Portfolio Manager Commentary Q2 '22

Dear Client,

Nick Crow, President, Motley Fool Wealth Management — Nick Crow
President, Motley Fool Wealth Management

Here are some questions that investors, clients, friends, and family understand we can’t know the answers to. But that doesn’t stop them from asking us...

...where do you think interest rates will top out?
...when do you think the market will bottom out?
...has crypto found its low point?
...is X, Y, or Z a good stock?
...should I get into real estate?
...should I stuff what remaining money I have under my mattress?

These are important yet mostly unanswerable questions. I have my personal opinions of course, and we use data and informed analysis to influence our advice to you. Still, I rarely attempt to answer questions like these directly because I can’t know the answers for certain, and I have a responsibility to consider what investors might do differently even if I did know.

So, I have one more unanswerable question for you...

What if the market bottom was June 17^th of last month?

After all, as I’m writing this the S&P 500 index is trading 5% higher. It is possible that will be the low point of this bear market.

If you knew the bottom was in, how would you invest differently? Email [email protected] to share your answer. Honestly, we would like to hear from you.

The reality is that a stock market recovery – at whatever time and at whatever price level – is only knowable after the fact. And even then it’s hard to pinpoint!

Worrying about it won’t change it. What you need instead is a plan that you believe has a reasonable probability of success over a wide range of potential scenarios.

Though we all have different individualized needs and investment plans, we all fall into two categories with respect to cash flows. Those who are:

Accumulating wealth and regularly adding to their investments.
Drawing down on their wealth and regularly taking distributions to pay for living expenses.

You should be able to find yourself in one of these two groups.

If, like me, you find yourself in the first group, I would strongly consider taking two steps if you’re able:

Make any sacrifices you can to cut expenses (easier said than done with current inflation rates).
Increase your rate of investment.

With inflation eating away at both our earnings and the value of our savings, our best potential protection is owning businesses without high reinvestment needs. Current price levels don’t guarantee success, but we believe they do offer a reasonable probability of success over long time horizons. So we think one should move any lump sums of cash into your investments and increase your monthly investment rate, if possible.

For the second group, retirees mostly, your actions may be more difficult because you’re living off your investments. The good news is that you probably have a plan. Those plans are generally grounded in popular financial planning withdrawal rate guidelines, like the famous 4% rule or our preferred “cash carveout” approach (there are others too), consider success rates over many different market environments like this one.

You can help out a bit too. If I were in your shoes, I’d consider temporarily reducing your withdrawal rate from your investments.

Generally this requires a bit of sacrifice in your standard of living, but it helps in two ways. The idea here is to wait until prices have recovered so you don’t draw from principle so quickly. And if prices don’t recover quickly, you may be glad that you haven’t been living too large.

If you’ve made it this far, I should share that you may have another lever at your fingertips. We can often increase the aggressiveness of your asset allocation. Generally, this has us selling lower expected return assets like bonds to buy higher expected return stocks.

If you make this decision with the guidance of your wealth advisor, you need to know that you should expect your portfolio to fall faster if the market keeps dropping. This isn’t for the faint of heart or for those using this portfolio as your only source of retirement income. You’ll be taking a bit more risk in hopes of a higher reward.

Most of us have lived and invested through a number of shocks, crashes, and bear markets. One lesson I’ve taken from these experiences is that taking a positive action in a negative environment always can provide me with a bit of comfort. Not to mention potentially a little more oomph to my portfolio when markets recover.

Here’s to taking positive steps and to the hope of a recovery, whenever it comes.

Sincerely,

Nick Crow
President,
Motley Fool Wealth Management

The above information and the following Portfolio Manager Quarterly Reports (“Reports”) are intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

Similarly, all information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice.

Performance results discussed herein and in the Reports represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed in the Reports.

Dividend

Portfolio Managers

Tony Arsta, CFA
Jeremy Myers, CFA

During the second quarter, the Dividend strategy posted a -10.29% return, net of fees, versus an -16.10% return for its benchmark, the S&P 500®. That brings returns for the year to -13.49%, net of fees, versus -19.95% for the benchmark. Having just completed the worst first half of the year since 1970 for the S&P 500®, we’re pleased to see that our most conservative large cap strategy did its job of reducing risk and cushioning some of the losses relative to the overall market. High-quality dividend paying stocks have traditionally been a good option for riding out the storm and that seems to be the case once again.

The Federal Reserve is aggressively increasing interest rates as it tries to pump the breaks on the economy, and it appears that Chairman Powell and company are going to get what they want. Speculative assets, like unprofitable growth stocks and cryptocurrencies, were the first to fall. More recently, commodity prices have started to decline and the housing market is softening, both suggesting that the economy is in fact slowing. It remains to be seen whether the Fed can engineer a “soft landing” without driving the economy into a deep recession, but history shows a tendency to overcorrect and tighten for too long. If inflation rates remain stubbornly high, we expect short-term interest rates will continue to increase through the end of the year and stock market volatility to remain elevated.

In the second quarter Value continued to outperform Growth, and we’ve benefitted from our exposure to value-oriented sectors like consumer staples and utilities. It’s also notable that we managed to outperform the benchmark without any allocation to the only sector to post positive returns in the first half of the year – the energy sector.

Annualized Net Returns as of 06/30/2022
	1 Year	3 Years	5 Years
US Large Cap Dividend	-5.91%	9.64%	11.71%
Benchmark (S&P 500)	-10.60%	10.61%	11.32%

While we remain conservatively positioned, we also want to make sure that we’re taking enough risk to be able to catch the market updraft when it eventually appears. For that reason, we continue to look for opportunities to reallocate to what we think are equities with the best risk-reward profiles. The more the market falls, the more we will be looking for heavily discounted companies that have the potential to bounce back quickly when sentiment improves.

Portfolio Review

Factoring in position size and performance, these three companies had the largest positive impact on the strategy in the second quarter:

American Tower: 2.92% return; 7.24% weighting
Agree Realty: 9.77% return; 2.19% weighting
Alexandria Real Estate Equities: 6.95% return; 0.46% weighting

Following a rough start to the year, American Tower was one of the few holdings that stayed in the green during the second quarter. The company is integrating its recent acquisition of the data center assets from CoreSite Realty which has resulted in some near-term uncertainty. Still, we feel American Tower’s highly predictable cell tower franchise should result in less volatility in the near term as investors shift their focus to the highest quality assets for safety.

Agree Realty’s stock also bounced back recently as expectations for long-term interest rates have moderated. Single-tenant net lease REITs tend to have very long leases which causes the equity to react like a long-duration bond in the short-term and decline in value when interest rates increase. Longer-term, Agree is executing well on its acquisition plan to grow the asset portfolio and we think the stock has the potential to deliver double-digit total shareholder returns for the foreseeable future.

Alexandria Real Estate Equities benefited from only being in the portfolio for a couple of weeks, during which time both Alexandria and the market generated positive returns. As noted in our recent trade alert, we’re excited about the long-term prospects for the healthcare sciences real estate sector and believe Alexandria will continue to deliver steady returns over the long term.

Factoring in position size and performance, these three companies had the largest negative impact on the strategy in the second quarter:

Microsoft: -16.49% return; 7.56% weighting
Paychex: -16.00% return; 7.30% weighting
Walmart: -18.06% return; 5.14% weighting

Microsoft’s stock fell this quarter after the company trimmed its guidance because of unfavorable currency exchange rates. The company has also indicated that it is slowing down hiring to adjust to the shifting economic environment. We expect that Microsoft will weather this market better than many of its peers. Office365 is a virtual monopoly and the Azure cloud hosting business is also growing rapidly as more businesses digitize and move their IT operations to the cloud. Because of its dominant position we believe Microsoft is well positioned to consolidate more market share as competitors struggle.

Until recently Paychex has been a top performer as the company benefited from a strong job market resulting in strong customer retention and demand for more HCM solutions from customers that wanted to attract and retain talent. The company’s stock pulled back along with the broader markets as recession fears have raised concerns that employment rates will begin to weaken in the coming quarters.

Walmart surprised investors with disappointing first quarter results. Customers are being pinched by rising gas and food prices and the company sees consumers pulling back in other areas to prioritize spending on food. Walmart is also feeling pressure from inflation and supply chain inefficiencies which will hurt margins in the coming quarters. The company has selectively raised prices in some categories, like clothing, but Walmart’s lower-income clientele will likely become more value-oriented as the year progresses. Management hosted an Investor Day in June that helped reassure investors that they now have a better handle on the current market and are making reasonable adjustments to maintain profitability.

Transactions

During the quarter we started an initial position in Alexandria Real Estate Equities. We think Alexandria is an exceptionally well-run REIT with a 28-year track record of delivering strong returns to investors. The company is riding a secular wave of increased investment in healthcare research and development, which requires detailed work by scientists in specialized offices and laboratories. This means that Alexandria’s properties are less exposed to the work-from-anywhere trend that is currently hurting other office types. Alexandria’s shares are trading at depressed levels and the dividend yield is approaching 3%, which looks like an attractive long-term opportunity for a business that should have many more years of growth ahead of it.

Sector Weighting
Sector Name	Weight
Real Estate	25.12%
Information Technology	18.31%
Consumer Staples	14.75%
Industrials	11.21%
Utilities	10.11%
Communication Services	5.47%
Financials	4.88%
Health Care	3.73%
Consumer Discretionary	3.24%
Cash & Equivalents	3.18%

The above information is intended solely for current clients of Motley Fool Wealth Management (“MFWM”) for the purpose of providing insight into how we manage our strategies and our investment philosophy. This information should not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided.

All information presented herein is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This information reflects the opinions, estimates and projections of MFWM as of the date of publication, which are subject to change without notice. We do not represent that any opinion, estimate or projection will be realized. While we believe this information to be reliable, no representation or warranty is made concerning its accuracy.

Performance results are based on a representative account for each strategy, not individual client accounts. Clients can see their actual account performance on the Interactive Brokers’ website at any time. Client account results may not exactly match the performance of the representative accounts. Such variance is due to a number of factors, including differences in trade prices, transaction fees, market activity, any restrictions have you may have imposed on your account(s), and the amount and the timing of deposits or withdrawals.

The performance information presented herein has been generated during a period of extraordinary market volatility. Accordingly, the performance is not necessarily indicative of results that we may achieve in the future, and we do not represent and it cannot be assumed that the performance of our strategies will be subject to the same economic risk factors that contributed to the above returns. Performance results discussed above represent past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that current performance may be lower or higher than the performance discussed above. The investment strategy and focus of our model portfolio strategies can change over time. Similarly, there is no assurance that the securities purchased will remain in a model portfolio strategy or that securities sold may not be repurchased. The mention of specific holdings does not constitute a recommendation by MFWM or its affiliates.

To the extent we invest more heavily in particular sectors or industries of the economy, the performance of our strategies will be especially sensitive to developments that significantly affect those sectors or industries. While investing in a particular sector is not a principal investment strategy of any model portfolio, client portfolios may be significantly invested in a sector or industry as a result of our portfolio management decisions. Similarly, a model portfolio’s investment may become concentrated in a small number of issuers. To the extent that we take large positions in a small number of investments, account returns may fluctuate as a result of changes in the performance of such investments to a greater extent than that of a more diversified account. Returns realized by a client account may be adversely affected if a small number of these investments perform poorly.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance, and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. It is not possible to invest in an index.

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Fixed Income

Portfolio Managers

Tony Arsta, CFA
Nate Weisshaar, CFA

Just when everyone was getting comfortable with (at least the mental concept of) rates going up, we’re now seeing recession fears rising and expectations of rates coming back down. Clearly there isn’t a lot of confidence in the Fed’s ability to softly land the economy.

For the time being, however, we’re still in a rising rate environment and the Fixed Income strategy performed as intended, beating its benchmark for the second consecutive quarter, and now delivering outperformance over the past year, although the quarterly and one-year returns were still negative.

One of the benefits of the way the Fixed Income strategy has been constructed is that the meaningful skew towards corporate debt with short maturities allows your money to be reinvested in new, higher-yielding debt as it matures.

And that is just what your portfolio team has been doing. During the quarter, we reduced exposure to the 2022 rung of our investment grade corporate debt ladder and added to our 2026 rung. You’ll notice from the chart below that the Treasury yield curve flattens at the 3-year maturity – investors aren’t being rewarded with extra yield for locking their money up for longer (until you get to 20 years).

Corporate debt rates don’t behave exactly like government rates, but they rhyme, and we chose the 2026 rung of our ladder for additional funds because this looked like the most attractive combination of yield and maturity – we felt this was where we were getting paid the most while not locking up money for too long.

Annualized Net Returns as of 06/30/2022
	Q2 '22	YTD	1 Year	3 Years	5 Years	Inception
Fixed Income SMA	-2.91%	-6.86%	-7.74%	-1.44%	-0.09%	0.25%
Bloomberg Barclays US Corporate Bond Index	-3.92%	-8.97%	-9.41%	-0.13%	1.57%	2.30%

As of quarter-end, roughly 52% of the Fixed Income strategy was held in the 2023 through 2026 rungs of our ladder. Your portfolio team believes this puts you in the most attractive part of the yield curve – offering decent income while maintaining lower rate and credit risk (debt that matures sooner is less likely to be defaulted on).

Your Fixed Income SMA is intended to provide stability and opportunity – a source of funds reliably available to capitalize on equity market disruptions and fund planned (or unplanned) life events. For this reason, your portfolio team focuses on minimizing risk.

We aren’t happy delivering negative returns, but we are happy that the portfolio we constructed for you performed better than the benchmark and is doing its job in providing a counter-balance to the far more volatile equity markets – even as rates have been historically volatile.

Going forward, we will continue to execute our strategy and we will continue to reinvest the 2022 rung of the ladder into the most attractive opportunities we see while maintaining a highly risk-averse profile.

International

Portfolio Managers

Tony Arsta, CFA
Michael Olsen, CFA

With war in Ukraine ongoing, the possibility of continued inflation and higher energy prices forcing Europe into recession, COVID-induced shutdowns weighing on the Chinese economy, and global monetary authorities raising interest rates in hopes of curtailing inflation, it would suffice to say it was an eventful period for international equities. The International strategy declined 14.2% net of fees, about in line with our benchmark, the S&P Global ex-U.S. BMI, which fell 14.1%.

In a difficult period for investors of all stripes, we find some small solace in our performance—which did not meaningfully differ from most international benchmarks. Now, as ever, we remain focused on the long view—using recent volatility to pare less attractive holdings, build our watch list, and best position our portfolio for the years and decades to come. While volatility and declines are an inevitability in investing, we remained focused on our north star: assembling a portfolio of what we believe to be the highest quality international companies, capable of accruing wealth to shareholders across long horizons.

Periods such as these afford the opportunity for truly long-term investors to purchase our favorite businesses at what we believe to be attractive prices. Equally significant, and germane to our investment approach, we remain happy with our long-term results—which reflect outperformance relative to our benchmark across 3- and 5-year periods.

Annualized Net Returns as of 06/30/2022
	1 Year	3 Years	5 Years
International SMA*	-21.6%	2.8%	4.0%
S&P Global ex-U.S.	-19.1%	2.0%	3.0%
*All return figures are presented net of fees.

Portfolio Review

Surveying the portfolio’s contributors and detractors, two themes emerge: the relative winners were leveraged to the Chinese economy’s reopening and/or durability of free cash generation; and detractors were exposed to central banks’ attempts to stem inflation, most notably higher interest rates. As before, a portion of the International strategy remains invested in ETFs to achieve geographic exposure: 20.9% on average, declining 13.2% on a weighted average basis.

Among key contributors, the list follows:

Yum China: 17.1% return; 2.5% average weighting
Fast Retailing: 1.6% return; 1.6% average weighting
Novo-Nordisk: 0.3% return; 3.9% average weighting

Yum China, operator of KFC and Pizza Hut in China, and Fast Retailing, Japanese fast fashion retailer under the Uniqlo brand (which derives roughly 20% of sales from China), rallied on optimism over the Chinese economy’s reopening, along with the possibility of pent-up demand spiking sales. Acknowledging our investment horizon, and taking the long view of their business prospects, the possibility of a short-term bonanza matters less to us. More importantly, we continue to regard Yum and Fast as two of the more capably-operated consumer brands in Asia. We remain happy shareholders.

Rounding out the portfolio’s contributors is Novo Nordisk, the Danish manufacturer of insulin. We attribute Novo’s strength to two factors: first, demand for insulin—and Novo’s cash generation—are not impacted by the state of the economy; and second, the possibility of a large, burgeoning opportunity in Novo’s soon-to-market weight loss drugs. Taking a longer view, we continue to believe Novo remains one of the more moat-worthy enterprises in healthcare, and should reliably generate free cash flow across cycles.

And the list of detractors follows:

Brookfield Asset Management: -21.3% return; 7.4% average weighting
MercadoLibre: -46.5% return; 2.7% average weighting
Atlassian: -36.2% return; 2.3% average weighting

The two largest declines in the portfolio were Latin American e-commerce and payments giant MercadoLibre and collaboration/project management software specialist Atlassian, which fell 46% and 36%, respectively. The root cause had less to do with the strength of their underlying enterprises—both delivered excellent quarterly results—and more to do with the market. Both shares delivered astronomic gains in years past, rendering their valuations a touch on the spendy side. (We recognized this, and pared our positions earlier this year.) As the prospect of higher interest rates loomed, the most highly-valued companies were hit hardest—a reality we anticipated and expected. Declines aside, we continue to believe MercadoLibre and Atlassian represent two of the better-run, internationally domiciled tech companies, and remain happy to hold shares at current portfolio weightings.

Last among the decliners is infrastructure and real estate investment manager, Brookfield Asset Management (BAM). Broadly speaking, we believe BAM shares were tagged for the same reason as fellow decliners—investors worrying that higher interest rates will ding the value of BAM’s investment holdings. We don’t discount these concerns, but here again we take the long view. As what we believe to be one of the best-pedigreed investment managers in its space, with a still-large addressable market and strong value discipline, we expect BAM to deliver strong results for shareholders across our investable horizon—three to five year periods, or longer.

Portfolio Activity

We made one purchase and two sales during the quarter, buying Universal Music Group (UMG) and selling our positions in Tencent and Softbank. UMG is a new/old position for us, recently spun-off by 3% portfolio holding Vivendi. The migration to paid streaming services has facilitated a fundamental shift in the music industry—allowing ongoing monetization of content assets. As the largest owner of content, Universal Music Group has profited, and should continue to. We estimate incremental streaming revenue carries margins in excess of 50%—improving already robust operating margins, at 20%. Looking forward, we believe the opportunity remains substantial: Paid streaming penetration is still low, approximately 20% of global households at 2020 year-end, according to our estimates. We expect this to become a digital utility, and are of the opinion for streaming revenues to grow more than 15%—allowing sustained double-digit growth to free cash flow.

We sold our positions in Tencent and Softbank for similar reasons. In all our investments, our decisions entail an effort to balance our view of the upside against our assessment of risks. We believe this equation has changed for Chinese tech giants (a substantial part of Softbank’s underlying value derives from its stake in Alibaba). Underlying this is a hard-to-quantify risk that we’ve been aware of, but has consistently grown: the extent of the Chinese government’s intervention. We continue to believe Alibaba and Tencent will remain an integral part of the average Chinese citizen’s daily life and goings on, and their core businesses remains well-moated. Our hesitation, and reasons for selling, are rooted in the Chinese government’s efforts to reduce large tech companies’ influence. Put simply, it’s impossible to gauge the long-term impact of China’s incursions on their long-term, cash generating capacity. For this reason, we sold our positions in these companies.

Large Cap Core

Portfolio Managers

Tony Arsta, CFA
Jeremy Myers, CFA

During the second quarter, the Large Cap Core strategy posted a -20.39% return, net of fees, versus a -16.10% return for its benchmark, the S&P 500®. That brings returns for the year to -25.41%, net of fees, versus -19.95% for the benchmark. It has been a rough first half of the year in the markets with the S&P delivering its worst performance in 50 years. The Nasdaq also lost nearly 30%, posting its worst performance since 1985. Even bonds didn’t do much to cushion the blow with many bond indexes experiencing a second consecutive quarter of losses.

We are disappointed in the performance of the Large Cap Core strategy but, considering the unusual behavior of the markets, we are not totally surprised. Though we try to manage Core as a blend between Growth and Value style stocks, we have tilted toward Growth in recent years. That has largely been to our benefit, but the past two quarters have seen the pendulum swing firmly in favor of Value stocks. In fact, according to Morningstar, large cap growth stocks underperformed value stocks by the biggest margin since 2000*, and you see that shift reflected in our results.

The underperformance of the portfolio can also be explained by our overweighted exposure to the information technology and communication services sectors, both of which were among the worst performing sectors during the quarter. We also were underweight in the three best performing sectors – consumer staples, energy, and utilities. These misses happen from time to time when you have a portfolio that is more concentrated than the overall market, but we prefer to have more exposure to the parts of the economy that we believe have the highest potential for long-term value creation.

Annualized Net Returns as of 06/30/2022
	1 Year	3 Years	5 Years
US Large Cap Core	-21.91%	7.18%	12.21%
Benchmark (S&P 500)	-10.60%	10.61%	11.32%

Over the past two quarters there has been an elevated number of transactions in the portfolio, and we expect that to continue in the coming quarters. We plan to take advantage of market volatility to add what we believe to be high-quality companies to the portfolio at more attractive valuations. There are numerous businesses that we have admired for years but have avoided because they always appeared too expensive. This will likely result in more positions and a greater sector diversification than we have held in the past. We remain cautious, but we also intend to play offense to make sure the portfolio is appropriately positioned for an eventual market rebound.

Performance Review

Factoring in position size and performance, only these two companies had a positive impact on the strategy in the second quarter:

American Tower: 2.92% return; 6.80% weighting
Alexandria Real Estate Equities: 6.95% return; 0.36% weighting

Following a weak first quarter, American Tower was one of the few holdings that stayed in the green during the second quarter. The company is integrating its recent acquisition of the data center assets from CoreSite Realty which has resulted in some near-term uncertainty. Still, we feel American Tower’s highly predictable cell tower franchise should result in less volatility in the near term as investors shift their focus to the highest quality assets for safety.

Alexandria benefited from only being in the portfolio for a couple of weeks, during which time both Alexandria and the market generated positive returns. We’re excited about the long-term prospects for the healthcare sciences real estate sector and expect Alexandria will continue to deliver steady returns over the long term.

Factoring in position size and performance, these three companies had the largest negative impact on the strategy in the second quarter:

Amazon.com: -34.84% return; 6.90% weighting
Splunk: -40.48% return; 4.49% weighting
Alphabet: -21.68% return; 6.54% weighting

Amazon.com was one of the big winners during the pandemics as consumers spent more time shopping from home. As e-commerce’s share of retail sales have reverted toward the previous trend line, investors have dumped stock. Amazon also announced that it overinvested in its warehouse and logistics network, and it will take several quarters to absorb the excess capacity. Despite the misstep on the retail side of the business, both advertising and Amazon Web Services sales are still growing at a fast clip.

Splunk reported strong first quarter results, but negative sentiment toward the tech industry was too much for the stock to overcome. Though the company is executing well on its transition to a cloud-focused product portfolio, investors are worried that companies may pull back on tech spending as the economy softens. We think that IT infrastructure and data analytics providers like Splunk deliver mission-critical services and that demand will hold up better compared to other discretionary spending.

Alphabet’s stock fell during the quarter as investor fears turned from high inflation to a possible recession. The recent pandemic showed that online advertising is just as cyclical as traditional advertising channels in a weak economy. Even so, we think Alphabet should be able to easily weather a downturn, use its strong cash flow to buy back stock at a discount, and come out stronger on the other end.

Transactions

During the quarter there was a higher-than-average number of transactions as we tried to take advantage of market volatility to better position the portfolio. We trimmed some of our overweight exposure to mega tech companies, including Alphabet, Apple, and Microsoft, and reallocated to two new positions in Alexandria Real Estate Equities and United Parcel Services. We also added to our position in Meta Holdings (formerly known as Facebook) when shares traded at an attractive valuation following a sharp decline in the stock price.

During the quarter we started an initial position in Alexandria Real Estate Equities. We think Alexandria is an exceptionally well-run REIT with a 28-year track record of delivering strong returns to investors. The company is riding a secular wave of increased investment in healthcare research and development which requires detailed work by scientists in specialized offices and laboratories. This means that Alexandria’s properties are less exposed to the work-from-anywhere trend that is currently hurting other office types. Alexandria’s shares are trading at depressed levels and the dividend yield is approaching 3%, which we think looks like an attractive long-term opportunity for a business that should have many more years of growth ahead of it.

We also started a position in United Parcel Service, the ubiquitous package delivery company. UPS provides delivery, transportation, logistics, and related services in the U.S. and globally. With CEO Carol Tome continuing to enforce cost and capital discipline, we believe the company should continue to generate adjusted ROIC of over 20% and grow ahead of the market for the next two to three years. Despite volume pressures in a bumpy macroeconomic environment, UPS just delivered a strong quarter on the top and bottom line; and the stock price dropped along with the rest of the market. We like this opportunity to add UPS to our Core strategy.

Sector Weighting
Sector Name	Weight
Information Technology	27.33%
Communication Services	18.63%
Real Estate	16.52%
Consumer Discretionary	13.95%
Financials	11.77%
Industrials	6.99%
Consumer Staples	4.65%
Cash & Equivalents	0.15%

Hedged Equity

Portfolio Managers

JP Bennett, CFA
Michael Olsen, CFA

The story of the second quarter was broad declines across asset classes. There were big losses in equity, fixed income, commodity, and crypto markets. Specifically, the S&P 500 declined -16%. Growth stocks performed worse, and even though value stocks had dramatic outperformance versus growth, they still declined quite a bit. All 11 sectors in the S&P 500 fell. There was seemingly no place to hide – even cash lost ground to inflation.

For a bit of painful market trivia, this was just the second time in 40 years that both bonds and stocks posted declines for consecutive quarters. The fact that bonds, often viewed as a safe haven in times of equity market turmoil, have performed so poorly has caused angst in the traditional investing paradigm.

What’s happening? To us, it seems markets are in a negative feedback loop. As the Russia-Ukraine conflict painfully slogs on, and as China’s zero COVID policy results in intermittent shutdowns to key global manufacturing regions, supply disruptions continue to exacerbate the inflationary pressures already present in the rest of the US. This has resulted in an increasingly aggressive Fed tightening plan which included a 75 basis point interest rate increase in June, prompting a spike in borrowing rates, falling asset prices, and cratering consumer confidence. The onset of economic dismay has heightened talk (and likely the probability) of recession. Markets are pointing to another 75 bps increase this month.

The doom narrative is pervasive. It’s impossible to say what might break the loop, but we’re beginning to see falling commodity prices, rising credit card balances, and building inventories. We believe these things should help relieve the upward pressure on prices, though we can’t be sure they’ll have any impact on news flow or asset price momentum.

The Hedged Equity portfolio is not performing well. Our hedges, direct equity shorts, and bond shorts have helped, but not enough. Returns have been driven by steep drawdowns in many core long positions. In most cases, we view these as temporary price movements rather than lasting changes in intrinsic business value. That’s reassuring for the long-term and the prospects of eventual recovery, but doesn’t offer any consolation in the current drawdown. While we aim to manage drawdowns, we don’t expect to outperform in all of them, and this is unfortunately one of those times. On the bright side, we believe the business quality of the companies we own is excellent, the prices of existing and potential new holdings have gotten considerably more attractive, and we have the tools at our disposal to deal with the environment we’re in. We will continue to work hard to do just that.

Annualized Net Returns as of 06/30/2022
	Q1-2022	1 Year	3 Years	5 Years
Hedged Equity	-16.08%	-24.73%	2.23%	7.15%
Benchmark (70% of S&P 500)	-11.42%	-7.24%	7.71%	8.13%
Note: This performance presentation is of a representative account. Your actual account performance will vary.

Portfolio Review

Factoring in size and performance, these three companies had the largest positive impact on returns during the quarter:

Invesco QQQ Trust ETF (short): -22.55% return, -3.84% average weight
iShares Russell Midcap ETF (short): -16.90% return, -3.13% average weight
Invesco S&P 500 Equal Weight ETF (short): -14.44% return, -2.81% average weight

The top three contributors during the quarter were hedges – no surprise in a swiftly falling market. Our shorts of the Nasdaq and Russell Midcap reflect hedges to the portfolio’s long exposure to technology (about 24% of the portfolio) and mid cap companies (about 28% of the portfolio). Our short of the equal weight S&P 500 modestly outperformed (fell slightly more) than the normal, market cap weighted S&P, as the breadth of selling pressure drove markets more than individual stock factors.

Factoring in size and performance, these three companies had the largest negative impact on returns during the quarter:

com: -34.84% return, 5.82% average weight
Howard Hughes: -34.32% return, 4.85% average weight
Atlassian: -36.22% return, 3.86% average weight

In early July, 27 years after founding Amazon.com, Jeff Bezos handed the CEO title to Andy Jassy. Jassy steps into a role where Amazon’s e-commerce business is slowing as in-person shopping returns, the company admits it vastly overbuilt warehouse capacity, labor relations continue to be a challenge, transportation and warehouse wage inflation are troubling, and the risk of regulatory intervention lurks in the background. On the bright side, Amazon Web Services backlog accelerated last quarter, it has adaptability in its DNA, and the company has, in the past, shown skill at reigning in expenses and boosting profitability when it needs to. Despite all the current headwinds, we contend shares represent a compelling opportunity and Amazon remains a top holding.

Howard Hughes owns and opportunistically develops valuable real estate. Investors appear concerned that sales of homes and condos in a few key areas will slow given higher interest rates. This is a fair concern, but doesn’t overshadow the positive developments (selling non core assets in Chicago and New Orleans, and finishing construction of the Tin Building in the NYC Seaport) in our view.

Collaboration/project management software specialist Atlassian’s decline had little to do with the strength of its underlying enterprise. It delivered excellent quarterly results but has delivered astronomic gains in years past, rendering its valuations a touch on the spendy side. (We recognized this, and pared our position in December last year.) As the prospect of higher interest rates looms, the most highly-valued companies have been hit hardest—and Atlassian fits the bill, though we continue to believe it represents one of the better run, internationally-domiciled, mission-critical software companies, and remain happy shareholders.

Portfolio Changes

There were no changes to the portfolio during the quarter. Coming into the third quarter, the portfolio is 65% net long. As more and more negativity is priced into the market we are seeing better opportunities for core long positions than we have in some time.

Sector Weighting
	Long	Short	Net	Gross
Totals	90.10%	-24.95%	65.15%	115.05%
Materials	0.00%	-1.78%	-1.78%	1.78%
Industrials	13.84%	-2.53%	11.31%	16.37%
Consumer Discretionary	8.64%	-1.57%	7.07%	10.21%
Consumer Staples	0.00%	-0.25%	-0.25%	0.25%
Health Care	9.33%	0.00%	9.33%	9.33%
Financials	6.03%	0.00%	6.03%	6.03%
Information Technology	23.64%	-5.48%	18.16%	29.11%
Communication Services	18.57%	-0.58%	17.99%	19.14%
Real Estate	10.06%	0.00%	10.06%	10.06%
N/A	0.00%	-12.77%	-12.77%	12.77%
Cash & Equivalents	34.85%	0.00%	34.85%	34.85%

Large Cap Aggressive Growth

Portfolio Managers

Tony Arsta, CFA
Jeremy Myers, CFA

During the second quarter, the Large Cap Aggressive Growth strategy posted a -28.16% return, net of fees, versus an -16.10% return for its benchmark, the S&P 500®. That brings returns for the year to -34.50%, net of fees, versus -19.95% for the benchmark.

Those numbers are painful to write. We are not happy with the performance of the strategy, but we also are not entirely surprised given the current market conditions. The S&P 500 just completed its worst first half since 1970 and the Nasdaq 100 Index just posted the worst first half since it was launched in 1985. To top it off, Value stocks also outperformed Growth by the largest margin since 2000. During these periods of market dislocation higher-risk strategies like Aggressive Growth tend to be even more volatile. This is normal – and though it feels like an eternity while it's happening, these conditions will not last indefinitely.

As aggressive growth investors, we get compensated in the long-term based on our ability to shoulder risk and stomach volatility in the short-term. Though none of us like to see a drawdown of this magnitude, these moves are what can create the opportunity for future returns. The problem is that investing during periods of uncertainty feels terrible and most people aren’t willing to do it, even if they know logically it’s the right thing to do. We believe it’s critical to stay invested during these times so that you can ride the upswing – which can be just as explosive – when it eventually arrives.

We remain highly confident in the quality of the businesses we own within this strategy, and we believe they are well positioned to weather an economic downturn. Much of the repricing we saw in the portfolio was the result of market-wide multiple compression rather than a decline in business fundamentals. We also have avoided many of the biggest losers in the technology sector because we have emphasized free cash flow and profitability and were not willing to pay huge premiums for companies that had irrational valuations.

Annualized Net Returns as of 06/30/2022
	1 Year	3 Years	5 Years
US Large Cap Aggressive Growth	-36.99	1.00	9.44%
Benchmark (S&P 500)	-10.60%	10.61%	11.32%

Following the recent drawdown we think there are a lot of high-quality businesses that are suddenly trading for 50% or more below where they were only a couple of quarters ago. Many of these are companies that we’ve followed for years waiting for an opportunity like this to pounce. So far this year there has been an elevated number of transactions in the portfolio, and we expect that is likely to continue if the current market environment persists. We are constantly looking ahead and want to have the portfolio well positioned for when sentiment shifts and the current bear market ends.

Portfolio Review

Factoring in position size and performance, only one of our equity holdings had a positive impact on the strategy in the second quarter:

BioMarin Pharmaceuticals: 2.92% return; 7.24% weighting

BioMarin Pharmaceuticals’ stock rallied strongly in the final weeks of the quarter thanks to positive announcements regarding its drug pipeline. The company received a positive Committee for Medicinal Products for Human Use (CHMP) opinion in Europe for its hemophilia A drug, Roctavian, increasing the likelihood the drug receives full European Commission approval before the end of the year. BioMarin has delayed the Biologics License Applications (BLA) filing process in the U.S. as the company collect more data, but it seems that momentum is building for what has been a slow developing thesis.

Factoring in position size and performance, these three companies had the largest negative impact on the strategy in the second quarter:

Amazon.com: -34.84% return; 12.39% weighting
MercadoLibre: -46.46% return; 7.12% weighting
Splunk: -40.48% return; 7.54% weighting

Amazon.com was one of the big winners during the pandemic as consumers spent more time shopping from home. As e-commerce’s share of retail sales have reverted toward the previous trend line, investors have dumped stock. Amazon also announced that it overinvested in its warehouse and logistics network, and it will take several quarters to absorb the excess capacity. Despite the misstep on the retail side of the business, both advertising and Amazon Web Services sales are still growing at a fast clip.

MercadoLibre reported a strong first quarter, but that wasn’t enough to keep investors from selling. In the short-term the company is facing some headwinds as Latin American consumers shift back to their pre-pandemic behavior, but MercadoLibre has held onto its gains better than many U.S.-focused e-commerce companies. Overall, we feel that MercadoLibre is executing well, its payment solutions are gaining market share, and the company should better monetize its fulfillment and marketing services over time.

Splunk reported strong first quarter results, but negative sentiment toward the tech industry was too much for the stock to overcome. Though the company is executing well on its transition to a cloud-focused product portfolio, investors are worried that companies may pull back on tech spending as the economy softens. We think that IT infrastructure and data analytics providers like Splunk deliver mission-critical services and demand will hold up better compared to other discretionary spending.

Transactions

During the quarter there were a higher-than-normal number of transactions as we tried to take advantage of market volatility to better position the portfolio. We trimmed two of our larger positions in Alphabet and Salesforce and added to our existing positions in Meta Holdings (formerly known as Facebook). We also added to our recently started positions in Okta and Twilio as the market declined.

Early in the quarter we started a new position in Okta following a steep decline in the stock price. Okta provides identity and access management (IAM) solutions to corporations for both workforce and customer-facing applications. There is a lot to like about this business, and we have been waiting patiently for an attractive entry point. Founded by two former Salesforce.com employees, Okta has executed exceptionally well with its strategy of creating a company culture that is sales-driven and focused on aggressive growth. The product has a reputation of being easy to implement with the largest number of pre-built integrations. There is a long growth runway remaining in this industry, and we think Okta is well-positioned to be a winner.

Sector Weighting
Sector Name	Weight
Information Technology	41.90%
Consumer Discretionary	26.76%
Communication Services	15.01%
Health Care	6.32%
Real Estate	5.23%
Cash & Equivalents	2.45%
Industrials	2.33%

U.S. Small & Mid-Cap

Portfolio Managers

Tony Arsta, CFA
Nate Weisshaar, CFA

It was the toughest quarter for the U.S. Small and Midcap strategy on an absolute basis, and a very poor one on a relative basis. The strategy benefited greatly from an overweighting on growth stocks from 2019 to mid-2021, but has suffered over the last year from what had previously been a great place to be invested. The performance of the stocks in the latest quarter did not match the performance of the companies held in the strategy, as many of them posted record quarterly earnings, and surprised to the upside with the announced results during the quarter. Nevertheless, the market was in a decidedly intolerant mood, and virtually nothing was spared in the short-term. The hardest hit stocks were the ones that are not yet profitable – a trend that started in the fourth quarter of last year and picked up steam in the first half of this year.

At the end of the quarter, the S&P Midcap 400 was priced at 12.4 times this year’s expected earnings – a huge discount to where the index traded at most of the last decade. Small cap stocks, as measured by the S&P 600 were priced at 13.0 times this year’s expected earnings. Something, in time, will give – either companies will fail to come anywhere close to the projected earnings this year and next year, or multiples will return to previous levels and stocks will move up, or small- and mid-cap stocks will set a new level that investors are willing to pay for their earnings. Although in the short term market multiples can contract dramatically after a bull market and overshoot fair value to the downside for some period of time, the laws of mean reversion almost always apply. We think it would be surprising for today’s lack of enthusiasm for small- and mid-cap stocks to continue for long.

Net Returns as of 6/30/22
	Q2 2022	1 Year	3 Year Annualized	5 Year Annualized
US Small and Mid Cap SMA	-23.73%	-33.94%	0.64%	4.31%
Benchmark (S&P Midcap 400)	-15.42%	-14.64%	6.86%	7.02%

Portfolio Review

Factoring in size and performance, only one company had a positive return during the quarter:

LCI Industries: 8.75% return, 2.58% average weight

Our next two “best” performers have only earned that distinction by losing less than most other holdings:

Thor Industries: -4.54% return, 2.07% average weight
Gentex: -3.70% return, 3.10% average weight

The stocks of the two RV companies (LCI Industries and Thor Industries) had already been hit hard by expectations of a slowdown in the recreational vehicle market before the beginning of the quarter, so we think their relative strength during the quarter was more a product of already depressed stock prices than new-found enthusiasm for the companies by the market. Each had blow-out earnings reports during the quarter, surpassing earnings expectations by about 30%, and reporting record quarters. Even that level of performance wasn’t of great interest to a market looking for a recession to start – and the effect such a slowdown in the economy would have on highly discretionary purchases like a recreational vehicle. Both companies are announcing stock buybacks, seemingly a good strategy when your company is doing extremely well, you feel confident about the long-term, and the market is offering a chance to buy your stock at 7 times earnings (LCI Industries), or between 3 times and 4 times earnings (Thor). We believe the cycle for RVs has almost surely peaked in the first half of the year, so caution by the market is understandable – but this level of caution looks like an opportunity for the RV makers to intelligently allocate capital by repurchasing their stock.

Gentex had a strong quarter, but wasn’t much rewarded by a hostile market. Despite easily surpassing earnings and revenue expectations for the quarter, and reiterating guidance for the rest of the year, the market mostly yawned, which was better than most other companies did over the same time period. Gentex, despite the slowdown in the auto industry caused by supply chain constraints, continues to take market share and post better than anticipated sales. Once supply chain issues are resolved, even if recessionary forces pick up, auto manufacturing should get a chance to start catching up to pent up demand. Gentex has navigated a lot of troubling forces – inflationary input costs, travel and labor issues – with success over the last couple years. We continue to believe the best days are ahead of Gentex.

Factoring in size and performance, these three companies had the largest negative impact on returns during the quarter:

Ping Identity: -33.89% return, 3.29% average weight
Watsco: -21.02% return, 5.85% average weight
Axon: -32.35% return, 4.03% average weight

There was nothing wrong with the business performance of Watsco, the strategy’s largest holding. The quarterly earnings report released in April showed the company beating earnings expectations by about 60%, and more than doubling year over year. The leading heating, ventilation, and air conditioning company has benefited from the surge in home repair and upgrades during the pandemic and so far we feel there isn’t evidence of pulling forward demand. Nevertheless, it’s been a very strong stock for the last three years, and the market took it down a peg over the quarter seemingly on the basis that nothing should be spared at present.

Ping Identity is a leader in identity management, a segment of the cybersecurity market that is critical for supporting remote work. With the company’s primary competitor dealing with a security breach issue, expectations were that Ping would capitalize in a big way, and that didn’t play out. Shares deflated. We see the business as progressing appropriately and believe its transition to a SaaS model will bear fruit.

Axon Enterprise (-32.35%, 4.40% average weight), the business, continues to hum along. It pre-announced better-than-expected 2022 results and affirmed its long-term revenue growth target of 20%. Axon’s safety, transparency, and efficiency-focused products are resonating with law enforcement far and wide. However, the company’s CFO unexpectedly took another job and several members of its ethics board resigned in the wake of the company pushing forward its Taser-equipped drone initiative. The CFO departure is a clear loss for the company, but one which will be overcome. The ethics board drama bears watching. Axon is a mission-driven company and we think its Founder/CEO’s ambition is great – but we have admired the checks and balances of impartial counsel and dislike the apparent lack of teeth it has been given.

Sector Weighting
Issue Name	Portfolio Weight
SMID SMA	100.000%
Information Technology	28.509%
Industrials	17.888%
Health Care	15.614%
Financials	12.840%
Real Estate	11.119%
Consumer Discretionary	8.471%
Cash & Equivalents	4.747%
Communication Services	0.812%

U.S. Large Cap: Vanguard S&P 500 ETF (VOO)

We believe U.S. large-cap stocks form the backbone of a diversified portfolio, and we intend for this asset class to serve as the anchor of our passively-managed investing approach. The S&P 500 index is an ideal tracking vehicle, as it offers a wide range of well-established and relatively stable companies for investment.

Just when we thought the first quarter was overly fraught with volatility, the second quarter proclaimed, “You ain’t seen nothing yet.” Large-cap stocks posted the fourth-worst quarterly performance of this century, behind only Q4 2008, Q1 2020, and Q3 2002. This led to the worst first half of the year for the S&P 500 since 1970 and second worst since its inception in 1952. The main factors influencing the downward trajectory and creating record low sentiment include high inflation, hawkish global central banks, the Russia-Ukraine War, lockdowns in China, and food and energy shortages.

As we have been talking about for quite some time, the divergence of returns between the value and growth sectors continued widening this quarter. Vanguard’s Value ETF posted a -10.54% second quarter, less than half of the loss of its Growth ETF counterpart return of -22.63%. With easy monetary policy far in the rearview mirror, growth stocks may continue to experience headwinds to narrowing that gap.

Watching the balance of your portfolio go down quarter after quarter is not for the faint of heart. It is easy to get emotional and feel like you need to take action. However, attempting to make your investment mix more conservative after sizable declines does not usually lead to market-beating returns. As the saying goes, “It’s not timing the market, it’s time in the market.” Stay strong and stay long.

U.S. Mid Cap: Vanguard Mid-Cap ETF (VO)

U.S. mid-capitalization stocks (broadly defined as having a market cap between $2 billion and $15 billion) offer an additional layer of equity diversification by allowing investors to benefit from the return potential of companies that combine the stability of larger names with the growth potential of smaller firms.

Mid-cap stocks fared slightly worse than their large-cap counterparts and had one of their worst quarters in recent memory. The themes from above have affected all sizes of companies and mid-caps were no exception. Despite recent struggles in this asset class, we will continue to maintain a select allocation to mid-caps as our valuation models dictate.

U.S. Small Cap: Vanguard Small-Cap ETF (VB)

U.S. small-capitalization stocks (broadly defined as having a market cap of less than $2 billion) provide an opportunity for greater growth and higher potential returns than their larger equity counterparts, although those returns tend to come with a touch of higher volatility.

Unsurprisingly, small-caps similarly participated in this quarter’s bloodbath along their large- and mid-cap counterparts. The Russell 2000 reported its worst half-year performance since the index was created in 1979 at -23%, assisted by a loss in the high teens in the second quarter.

While small-cap stocks did not perform up to par with large-caps, looking over a longer time frame, smaller names have a very favorable risk-reward trade-off. As a result, we expect to continue to allocate to small caps within our models to capture that higher return potential.

International Developed: Vanguard FTSE Developed Markets ETF (VEA)

International stocks can be a key asset class for building a well-balanced portfolio in today’s global world. Developed stock markets are domiciled in countries with advanced economies and well-established trading and regulatory environments. As a result, they serve as the core of our international allocation.

The Russia-Ukraine war has had a substantial impact especially in international markets. For one, it has led to soaring energy prices which, in turn, caused the Eurozone to post a record-high year-over-year inflation rate of 8.6% at the end of June and almost half of the countries are now in double-digit inflation territory. Not helping returns is the escalating need for the European Central Bank to combat this inflation by raising interest rates, a story we know all too well in the United States. As long as high inflation, food and energy shortages, and the war persist, we expect significant headwinds to stifle stock returns in this asset class.

International Emerging: Vanguard FTSE Emerging Markets ETF (VWO)

Emerging market stocks are domiciled in foreign countries that tend to exhibit more rapid economic growth than developed nations, which can translate into faster stock market appreciation. This higher return potential comes with added risk, but in a carefully considered allocation this asset class can add meaningful value to a portfolio.

With all of the “worsts” and “records” we’ve discussed already, it’s no surprise that emerging market countries failed to buck that trend. Well, except for one country. China was a shining star, recording a surprisingly positive return in the second quarter of 2022. China’s quarter started with a volatile month of April amid extreme COVID lockdowns and regulatory pressures on key companies. However, while the western world worked to tackle inflation with hawkish policies China was loosening fiscal measures and easing their COVID lockdowns, leading to substantial outperformance.

Real Estate: Vanguard REIT ETF (VNQ)

As an asset class, real estate can offer a lower correlation with many other portfolio assets, as well as meaningful return potential. This “alternative” asset class can also provide a relatively stable income flow and ongoing protection against inflation.

Generally, REITs are expected to perform relatively well during periods of higher inflation, but not when that’s coupled with aggressively rising interest rates. Add to that growing recession fears and we have a concoction ripe for underwhelming returns, which is exactly what the REIT space experienced in the second quarter. We still see this asset class as a reliable diversifier in our passive portfolios and will continue to invest accordingly in our models.

Fixed Income: Vanguard Total Bond Market ETF (BND)

Fixed income securities can be a critical diversifying complement to higher-risk equities. While bonds may not offer the same long-term return potential as stocks, they can dampen overall volatility and can provide a reliable source of income, making their inclusion in many portfolios a winning proposition.

Bonds tend to provide relief when stock returns suffer, but the year-to-date trend of bonds moving in tandem with stocks continued for much of the second quarter. The bond market felt the effects of the largest Federal Reserve rate increase since 1994 as the Fed seeks to combat inflation. The Federal funds rate was increased by 0.75% which eclipsed the initial expectation of the Fed targeting a 0.50% increase as Jerome Powell tries to tackle inflation head-on while admitting that a “softish” landing may be easier said than done.

While we expect the foreseeable future to generally be characterized by rising interest rates, we still view fixed income securities as an essential tool for managing total portfolio risk; as such, we expect to continue to incorporate bonds in some measure for a majority of our passive portfolios.

Fixed Income: iShares National Muni Bond ETF (MUB)

Municipal bonds offer income streams that are exempt from federal – and sometimes state and local – income taxes, making them especially useful for investors in higher tax brackets. To gain exposure to this asset class, we chose a low-cost, broad-market fund that invests in a wide variety of bonds issued by various government entities across the country.

Much like our synopsis in the first quarter of 2021, high levels of tax collection and a surplus of federal relief funding that is being appropriated will hopefully buoy municipal bonds in the coming years but for now, the pain in the municipal bond market persisted to the tune of a historic year-to-date drawdown inclusive of $87 billion being withdrawn from municipal funds. With more Wall Street analysts and prognosticators calling for a recession – or at least an economic slowdown – that tends to provide some optimism for municipal issues that the steepest rate increases are beginning to reach a conclusion.

We will continue holding an allocation to municipal bonds for investors as the sector should provide reasonable tax-free return opportunities over the long run and a slight asset class differentiation from taxable fixed income securities.

Fixed Income: Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)

Treasury Inflation-Protected Securities (TIPS) are designed to minimize inflation risk, providing investors with a guaranteed real rate of return. The principal component of these bonds is indexed to inflation, so as inflation rises, the principal and corresponding coupon payment also rise in step.

Relative to corporate bonds or municipal bonds, TIPS posted the best relative quarter from a return perspective but still finished lower year-to-date. TIPS continue to be a desired portion of our portfolio composition due to the current persistent inflationary environment. TIPS help to alleviate the concern of maintaining purchasing power over time, and thus will continue to have a place in our passive portfolios for the long-term.

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PLEASE NOTE that the performance results, presented for the passive strategies/index ETFs, do not represent the performance of MFWM’s discretionary management decisions, nor does it reflect the management fee charged by Fool Wealth to manage client accounts. Third party ETFs in which we invest client assets are subject to fees and expenses (“Underlying Fund Fees”) that are separate from (and in addition to) Fool Wealth’s management fee. These Underlying Fund Fees are passed along to clients. Depending on the strategy, Underlying Fund Fees may be significant. Fool Wealth’s management fees reduce the rate of return on investments. Details of Fool Wealth’s fees for index-based portfolios can be found in Item 5(A) (1)(a) of our Brochure (“Form ADV Part 2A”).

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Nick Crow