decline sharply and they would be unable to service their debt. But business held up much better than expected, so the stocks are now recovering fairly consistently. Also, they represent one of the few areas in the market where investors can find yield. At this point, the upside should be more limited, since the recovery is largely complete. We had a tiny position in FS KKR Capital and shifted it into another BDC.

Financial companies retreated in June, as they have moved consistently in the same direction as Treasury yields. Low interest rates compress profit margins for these companies. Banks can’t reduce interest paid on deposits (or don’t want to charge fees) and the yield earned on loans has also declined, so net interest margins remain under pressure. Insurance companies earn less on their newly invested assets. Financial stocks dropped more than 3%, with notable losses for banks and insurance companies. Any rise in rates would sharply increase profits.

Materials and industrials had a particularly rough month. Dow slid over 3%, which was typical for materials companies. Business for these companies is improving


nonetheless, as these companies benefit from the reopening of the economy. This also applied to industrial companies. While most industrial companies also gave ground, Fortress Infrastructure surged more than 10%, as several analysts ungraded the company after it announced the acquisition of some assets from U.S. Steel and a rail line, which led some to speculate it might convert from a partnership to a corporation and split up the company into separate, standalone businesses.

Utilities and Communication Services generally retreated. Utilities tend to move in sympathy with bond prices, but they were little changed in June, although mostly on the negative side. We sold out of Clearway Energy and swapped into Clearway Energy, A. The securities have the same economic interest, but the A shares provide a slightly higher yield. We also used the rally in Brazil Telecom to sell off our remaining position and used that capital to add to our BDC exposure. Information technology enjoyed a solid month, in keeping with the rally in tech and companies that did well during the pandemic. These companies enjoy a secular growth outlook, but growth is moderating a bit as the economy reopens and people return to more normal activities. All of our holdings in the tech sector advanced between 1% and 2%, except IBM, which declined around 4% in June, after a strong performance earlier in the year.

Yields:• TaxableIncomewithGrowth(K-1permitted):5.6%

• Tax-exemptIncomewithGrowth(noK-1):5.4%

• ModelIncomewithGrowth:5.2%

Balanced Composite Update

Portfolio UpdatesClients will have seen returns in Private Balanced portfolios of roughly 4-5% in 2Q, and the exact amount will depend on the equity-fixed mix and the choice of income exposure (sleeves T3, T4, or T5). Note that because all three sleeves are income oriented, with dividend yields well above that of the S&P 500, performance will also vary across those sleeves as market dynamics shift between Growth, Value, and Income investing styles.

Appreciation in T3 Balanced portfolios in 2Q was led by our selections in Info Tech and Financials, and year to date through the end of 2Q (YTD), in Energy and Consumer Discretionary. Nokia (+34%) and PayPal (+20%) were the best performers in Info Tech in 2Q, while Nokia (+37%) and Zebra (+42%) led YTD. Investments into the infrastructure for 5G cellular are accelerating and Nokia’s long-delayed solution is finally reaching customers. Among other drivers, PayPal and Zebra are both benefiting from the increase in consumer spending that is propelling online shopping. Even as bank stocks took a breather last quarter, our Financials group got a boost from Blackstone (+30%) as its private equity and real estate investments continued to gather speed. YTD, Financials delivered among the highest returns, led by MetLife, and JP Morgan. Consumer Discretionary was also mixed. Williams Sonoma (WSM) was a favorite during COVID’s stay-at-home period and is benefiting further from store reopenings. But it was up 76% in 1Q and gave back some in 2Q (-10%). We think there’s more room for appreciation here as consumer spending continues to favor home goods. General Motors (GM) appears to finally be getting attention for its pivot towards electric vehicles, and 2Q added another 3.8% appreciation after its strong 38% increase in 1Q. One of the best performers in this group was Target where those strong consumer spending trends pushed shares up 22% last quarter (+40% YTD). T4 and


T5 saw less equity appreciation last quarter since they are more tilted towards value and income stocks.

Underperformance in 2Q again came in Health Care, although the group in T3 was still up close to 6%. Pharma continues to underperform as regulatory concerns weigh on outlooks. But Bruker (+18%) continues to benefit from reopening of academic and national labs as it sees demand for its analytical tools rise. And Comm Services was also on the weaker side, despite Alphabet’s (Google’s parent company) 21% rise. This was partially offset by mid-single-digit declines in Disney, AT&T and Verizon. We continue to see upside for Disney (and recent success in movie releases and subscription trends support that view), while the telecom service providers continue to face skepticism as they roll out new 5G plans (trends are improving). Energy stocks had a mixed quarter: the pipeline companies (KMI and OKE) were both up close to 10%, but CVX was flat, after surging 24% in 1Q. For the year, that group was up over 25%.

We have continued to adjust holdings in Balanced, and changes differ for T3, T4, and T5. The only additional changes made in June occurred in T5, where we added Walmart de Mexico (WMMVY) to gain more exposure to consumer spending (a plus with economic recovery) and more international exposure (a plus given risk to corporate income taxes in US and because we expect global recovery to occur after US recovery, providing a longer tailwind). We also added Dow Inc (DOW) to gain more exposure to both US and global recovery, greater infrastructure spending, and inflation protection. Both these positions also bring attractive dividends to T5. We sold OneOK (OKE), an energy pipeline company, after it rallied, and to reduce our overweighting on the Energy sector. We continue to hold Kinder Morgan (KMI), another pipeline, and Chevron (CVX).

The fixed components of Balanced strategies outperformed their benchmarks as our careful selections kept the duration of our bonds shorter than the benchmarks; we also continue to take advantage of some opportunities among lower-rated (but still Investment Grade) opportunities to increase fixed returns. Fixed income selections in T3 accounts, for example, were up over 2.5%, while the benchmark was up 0.9%. See the Fixed Income discussion for further detail.

We continue to carefully select individual bonds and preferreds to support our three yield-differentiated sleeves of Balanced. We have moved to reduce volatility on the Fixed side by reducing our exposure to Preferreds, given the low levels of rates and credit spreads, so fixed income returns will be lower, on average, than equity yields within each of T3, T4, and T5, as described below. While those figures are for new accounts, they provide a rough idea of yield differentials for existing clients, particularly as holdings evolve in response to changes in the market. Note that as the percentage of fixed in a balanced portfolio climbs, we need to add more positions and these will generally come with lower yields.

Gross Estimated Returns for Fixed and Dividend Yields for Equities (these are for a new account at a 70:30 equity:fixed mix):• FixedT3:2.05-2.25%;EquityT3:2.6%

• FixedT4:3.20-3.50%;EquityT4:4.0%

• FixedT5:3.50-3.80%;EquityT5:4.5%

Balanced Fwd P/E:• PrivateBalancedT3:17.4

• PrivateBalancedT4:15.3

• PrivateBalancedT5:14.6


Fixed Income Update

Portfolio UpdatesThe second quarter of 2021 was a solid quarter for fixed income. Treasuries and high-quality investment grade bonds were strong as interest rates declined resulting in positive returns especially for high duration/long-dated securities. High yield bonds were also strong up over 2.7% in the quarter as the economic outlook improved coinciding with the stock market up more than 8.3%. The Preferred index returned over 3.6% in the quarter.

The ACM Fixed strategy continued to outperform by over 0.6% in the quarter (on a net basis). The outperformance was driven by selecting credits that benefit from the economic recovery currently underway, as well as from having a lower duration (interest rate exposure) than the benchmark. In the first half of 2021, the strategy was up over 1% net, versus the benchmark which was down more than 0.5%.

It is worth noting that while the average investment grade bond was up more than 3.5% in 2Q’21, the average investment grade bond is still down more than 1.2% year-to-date (as of 6/30/21). This is because the average investment grade bond outstanding has a maturity of 12 years resulting in substantial interest rate exposure.

Why was 2Q’21 such a strong quarter across fixed income? What happened to interest rates and credit spreads in 2Q?Second quarter returns were driven by both the decline of interest rates and the tightening of credit spreads (risk premiums). Interest rates declined due to continued Fed buying of Treasuries as well as agency mortgage-backed securities. As the Fed noted in its recent minutes, it will continue to aggressively purchase Treasury securities and agency MBS until further progress has been made on the Fed’s two primary goals - maximum-employment and price-stability. Additionally, three other factors that have influenced interest rates are the foreign purchases of Treasuries, the belief by some investors that the recently experienced increased inflation will prove to be transitory, as well as the impact of investors who made bets on rates rising deciding to reduce their exposure as rates have gone against their positions.

To help put the importance of rates into perspective, for the last 5 years, interest rates have accounted for more than 65% of investment grade bond yields with the other 35% composed of credit spreads (yield = interest rate + credit spread). Consequently, the average investment grade bond is still down year-to-date given this massive interest rate sensitivity and only limited potential offset from credit spread compression in an improving economy. It is important to note that interest rates tend to be a higher proportion of yields for high quality investment grade versus the BBB / BBB- universe in which ACM tends to focus.

Regarding credit spreads (risk premiums), the improving economic outlook in the U.S. combined with lower yields has many fixed income investors looking for higher yields than Treasuries currently provide. This corresponded with the stock market rising over 8% in the quarter. Regarding the improving economic outlook, several stimulus packages combined with the Fed actions and an accelerated vaccine rollout are helping


the economy to recover. Recent economic data is showing jobs, confidence, and spending are trending positively and with an eventual return to pre-Covid levels now a realistic possibility.

For primarily the same reasons that credit spreads declined, non-investment grade (high yield) securities also performed well. For the last 5 years, credit spreads (risk premiums) have accounted for more than 60% of the yield of the average non-investment grade rated security, with less than 40% composed of interest rates (yield = interest rate + credit spread).

Preferreds, which can be both investment grade and high yield, also had a solid quarter. Both investment grade and high yield preferreds performed strongly as expected given the interest rates decline and credit spreads tightening. Again, high yield security performance is more driven by credit spreads rather than interest rates (as discussed above).

Where are yields now?In the first half of 2021, the overall interest rate increases have resulted in higher investment grade bond yields. However, investors could earn significantly higher yields and potentially more total return, using the ACM approach of focusing on BBB / BBB- rated investment grade bonds. These securities provide additional yield and potentially lessen the interest rate sensitivity. BBB / BBB- rated bonds are often less interest rate sensitive because as the economy improves these companies benefit which can lead to credit spread tightening. ACM does the credit research to distinguish which BBB / BBB- credits are attractive and hence worth owning. We also purchase select investment grade preferreds that offer incremental yield on an attractive risk-adjusted basis.

On the other hand, the AA and A rated corporate credits, do not typically benefit much from an improving economy as these credits are deemed so safe the economic outlook is generally of little importance. Consequently, they also provide much lower yields due to tight credit spreads, making them more rate sensitive.

Please see below to appreciate the current differentiation in investment grade yields between AA, A and BBB rated securities. We think investors that own AA and A rated paper often do not appreciate how low a yield they are earning as the coupons and therefore, the current cash flow on a fixed income portfolio are much higher than the actual return or estimated yield. (Please see the Fixed Income Bonus Feature below for an explanation)

***Important: Note these yields are based on a large basket and not necessarily indicative of the yield of our strategies.

Yield on basket 5 yr. Investment Grade bonds 5 year Bonds 5 year Bonds 12/31/17 12/31/18 12/31/19 12/31/20 6/30/21usgg5yr index Treasury 2.21% 2.51% 1.69% 0.36% 0.89%IGUUACO5 Index AA+/ AA / AA- 2.54% 3.24% 2.00% 0.64% 1.09%IGUUACO5 Index A+/ A / A- 2.68% 3.42% 2.15% 0.78% 1.20%IGUUBCO5 BVAL Index BBB+ / BBB / BBB- 3.04% 3.98% 2.53% 1.04% 1.48%IGUUC505 BVAL Index BB+ / BB / BB- (High Yield) 4.37% 6.20% 3.54% 2.97% 3.01%

Source: Bloomberg. LLC.Note: Please note we quote benchmark yields which are a based on a large basket of bonds and not necessarily indicative of the yield of our strategies.


What have we done recently? What is our current plan?During the quarter, we continued to buy high quality, investment grade bonds with yields typically above the benchmark yield for a similar maturity and credit rating. This is where carefully choosing bonds can consistently provide incremental potential returns. We also purchased multiple investment grade preferreds that we think provide attractive additional yield in excess of investment grade bond yields. Furthermore, a few bonds matured or were redeemed by the issuers. We did take advantage of the market rally to sell some lower yielding securities, including preferreds, to reinvest at higher yields elsewhere. Going forward, we are focusing on maintaining a portfolio of attractive, high quality bonds and preferreds. As always, we will continue to monitor existing positions to determine if we should pursue more attractive opportunities. We think it is important that as investors we remain disciplined and extremely discerning when purchasing new securities.

Fixed Income Bonus Feature: Do not let a High Coupon deceive you --> Yield and Coupon are VERY different concepts

We also think it is worthwhile to remind investors that coupons and yields are often extremely different. For example, if you own a 1-year bond maturing that has a 6% coupon and trades at $105, you only net approximately 1% profit for the year, not 6%. Please see below for two detailed examples. This simple example applies to the vast majority of investment grade bonds currently, as almost all investment grade bonds are trading well above par.

Please let us know if you would benefit from a review of your non-ACM fixed income holdings. We are confident many investors do not know how low the future yields are on their existing, traditional investment grade bond portfolios. While these bonds have performed well during the past decade and in 2020, the majority of the returns have already been realized (and are now reflected in higher bond prices). Please see the table above which highlights the decline in investment grade bond yields versus history.


Global Dividend Composite Update

Global Growth Composite Update

International ADR Composite Update

Portfolio Update(s) Our investment philosophy states “invest long term in attractively-valued, conservatively-structured, competitively-advantaged dynamic companies with growing free cash flow and honest, competent leadership”.

Portfolios: International ADR / Global Growth / Global DividendGlobal equities gained in the second quarter 2021, generally advancing on an economic reopening theme in most regions. ACM portfolios – International ADR (+7.41%) and Global Growth (+7.55%) posted competitive returns against their benchmarks – the MSCI ACWI ex USA Index (+5.48%) and the MSCI ACWI IMI Index (+7.18%). (“ACWI” stands for All Country World Index. IMI stands for investable market index which includes small- and mid-cap sized companies.) The International ADR return advantage of 193 basis points over its benchmark and Global Growth’s outperformance was driven by China and Hong Kong-based holdings. Global Dividend lagged the MSCI ACWI Index (+5.43% versus +7.39%) but outpaced the more comparable MSCI ACWI High Yield Index (+3.87%). This ACWI High Yield Index, like the Global Dividend strategy, is constructed exclusively with dividend-paying stocks. US 10-year treasury yields declined from 1.74% to 1.47% during the quarter and this interest rate decline contributed to the lagging performance of higher-yielding US stocks in the global indices. (All else being equal, falling interest rates favor non-dividend paying growth stocks compared to higher-dividend yielding value stocks.)

Supercharged economic recoveries from the coronavirus-induced slump helped North American equities (+8.62%) rank best amongst the major global regions. Mexico (+10.40%), where second quarter GDP growth may exceed 20%, and Canada (+10.70%) both delivered double-digit gains, followed by the U.S. (+8.49%). Western Europe (+7.73%), reflecting an accelerated vaccine rollout, received boosts from Switzerland (+11.70%) and France (+9.71%), but the Asia Pacific region (+2.25%) experienced new surges of the new more infectious Covid-19 variants, first discovered in India. Truly a disheartening development for the region given Asia Pacific’s better pandemic management in 2020 compared to most of the world, the renewed outbreaks required various levels of lockdown in multiple countries including Japan (-0.33%), Malaysia (-6.28%), Indonesia (-5.48%), and Thailand (-6.28%).

Other analysis factors reviewed below for the quarter include currency, company size, and dividend yield. Currency added 0.68% to non-U.S. equity returns in the second quarter 2021 with the dollar weakening against Europe’s currencies including the euro, Swiss franc, and Swedish krona. The greenback recovered late in the quarter, however, strengthening 1.91% in June with U.S. Federal Reserve Chairman Powell


suggesting earlier than anticipated reduced monetary accommodation by the Central Bank. This suggests higher prospective US interest rates relative to other countries. Large-sized companies (+7.49%) performed best, outpacing Mid-Caps (+6.05%) and Small Caps (+2.27%) in the global index. This size factor was especially pronounced in Western Europe where Large Caps (+7.85%) produced substantially all of the region’s return compared to Mid-Caps (+0.70%) and Small Caps (-0.43%). As mentioned above higher dividend yielding stocks lagged. The highest quartile of yield in the global index returned +3.11% compared to +10.25% for the lowest yielding quartile and +10.13% for non-yielding stocks over the three months. The US accounted for much of this impact.

Portfolio Highlights for the Quarter

China sports apparel and athletic shoe company, Anta Sports, gained on strong earnings as well as market share gains due to Chinese consumers boycott of Western brands like Adidas and Nike. Other leading China-based performers included BYD Co (+38.99%), the EV vehicle and battery maker, and shipping firm, SITC International (+36.13%). China leads the world in EV battery supply, and accelerating demand helps key suppliers like BYD. We believe BYD’s ability to produce its own batteries and EV semiconductors gives the company an important competitive edge in the EV vehicle industry. Climbing shipping freight rates helped SITC International achieve a new high in the quarter. Analysts have steadily moved up 2021 freight rate growth expectations from low double-digits at the beginning of 2021 to more than 50%, currently. Other positive performer highlights include Pool Corp (+33.10%), held in both global portfolios; Bentley Systems (+38.10%), held in Global Growth; and Blackstone Group (+31.54%), held in Global Dividend. Blackstone also posted an earnings beat, which is almost becoming routine for the best-in-class alternative asset class manager. Bentley’s stock price appreciated with sentiment improving towards the engineering software company’s outlook as investors anticipate greater infrastructure spend in the U.S. and globally.

Weak performers include Krungthai Card, Exagen, and China Gas. Bangkok-based credit card company, Krungthai Card, pulled back in the second quarter after an impressive 127.37% gain over the previous six months. Renewed lockdowns in much of Thailand dampened investor enthusiasm for Thai equities, but we believe the longer-term fundamentals for KCI remain sound. China Gas surprised the market by announcing the issuance of more shares. The gas distributor company has struggled to generate positive free cash from operations recently, and we’ve lost confidence in the company’s management since they indicated in previous meetings with us that an additional capital call should not be necessary. Thus, we sold the position. Autoimmune disease diagnostic company, Exagen, earnings disappointed investors, and shares have been under pressure since the company issued more shares in late March. However, we

International ADR Global Growth Global Dividend

Best Sector Consumer Discretionary (+23.64%) Consumer Discretionary (+16.31%) Materials (+17.98%)

Worst Sector Utilities (-12.67%) Utilities (-11.95%) Utilities (-12.16%)

Best Country China (+24.07%) China (+26.89%) Philippines (+15.82%)

Worst County Thailand (-16.41%) Thailand (-16.41%) Thailand (-16.41%)

Best Stock Anta Sports (+43.10%) Anta Sports (+43.10%) Pool Corp (+33.10%)

Worst Stock Krungthai Card (-16.41%) Exagen (-23.71%) Krungthai Card (-16.41%)


believe the autoimmune diagnostic company enjoys a bright outlook with its best-in-class tests for lupus and other hard-to-diagnose diseases. We anticipate ramping free cash flow generation as rheumatologists begin ordering the company’s tests in volume.

Key Trades During the QuarterIn addition to China Gas, for all three portfolios we sold Novartis, the Swiss pharmaceutical giant, and Mowi, the Norwegian salmon farmer. We purchased SGS. In ADR and Global Dividend strategies, we bought Reckitt Benckiser Group. For Global Growth we sold Amgen, Evans Bancorp, Exagen, Gentex, Madison Square Garden Entertainment, Madison Square Garden Sports, Mowi, and Redball Acquisition; and bought Air Products and Chemicals, Aon, Castle Biosciences, The Walt Disney Company, Evolution, PayPal Holdings, and Zoetis.

SGS is a global leading TIC – testing, inspection, and certification – company. These services are crucial for clients to meet regulatory standards for their products. SGS provides these services to a wide range of companies in areas including industrial, agricultural, food, and life sciences. The extensive library of accreditations and operating licenses, combined with unsurpassed scale to perform these activities give SGS a tremendous competitive edge. We believe growth should accelerate with several global trends favoring the TIC services industry.

New position Reckitt Benckiser produces and distributes a variety of leading brands for the home and personal care market including Calgon, Lysol, Mucinex, Clearasil, and Enfamil. The company pursues a “powerbrand” strategy by focusing on recognized brands in big categories. Market share leadership provides scale-based cost advantages as well as being a more-trusted partner for retailers, especially grocers, helping RKT to command premier shelf space compared to discount competitors. Brand strength provides better pricing power compared to peers, an attribute which should be better appreciated in a more inflationary environment. The stock provides attractive valuation, an improved balance sheet, an accelerating growth profile, and a cash dividend yield of 3%.

New Global Growth position PayPal Holdings provides electronic payment solutions. International money transfer service Xoom and Venmo, a person-to-person payment platform also belong to PayPal. The company has carved out an important niche in the ecommerce space providing an easy checkout, and safe, fraud-protected payment system for both consumers and merchants. This convenience and security capability should allow PYPL to continue to grow its network globally.

Also purchased in Global Growth included Health Care name, Castle Biosciences, a leading dermatology diagnostics company using genomic information for the diagnosis and treatment of dermatology disorders such as psoriasis (PSO), atopic dermatitis (AD), and skin cancers including melanoma.

The remaining trades for Global Growth were due to restructuring. The portfolio has enjoyed better performance from small and mid-caps for several years, but this has resulted in a under exposure to larger cap names. Thus, we repositioned the portfolio by increasing the large cap growth segment of the portfolio as well as making some sector adjustments.

Global Dividend 12-month Dividend Yield: 1.99% iShares MSCI ACWI ETF 12-month Dividend Yield: 1.38%


Dr. Charles LiebermanCO-FOUNDERCHIEF INVESTMENT OFFICER

Income with Growth Fixed Income ACM Investment Committee

Dr. JoAnne FeeneyPARTNER PORTFOLIO MANAGER

Growth Balanced ACM Investment Committee

Fixed Income ACM Investment Committee

Kevin KellyPORTFOLIO MANAGER

David L. Ruff, CFA®

PORTFOLIO MANAGER

International Strategies Small/Mid Cap ACM Investment Committee

Kevin Strauss, CFA®, M.B.APARTNER PORTFOLIO MANAGER

Fixed Income Balanced U.S. Dividend ACM Investment Committee

Randall T. Coleman, CFA®

PORTFOLIO MANAGER

International Strategies Small/Mid Cap ACM Investment Committee

David Lieberman, M.B.A.PARTNERPORTFOLIO MANAGER

ACM Investment Committee

Paul Broughton, CFA®

PORTFOLIO MANAGER

U.S. Dividend International Strategies Small/Mid Cap ACM Investment Committee

Investment Professionals

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201.447.3400

www.advisorscapital.com

An investment advisory firm

This report contains opinion and performance reporting through June 30, 2021. Advisors Capital Management’s (ACM) individual strategy performance is available upon request and are created and audited independently under the standards of GIPS reporting. Although the information included in this report has been obtained from sources ACM believes to be reliable, ACM cannot guarantee its accuracy. The opinions highlighted in this report are that of ACM’s investment committee. The committee’s economic; market, sector and company specific outlook can change without notice. Past performance does not guarantee future results. Consult with your advisor before investing. Investing in market securities such as stocks and bonds involves risk and investors can lose money. ACM is a registered investment advisory firm. Our ADV Part 2A and 2B are available upon request. This is not a suggestion or solicitation to buy or sell any of the stocks mentioned in this report. Visit our website at www.advisorscapital.com for additional information and commentary.

Documents

2021 REVIEW AND OUTLOOK...2021/06/30 · Small/Mid Cap Composite Update Portfolio Updates The ACM Small/Mid Cap portfolio returned 6.65% net of fees for the second quarter 2021, compared