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KCM MACRO TRENDS FUND Actively Managed Liquid Alternatives May 2017 TABLE OF CONTENTS Kerns Capital Management Section Overview 3 Opportunity Set 4 Investment Strategy 5 Our Edge 7 Investment Process 8 How We Manage Risk 11 The Team 12 Performance 14 Summary Terms & Contact Information 16 2 OVERVIEW Actively Managed Liquid Alternatives Who We Are Kerns Capital Management: Houston, TX-based SEC Registered Investment Adviser founded in 1996, specializing in active management of liquid portfolios. – Adviser to liquid alternatives mutual fund and several separately-managed account strategies, $180 million firm-wide discretionary AUM as of May 1, 2017 President & Lead Portfolio Manager, Martin L. Kerns II: AIF, JD, Series 65 Licensed, cofounder and fund manager since 2008 inception, joined the firm in 2007 Co-Portfolio Manager, Parker Binion: 20+ years investment experience, JD, Series 65 Licensed, joined the firm in 2014 What We Do Apply rules-based assessment of macro trends in equity markets to determine risk level – Use quant models to exploit market inefficiencies under favorable equity risk level; seek returns in asset classes uncorrelated with equities when unfavorable risk level Implement highly scalable investment strategy with diverse, quantitative, unemotional buy/sell discipline – Manage risk by position size, sector exposure caps, strategy diversification and uncorrelated assets 3 OPPORTUNITY SET Equity Focused Investment Exposure Depends on Macro Trends “Our disciplined top-down assessment of macro trends in equity markets is the driving factor in shaping a flexible opportunity set. We use quantitative models to determine perceived risk levels and identify investment opportunities among equities and alternative assets.” – Martin Kerns, President & Parker Binion, Chief Investment Officer 4 INVESTMENT STRATEGY Disciplined Rules-Based Risk Assessment and Buy/Sell Implementation Risk Perception Drives Quantitative vs. Qualitative Strategy Implementation – Risk-on environment (equity investing): Quantitative models drive analysis, portfolio construction, security selection, buy/sell discipline and position sizing – Invest across sectors, market caps and countries, seeking stocks with sound fundamentals – Risk-off environment (equity sell-off): Conduct qualitative analysis and seek marketneutral allocations Multi-asset opportunistic investing – Top down macro strategy applies quantitative, fundamentally-based portfolio construction – U.S. equity-focused long/short (long bias) Seek long-term risk-adjusted capital growth – Carefully manage portfolio risk guidelines and sector exposures – Actively hedge to control volatility, preserve capital and improve returns 5 STRATEGY: SECURITY SELECTION / HEDGES Diversified Investing + Active Hedging Security Selection Diversified across sectors, market caps and countries Stocks with high EBITDA per Enterprise Value High dividend, lower volatility Significant sales growth Substantial free cash flow Industry leading ADRs Active Equity Hedge Hedge against the most vulnerable markets (too early causes whip-saws); apply hedging signals by shorting the index or basket of securities Exit as soon as possible (too late misses the rally of bottom - where many fall short) Quantitative rules based strategy: factoring price, momentum, breadth, volatility and volume Cash, Inverse ETFs & Options 6 OUR EDGE Scalable Process & Award-Winning Results Scalable process designed to capture the upside and provide downside protection – Refinement of models and algorithms in early 2016 has resulted in market outperformance and positioning for bear markets.* 5-Star Overall Rating from Morningstar • KCM Macro Trends Fund (KCMTX) ranks in the top 2% of 153 Morningstar MultiAlternative funds by Morningstar for the five year period ended 04/30/17 based on total return. KCMTX ranks in the top 2% and top 3% for the 1 and 3 year periods out of 423 and 245 funds, respectively, with a 5 star overall rating. * There is no guarantee that the fund’s investment objective will be achieved or maintained. 7 INVESTMENT PROCESS Implement Quantitative, Scalable & Liquid Strategy Assess Market Environment Risk-on / Risk-off Actively Monitor, Hedge & Re-Allocate Select Securities Allocate Among Strategies Parker Binion joined firm Firm organized 1996 Quantify Risk Exposures 2008 KCM Macro Trends Fund inception 2014 2016 Quant models refined 8 INVESTMENT PROCESS: RISK-ON Allocate Among Equity-Focused Investments RISK-ON MARKET PERCEPTION* Rules-Based Macro Analysis Quantitative Equity Strategies Allocate 100% SYSTEMATIC RESEARCH-BASED Buy / Sell Rules CONTRARIAN Core Strategy 40-75% 20-50 of Largest 1200 Stocks BLUE CHIP Core Strategy 20-25% 12-18 Dow Industrials ADR Opportunistic 0-20% DIVIDEND Opportunistic 0-40% SECTOR Opportunistic 5-10%% 25-50 Liquid ADRs 25-50 of Largest 1200 Stocks 5-10 of Largest 1200 Stocks * Note: These risk-on strategies are value-oriented by nature, and are expected to work well in most market environments. We would not use them in momentum-driven markets such as the late 1990s. 9 INVESTMENT PROCESS: RISK-OFF Pursue Market Neutral Investments Based on Qualitative Analysis RISK-OFF MARKET PERCEPTION Non-Correlated Strategies Up to 100% Market Neutral Approx. 50% Long Stocks, 50% Short S&P CASH BOND ETFs CURRENCY ETFs COMMODITY ETFs 10 HOW WE MANAGE RISK Risk Guidelines Applied to Positions, Exposures and Portfolio Weights POSITIONS Generally less than 70 Maximum position size approx. 3% of aggregate portfolio EXPOSURE Long: 0%-133% (with leverage) Short: 0%-50% Net: -10%-133% (with leverage) Maximum Leverage: 133% Liquidity: 70% of Holdings > $5B market cap PORTFOLIO WEIGHTS Country: 80%-100% U.S. domiciled or listed Asset Class: 0%-100% Sector: 0%-25% BENCHMARKS HFRX Equity Hedge Index Morningstar MultialternativeTM Category This summary of risk guidelines as to positions, exposures, and portfolio weights is provided as a general overview, subject to customization with a separately managed account. 11 THE TEAM: EMERGING FUND MANAGER Experienced Investment Professionals Martin L. Kerns, II President Investment Management Business / Operations Martin Kerns Chief Executive Officer Product Development: Parker Binion Operations: Michelle LaDoucieur IT: Mark Ellender Client Service / IR: Keith Johnson Parker Binion Chief Investment Officer Service Providers Fund Distributor: Northern Lights Distributors Custodian: Fifth Third Bank Auditor: Tait, Weller & Baker Fund Administrator: Gemini Fund Services Legal: Thompson Hine 12 TEAM: MANAGEMENT BIOGRAPHIES Martin L. Kerns, President, & Parker Binion, Chief Investment Officer Martin L. Kerns, II (joined Kerns Capital in 2007) President, Chief Executive Officer & Chief Compliance Officer Fund Co-Founder & Lead Portfolio Manager, KCM Macro Trends Fund Purchased KCM in 2012 Board Member, Guggenheim/Rydex Dynamic Advisory Board Former Board Member, National Association of Active Investment Managers Accredited Investment Fiduciary (AIF®), Center for Fiduciary Studies B.A. Finance, University of Texas - Austin; J.D. South Texas College of Law Parker Binion (joined Kerns Capital in 2014) Chief Investment Officer Co-Portfolio Manager, KCM Macro Trends Fund Manages KCM’s SMA Strategies 20+ years experience in fundamental and technical analysis, including portfolio management since 2012 Developed quantitative models implemented by KCM Macro Trends Fund in 2016 B.A. Duke University; J.D. with Honors, University of Texas – Austin 13 FUND PERFORMANCE (8/4/08 INCEPTION – 4/30/17) Significantly Outperformed Cumulative Benchmark Returns The performance data quoted here 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 1-800-945-2125. 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 1.71%. The indices and categories shown are for informational purposes only and are not reflective of any investment. As it is not possible to invest in the indices or category, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. The HFRX Equity Hedge Index (“HFRX”) is reflected as a benchmark for equity hedge strategies. Source: https://www.hedgefundresearch.com/family-indices/hfrx 14 FUND PERFORMANCE STATISTICS (AS OF 4/30/17) Exceeding Benchmarks For Trailing 60 Months KCMTX vs. HFRX Correlation 0.81 Alpha Annualized 3.5% Beta 1.59 The performance data quoted here 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 1-800-945-2125. 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 1.71%. The indices and categories shown are for informational purposes only and are not reflective of any investment. As it is not possible to invest in the indices or category, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. The HFRX Equity Hedge Index (“HFRX”) is reflected as a benchmark for equity hedge strategies. Source: https://www.hedgefundresearch.com/family-indices/hfrx 15 SUMMARY TERMS & INVESTOR RELATIONS Contact us for Further Information or to Arrange a Meeting KCM Macro Trends Fund KCMTX Investment Adviser KCMIX Separate Account Kerns Capital Management, Inc. Inception Aug. 4, 2008 March 20, 2017 Available Minimum Initial Subscription $5,000 $250,000 $500,000 Liquidity Daily Daily Daily Sales & Redemption Fees (p.a.) None None None Management / Performance Fees 1.0% / 0% 1.0% / 0% 0% / 30% Operating Expenses (max. p.a.) 1.71% 1.46% N/A The information presented is for informational purposes only. This summary is not complete and is qualified in its entirety by reference to the more detailed discussion contained in the Fund Prospectus. Our investor communication includes thought leadership commentary, white papers, a monthly newsletter and access to full transparency. Visit KCMTX.com or contact: Marty Kerns, President (phone 800.945.2125 ext. 107) Kerns Capital Management 9821 Katy Freeway, Suite 400 Houston, TX 77024 16 DEFINITIONS Long: The buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value. 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/short (long-bias): is an investing strategy of taking long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. A long/short equity strategy seeks to minimize market exposure, while profiting from stock gains in the long positions and price declines in the short positions. A long-bias fund maintains a differing ratio of long positions (compared to short positions) that usually exceeds 40%, in order to benefit during rising markets. Whipsaw: A condition in which a security's price heads in one direction, but is followed quickly by a movement in the opposite direction. A trader is considered to be "whipsawed" when the price of a security he just invested in abruptly moves in the opposite direction of what was expected. EBITDA: Stands for earnings before interest, taxes, depreciation and amortization. EBITDA is one indicator of a company's financial performance and is used as a proxy for the earning potential of a business. Further, EBITDA strips out the cost of debt capital and its tax effects by adding back interest and taxes to earnings. ADR: Stands for American depositary receipt. An ADR is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. Liquid/Market Liquidity: Market liquidity refers to the extent to which a market, such as a country's stock market or a city's real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid. Quant Fund: An investment fund that selects securities based on quantitative analysis. In a quant fund, the managers build computerbased models to determine whether an investment is attractive. Top-Down, Macro Trends Analysis: Top-down investing is an investment approach that involves looking at the overall picture of the economy and then breaking down the various components into finer details. After looking at the big-picture conditions around the world, analysts examine different industrial sectors to select those that are forecast to outperform the market. From this point, they further analyze stocks of specific companies to choose potentially successful ones as investments. Marco refers to a large scale trend. Hedge: A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. 17 DISCLOSURES Past performance is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Past performance, ratings and ranking are no guarantee of future results and are just three forms of performance measurement. There is no guarantee that any investment will achieve its objective, generate positive returns, or avoid losses. © Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied of 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 Multialternative TM category includes funds that have a majority of their assets exposed to alternative strategies, including long/short strategies, and can include both funds with static allocations to alternative strategies and funds tactically allocating among alternative strategies and asset classes. 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 received 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 fund is derived from a weighted average of the performance figures associated with its three-, five- and ten- year (if applicable) Morningstar Rating metrics. KCM was rated against the following number of U.S. domiciled Multi-Alternative funds over the following periods ending 04.30.17: 245 funds in the last three years and 153 funds in the last five years. With respect to these Multi-Alternative funds, KCMTX received a Morningstar Rating of 5 and 5 stars for the threeyear and five-year periods, respectively. 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 sell 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. Investors should carefully consider the investment objectives, risk, charges and expenses of the KCM Macro Trends Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained at www.kcmtx.com or by calling 877-275-5599. 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 and Northern Lights Distributors, LLC are not affiliated. 3363-NLD-5/10/2017 18