The month of June was a solid month for the stock market, though most of the gains came in the first week. The S&P 500 actually hit its peak on June 8th, an interim high that has yet to be surpassed. There was also a brief scare in the form of a -5.9% one-day plunge that felt to many investors like the market might be posed for another swoon, since it has been a few months since the lows and the market has risen quite a bit. But the market found its footing and never broke below the widely watched 50-day moving average of support (blue line).
Another interesting market phenomenon has been the stark divergence – or sharp vacillations – back and forth between growth and value stocks. We showed this last month, and have some charts to update it this month, highlighting how large of a performance gap has developed between these two factor-based investments.
The reason this is important for the Fund is that the portfolio is heavily weighted toward growth stocks currently, so during those episodes where the market experiences a rotation out of growth stocks and into value, it can seem as if the overall market is moving higher while our portfolio is not participating. But as we have shown several times in the past few years, these episodes seem to run their course in due time, so it has not been worth it to attempt to rebalance the portfolio by forcing more value names into the mix.
To review, our Fund is not a “growth” fund per se. Rather, we strive to build a bottoms up portfolio of market leading stocks. These stocks for the most part have top notch fundamentals and have also experienced strong breakouts from a technical perspective. We run our screens daily and continue to monitor market leadership and which areas it is coming from. In recent years, many of the market’s big winners have come from the growth side of the equation, and that is why our portfolio is reflective of this trend. Should a period arise in which value stocks became the new market leaders, they would start to show up in our screens and make their way into the portfolio.
Getting back to the recent performance gaps between growth and value, the below charts show two ETFs we use to track these trends. The purple line is the growth ETF (MTUM) and the gold line is the value ETF (VLUE). You can see that from early May to early June, VLUE outperformed by a wide margin – to the tune of +1779 bps. But since the market peak on June 8th, growth has resumed the leadership position in a big way, outperforming value by a whopping +2111 bps.
We believe there will continue to be volatility between these factor-based ETFs in the form of wide performance discrepancies. But as the charts below show, we feel sticking with the growth over value mantra has been the right call for investors. Growth has outperformed by a wide margin over the last 1-yr (below left) and 3-yr (below right) time frames. We will stick to what we believe is working.
Before we move on to the Fund update, we would be remiss if we didn’t share a chart that gave us significant pause when we saw it. The chart below is a graph of call option buying amongst small traders (mostly retail). It goes back 20-years, and has a fairly defined range. That is until this year, when the Covid lockdown coincided with a newcadre of daytraders (the “Robinhooders”) who flocked to options to leverage their bets. It is too early to see howthis ends, but this type of rampant speculation is usually seen closer to market tops than bottoms. Time will tell.
Our dynamic hedge model started the month of June targeting exposure of 85%. It got down as low as 55% when the indices began to break support levels and reflect increased uncertainty among investors. But by the end of the month the indices had regained support and the hedge model finish the month at 90%.
The ACM Dynamic Opportunity Fund (ADOIX) performed well in June, outperforming all of its relevant benchmarks as well as the S&P 500 Index. Additionally, the Fund is solidly in positive territory YTD while all the respective benchmarks remain negative.
Many of our leading portfolio names had big runups in June. We continue to trim positions where this has occurred in order to manage risk, and sometimes implement hedges where stocks look to be overextended on the upside. In some cases, we feel valuations are becoming stretched as well. That likely means another growth stock correction could be in the cards in the near future. Stay safe out there.
Thank you for your continued support.
Jordan L. Kahn, CFA
Chief Investment Officer
Sources: Standard & Poor’s, Stockcharts.com, Morningstar
Defined Terms: S&P 500 Index- The S&P 500 index is an unmanaged composite of large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. HFRX Equity Hedge Index– tracks strategies that maintain positions both long and short in primarily equity and equity driven securities. Morningstar Long/Short Equity Category- A composite of returns produced by Morningstar which can be used to compare the returns of other mutual funds in the same category. Long– the holder of the position owns the security and will profit if the price of the security goes up. Short- Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit. Derivative hedge – transaction that limits investment risk with the use of derivatives such as option contracts.
Investors are not able to invest directly in the indices referenced and unmanaged index returns do not reflect any fees, expenses or sales charges. For current performance information, please visit our performance page: http://acm-funds.com/dynamic-fund-performance/
There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.
ETF’s are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Investments in foreign securities could subject the Fund to greater risks including, currency fluctuation, economic conditions, and different governmental and accounting standards.
Investors should carefully consider the investment objectives, risks, charges and expenses of the ACM Dynamic Opportunity Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-844- 798-3833. The prospectus should be read carefully before investing. The ACM Dynamic Opportunity Fund is distributed by Northern Lights Distributors, LLC, member.”http://www.finra.org/” FINRA. “http://www.sipc.org/” SIPC. Northern Lights Distributors, LLC and Ascendant Capital Management, LLC are not affiliated.
June 2020 Fact Sheet
We strive to help our investors participate in the gains available from financial markets, while mitigating the downside risk
The ACM Dynamic Opportunity Fund is designed as a core investment for investors seeking long term capital appreciation with a short-term focus on capital preservation. The fund employs a dynamic strategy, which aims to actively participate during a rising market environment and mitigate downside risk when markets experience downturns.
|PERFORMANCE||As of 5/31/2020|
|1-mth||3-mth||YTD||1 Yr*||3 Yr*||Since Inception*|
|HFRX Eq Hedge||2.21%||8.11%||-6.30%||-2.11%||-0.12%||0.33%|
|Morningstar L/S Category||0.81%||8.19%||-4.57%||-0.87%||2.17%||1.59%|
*As of 6/30/20
You should be aware that the Fund’s past performance (before and after taxes) may not be an indication of how the Fund will perform in the future. Although Class A shares would have similar annual returns to Class I shares because the classes are invested in the same portfolio of securities, the returns for Class A shares are different from Class I shares because Class A shares have different expenses than Class I shares. Updated performance information is available at no cost by visiting www.ACM-Funds.com or by calling 1-844-798-3833. Actual Total Annual Fund Operating Expenses of 1.95% for Class A and 1.70% for Class I from the prospectus. The Adviser has contractually agreed to reduce its fees and reimburse expenses of the Fund, at least until April 30, 2021, to ensure that the net annual fund operating expenses will not exceed 2.40% for Class A shares and 2.15% for Class I shares. These fee waivers and expense reimbursements are subject to possible recoupment from each Fund within three years after the fees have been waived or reimbursed. Maximum sales charge for Class A shares is 5.75%. Please review the fund’s prospectus for more information regarding the fund’s fees and expenses.
As of 6/30/2020
There is no assurance that the Fund will achieve its investment objectives.
|Dynamic Opportunity Fund|
|O’Reilly Automotive Inc||2.60%|
|Thermo Fisher Scientific Inc||2.39%|
|Spotify Technology SA||2.35%|
|Fund Characteristics *|
|Avg. Market Cap||$76,426M|
|Gross Long Exposure||93.1%|
|Gross Short Exposure||-2.8%|
|Net Market Exposure||90.3%|
|Beta Adj. Exposure||96.9%|
|HFRX Eq Hedge||-1.61%||0.10%||9.98%||-9.42%||10.71%|
|Morningstar L/S Category||-2.20%||2.34%||11.18%||-6.73%||11.90%|
*Inception Date 1/20/2015
Investors should carefully consider the investment objectives, risks, charges and expenses of the ACM Dynamic Opportunity Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-844-798-3833. The prospectus should be read carefully before investing. The ACM Dynamic Opportunity Fund is distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Northern Lights Distributors, LLC and Ascendant Capital Management, LLC are not affiliated.
Mutual Funds involve risk including possible loss of principal. Adverse changes in currency exchange rates may erode or reverse any potential gains from the Fund’s investments. ETF’s are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Investments in underlying funds that own small and mid-capitalization companies may be more vulnerable than larger, more established organizations. Derivative instruments involve risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Investments in foreign securities could subject the Fund to greater risks including currency fluctuation, economic conditions, and different governmental and accounting standards. In addition to the risks generally associated with investing in securities of foreign companies, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues.
Investors bear the risk that the Fund may not be able to implement its investment strategies or attract sufficient assets. Purchased put options may decline in value or expire worthless and may have imperfect correlation to the value of the Fund’s portfolio securities. Written call and put options may limit the Fund’s participation in equity market gains and may amplify losses in market declines. The Fund’s losses are potentially large in a written put or call transaction. If unhedged, written calls expose the Fund to potentially unlimited losses. The Fund will incur a loss as a result of a short position if the price of the short position instrument increases in value between the date of the short position sale and the date on which an offsetting position is purchased. Short positions may be considered speculative transactions and involve special risks, including greater reliance on the ability to accurately anticipate the future value of a security or instrument. The Fund’s losses are potentially large in a short position transaction.
Price to Earnings (P/E) is a valuation ratio of a company’s current share price compared to its per share earnings. Gross Long and Short Exposure is the percentage in securities that are expected to rise and decline, respectively. Beta is a measure of systemic risk. Standard Deviation is a statistical measurement. It sheds light on the historical volatility of that investment. The greater the standard deviation of a security, the greater the variance between each price and the mean, indicating a larger price range. Treynor ratio – A performance metric for determining how much excess return was generated for each unit of risk taken on by a portfolio. HFRX Equity Hedge Index – tracks strategies that maintain positions both long and short in primarily equity and equity driven securities. S&P 500 Index – tracks 500 individual stocks chosen for market size, liquidity and industry grouping, among other factors.
Investors are not able to invest directly in the indices referenced in this illustration and unmanaged index returns do not reflect any fees, expenses or sales charges.