Counterpoint Tactical Income and Tactical Equity August 2016 Update
Counterpoint Tactical Income Fund Update
The Counterpoint Tactical Income Fund remains invested in US High Yield Corporate bonds. As of August 16, the BofA Merrill Lynch High Yield Bond Master II® Index yields 6.42% versus the April 30 level of 7.58%. From April 29 to present, WTI front month crude is almost unchanged from $45.92/barrel to $46.44 in live trading. Stability in commodities and risk assets in general has enabled solid returns from high yield. While our outlook does not determine our model’s position, the following thoughts should help illuminate a possible path forward.
As of August 17, the Fed futures – implied probability of a 25 basis point rate hike sits at 26% for the September 21 Fed meeting. Likewise, the probability of at least one rate hike happening at the December meeting sits cumulatively at 53.5%. Given the backdrop of continued strong employment and inflation data as well as supportive stock prices, it is our opinion that the markets are underestimating the likelihood of rate increases for 2016 and beyond.
Global interest rates have minimally bounced off the fear-induced lows from Brexit despite the recent positive move experienced in high yield and risk assets. This is quite a surprise in the face of ongoing readouts of positive real economic data throughout the world.
While new easing measures out of the United Kingdom are inspiring UK government yields to touch new historic lows, Eurozone yields remain under pressure due to continued support from the ECB and the Swiss National Bank. A recent proposal by the BOJ to formally reassess the effectiveness of current easing measures has triggered a recent selloff in JGBs, putting yield levels right in the middle of the six month range.
Besides a well-supported stock market, we expect 3rd quarter GDP data in the US to come in stronger than the prior quarter on account of an expected inventory rebuild. Likewise, there have been no indications that payrolls data will alter the course of the multi-year trend.
What is the prognosis for investors? If history is to repeat, a rising rate environment will likely continue to be supportive of stocks as well as high yielding debt, and provide a headwind to investors more heavily weighted in safe haven, agency, and investment grade corporate debt.
While plenty of digital ink has been spilled over risk assets at historically expensive levels, there is no compelling argument that valuations should be anchored to some absolute level when considering the expected return available to fixed income participants today.
There is reason to think that a “reset” to higher valuations must be accompanied by lower expected returns, or else that earnings must increase to compensate. However, a long-term upward reversal of commodity prices following declining capital expenditures will only reverse any earnings collapse. This should be long-term supportive of risk-asset prices, as only a substantial reversal in capital investment over a long period can alter this supply/price outcome.
Counterpoint Tactical Equity Fund Update
The Fund is still positioned in a “risk-on” manner. This has benefited the Fund because the market has experienced a significant post-Brexit recovery, rallying on positive news such as the July jobs report. Given the Fund had a beta targeting approximately 0.8 during this period, Fund returns clearly came from both its market exposure and its factor-based stock selection. Also, as we noted in the previous update, we are continuing to see a “return to normal” among our factors as oil and other commodity prices begin to stabilize. Factors which have historically performed well – but abruptly reversed during the first quarter of 2016 – have generally been performing well again. Although month-to-date factor returns have reverted adversely, this has not negatively impacted Fund results so far in August. Some of this can be explained by well-chosen stocks within these broad factor groups as well as factor interactions within our multi-factor approach to stock selection.
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 BofA Merrill Lynch High Yield Bond Master II® Index is an unmanaged index that tracks the performance of below investment grade U.S. denominated corporate bonds publicly issued in the U.S. domestic market. The referenced indices are shown for general market comparisons and are not meant to represent the Funds.
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.