Counterpoint Tactical Income and Tactical Equity September 2016 Update
Counterpoint Tactical Income Fund Update
The Fund remains invested in US High Yield Corporate bonds. As of September 15, the High Yield All Cash Bonds Option Adjusted Spread sits at 538 basis points versus the May 31 level of 612. WTI front month crude sits at $43.01 in live trading, remaining within the trailing 6-month trading range. High yield continues to produce solid returns amid price stability for commodities and riskier asset classes. While our outlook does not determine our model’s position, the following thoughts should help illuminate a possible path forward.
Remarks from Fed Chairman Janet Yellen at the Jackson Hole Fed summit in late August signal that as the U.S. economy strengthens, so does the case for a near-term rate hike. The August employment report of 150,000 new jobs is consistent with some Fed governors’ expectations for economic growth. Month-to-date weaker than expected US economic data has lowered the consensus expectation that the Fed will hike rates in September hike. As of September 15, the Fed futures – implied probability of a 25 basis point rate hike sits at 20% for the September 21 Fed meeting. Likewise, the probability of at least one rate hike happening by the December meeting sits cumulatively at 51%.
In the meanwhile, global interest rates have climbed off the Brexit lows, moderating with respect to their trailing 6 month ranges.
Stateside, the stock market continues near all-time highs. We have cautious expectations for third quarter GDP growth. Though evidence of an expected inventory restocking has yet to materialize, recent data continue to support the notion of a slow and fitful US recovery. There is plenty of reason for caution. High valuations leave expected returns across asset classes near historic lows. In particular, high yield credit spreads are near the bottom of their two-year historical range.
This brings to mind the possibility of a correction in prices. However, in our view expensive valuations are not sufficient predictors of near-term performance to affect risk allocation decisions.
In sum, the overall direction continues to be positive. Although there is reason for caution, our strategy requires a more substantial change in pricing trends to trigger a risk-off positioning. The Fund’s quantitative model shows the high yield asset class’s moving averages are continuing to catch up with current price levels.
This dynamic reduces the fund’s tolerance for downside risk going forward.
Counterpoint Tactical Equity Fund Update
The Fund is positioned in “risk-on” manner. With a beta positioning slightly below its corresponding market capitalization market segments, Tactical Equity has lately benefited from such exposure. Beyond broad market risk positioning, factor exposure has continued to drive performance despite a near term reversion in broad factor results. The Fund’s “risk-on” weighting is geared more towards earning returns from beta rather than pure factor exposures, since the Fund’s short position is relatively small. For this reason, the market returns have explained the bulk of recent performance, despite August and September returns showing a reversion of factor returns away from longer term averages.
As a reminder, Counterpoint Tactical Equity invests in stocks which have exposure to multiple anomaly factors. A summary of returns from several individual factor styles – some of which Counterpoint Tactical Equity uses in its stock selection – are provided by S&P Capital IQ above.
Return Spread is the difference between the top quintile and bottom quintile returns, seeking to eliminate the broad market return to show performance on a factor. Size is a blend of returns to market capitalization and total revenues. Top quintile represents highest market capitalization and revenues. Volatility is blend of factors to total standard deviation in annual and recent month periods as well as beta to the broad market. Top quintile represents highest volatility stocks. Analyst Expectations represents factors such as realized earnings surprise versus expectations measures, and estimate diffusion (the net change in analyst expectations of earnings results). Top quintile represents the blend of signals that signify positive developments for companies relative to baseline expectation. Historical Growth represents a blend of factors including 1 year changes in cash flow and earnings per share. Top quintile represents those companies which have historically exhibited the highest growth rates. Price Momentum is a combination of momentum factors (i.e. recent 12 month return, five day returns, nine month returns). Top quintile represents stocks that have had the best recent price performance. Earnings Quality represents measures that describe the quality of earnings including net profit margin and stability of net income. Top quintile represents stocks which excel in these measures. Capital Efficiency refers to a firm’s ability to deliver excess returns relative to its cost of capital. It includes a blend of ratios such as return on equity, return on invested capital, and share issuance. Top quintile signifies companies that excel in these measures relative to the rest of the market. Valuation factors are variety of metrics some as book to market, earnings to price, sales to price, and cashflow to price. Top quintile represents stocks which excel in these measures. The The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The BofA Merrill Lynch High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below). The referenced indices are shown for general market comparisons and are not meant to represent the Fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges.
Past performance is no guarantee of future results. There is no assurance the Funds will meet their stated objectives. Investors should carefully consider the investment objectives, risks, charges and expenses of the Counterpoint Tactical Equity Fund and Counterpoint Tactical Income Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained at counterpointmutualfunds.com or by calling 844-273-8637. The prospectus should be read carefully before investing. The Counterpoint Tactical Equity Fund and Counterpoint Tactical Income Fund are distributed by Northern Lights Distributors, LLC member FINRA/SIPC.