KCM Macro Trends Fund is a long/short, equity-focused, liquid alternative investment strategy, and is available in SMA or mutual fund structure. The fund’s flexible mandate provides the ability to invest globally in a wide variety of asset classes, company sizes, industries and equity types (growth vs. value). It can also employ tactical hedging to control market risk and manage volatility. Quantitative, top-down hedging and bottoms-up stock picking tools are used to remove emotion and behavioral biases from investment decision.
Martin L. Kerns, II
Parker B. Binion
The fund’s primary investment objective is long-term growth of capital. As a secondary, but equally important objective, the fund seeks to manage volatility and market risk. Generating profits during good times is important, but it is equally important to protect your assets during bad times. The fund’s primary goal during tenuous markets is capital preservation.
The KCM Macro Trends Fund employs a risk-averse investment strategy predicated on the belief that strong long-term investment results are best achieved through the compounding of reasonable gains and the avoidance of major losses.
1. Long-term growth of capital
The fund’s mandate provides the flexibility to invest globally in any asset class, long or short. We believe, however, that owning common stocks offers the greatest opportunity to grow capital over time. Therefore, we start by determining if we want to be invested in stocks. We make this determination via equity exposure rules. We call this our “Risk On/Risk Off” hedging process.
If Risk is On, we become stock pickers. Last year we implemented several quantitative, equity strategies via algorithms to make the buy/sell decision. These algorithms are based on fundamental input and are designed to exploit opportunities in the marketplace. This is the same approach we have always used, but with emotion and behavioral bias removed from the buy sell/equation by the algorithms. Our testing of the algorithms prior to implementation demonstrated a more efficient and profitable outcome for the fund, over long and short-term periods, past and future. As before, each strategy focuses on various factors, both fundamental (such as earnings, debt, free cash flow, dividends and industry leadership) and technical (including price, momentum, volume, volatility and breadth). Each has its own ranking system and buy/sell rules.
Nearly all of our strategies set exposure ceilings of 25-35% on any one sector. As a portfolio, including any international allocations, individual stock weightings are typically limited to ~3%. We believe this diversification reduces sector and stock-specific risk.
2. Preservation of capital
If Risk is Off, we will hedge using three approaches: (1) buying ETFs that act inverse to the stock market to create a market neutral or net short posture, (2) option trades that accomplish the same thing, and (3) investing in non-correlated asset classes such as bonds, precious metals or currencies through the use of ETFs.
We also have a plan for exiting the hedge, which is also rules-based and very important. We strive to re-enter the market as soon as possible to catch the rally off the bottom, which is often the most profitable leg up in a new bull market.
3. Our edge
Our equity exposure and stock selection tools give us two distinct advantages over our competitors and the market.
First, our Risk On/Risk Off market exposure process tells us when to be invested in stocks, and when to hedge. Hedge too early and you may get whipsawed (market resumes trend up). Remove the hedge too late and you may miss the rally off the bottom. Our quantitative tools provide us direction.
Second, our quantitative, fundamentally-based stock selection models tell us when to buy and sell stocks. This removes emotion and behavioral bias from the decision. We’ve found that most investors have a good buy philosophy, but poor sell discipline. Our quantitative models assist with both sides of the trade.
Investors seeking exposure to U.S. and international stocks, with the potential for downside protection, may find the KCM Macro Trends Fund an attractive solution to their portfolio. For more information about the KCM Macro Trends Fund please see the fund’s Prospectus or Contact Us.
Performance data represents past performance and is not a guarantee of future results. Performance current to the most recent month-end may be lower or higher, and can be obtained by calling 800.945.2125. The investment return and principal value of an investment will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. The Fund’s total annual operating expense ratio is 1.65%. The indices shown are for illustrative purposes only. Unmanaged index returns do not reflect any fees, expenses or sales charges. You cannot invest directly in an index. The HFRX Equity Hedge Index is reflected as a benchmark for equity hedge strategies. Source: Hedge Fund Research, Inc. The Morningstar MultialternativeTM category includes funds that have a majority of their assets exposed to alternative strategies, including long/short strategies, and can include funds with static allocations to alternative strategies and funds tactically allocating among alternative strategies and asset classes. Source: Morningstar, Inc.
The KCM Macro Trends Fund (KCMTX) ranks in the top 1% of 155 Multialternative funds by Morningstar, Inc., for the five-year period ending December 31, 2017 based on total return. The fund ranks in the top 2% and top 2% of Multialternative funds by Morningstar for the one-year and three-year periods out of 373 and 264 funds, respectively. Rankings are just one form of performance measurement.
For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of the funds in each category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and ten- year (if applicable) Morningstar Rating metrics. The KCM Macro Trends Fund was rated against 286 and 163 U.S.-domiciled Multialternative funds for the three and five-year periods ending December 31, 2017. The fund received a rating of five stars for the three-year period, five stars for the five-year period, and an Overall Morningstar Rating of five stars.
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Mutual Funds involve risk including possible loss of principal. Investors should carefully consider the investment objectives, risks, charges and expenses of the KCM Macro Trends Fund before investing. The Fund may invest in small, less well-known companies, which may be subject to more erratic market movements than large-cap stocks; foreign securities, which are subject to currency fluctuations and political uncertainty; and derivative securities, which may carry market, credit and liquidity risks. The Fund may also engage in short selling activities, which are more risky than “long” positions because the potential loss on a short sale is unlimited. The Fund may use leveraging and/or hedging techniques that could fail if changes in the value of the derivative do not correlate with the securities being hedged. These risks may result in greater share price volatility. Definitions. Short: Any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume they will be able to buy the stock at a lower amount that the price at which they sold short. Long: The buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value.
No-Load mutual funds are sold without a sales charge, however other fees and expenses do apply to an investment in the fund. This and other important information about the Fund is contained in the prospectus, which can be obtained at www.kernscapital.com or by calling 800-945-2125. The prospectus should be read carefully before investing. The KCM Macro Trends Fund is distributed by Northern Lights Distributors, LLC. Member FINRA/SIPC. Kerns Capital Management, Inc. and Northern Lights Distributors, LLC are not affiliated. 3756-NLD-10/09/2017