KCM Macro Trends Fund is an equity-focused macro fund with the flexibility to invest globally and tactically, including long/short, across all asset classes. The fund focuses on long-term growth of capital while managing volatility and market risk, catering to investors seeking the ability to participate in the potential for upside capture while actively managing downside risk. 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. Seeking long-term growth of capital during good times is important, but it is equally important to manage volatility and market risk during bad times.
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. Managing market risk
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.
In addition to its Morningstar Rating, the KCM Macro Trends Fund won Best Fund Over 5 Years in the Alternative Global Macro Funds category at the 2018 Thomson Reuters Lipper Fund Awards, out of 208 comparable shareclasses. These awards recognize funds and fund management firms for their consistently strong risk-adjusted performance relative to their peers, based on Lipper’s proprietary performance-based methodology.
Investors seeking exposure to U.S. and international stocks, with the addition of downside risk management, 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.
1. Calculated from S&P 500 high on 8/11/08 to its market bottom on 3/8/09. The Fund launched on 8/4/08.
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) is the top-ranked Morningstar, Multi-Alternative fund for the five-year period ended December 31, 2018 out of 180 funds based on total return. It is ranked in the in the top 3% and 6% out of 291 and 63 funds for the the three- and ten-year periods, respectively. Rankings are just one form of performance measurement.
© 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
The Morningstar RatingTM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The KCM Macro Trends Fund was rated against 290, 179 and 62 U.S.-domiciled Multialternative funds for the three, five and ten-year periods ending December 31, 2018. The fund received a rating of five stars for the three-year period, five stars for the five-year period and five stars for the ten-year period, and an Overall Morningstar Rating of five stars. Morningstar Rating is for the R-1 share class only; other classes may have different performance characteristics.
Lipper, Inc: The Best Alternative Global Macro Fund award is granted to the fund in the Alternative Global Macro category with the highest Lipper Leader score for Consistent Return over the 5-year period as of 11.30 of the prior year. Lipper awards are granted annually to the funds in each Lipper classification that achieve the highest score for Consistent Return, a measure of funds’ historical risk-adjusted returns, relative to peers. From Thomson Reuters Lipper Awards, © 2018 Thomson Reuters. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited. Lipper, a wholly owned subsidiary of Thomson Reuters, is a leading global provider of mutual fund information and analysis to fund companies, financial intermediaries and media organizations.
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. 3069-NLD-1/16/2019