2017 Outlook and Strategy

The capital markets remain dominated by political and headline risk. The underlying environment remains constructive for risk in our view, notwithstanding substantially elevated valuations in both credit and equity.

The fund’s core strategy is to obtain income and capital appreciation from fixed income and equity securities. In fixed income, the fund focuses on corporate credit (high yield bonds, loans, emerging/non-domestic bonds), preferred shares, and real estate (trusts, home builders). The fund’s equity strategy utilizes equity derivatives (options) to enhance returns and hedge fixed income exposure.

The fund started 2017 underweight risk in anticipation of opportunities when the existing momentum breaks. The post-election consensus provides opportunities either from a disintegration of the consensus or a continuation of the current trend against prevailing skepticism. (We define the current trend as a slow grind higher in equity valuations against a backdrop of rising bond yields).

US government bond yields remain a principle driver of market direction (both credit and equity). The substantial move from the summer 2016 low in yields to the current levels has been orderly – in so far as no cataclysm has spiked volatility and risk aversion. Equity valuations have increased against a decline in government bond prices. This can only go so far, in our view. Volatility – as measured by equity and credit derivatives- is significantly low. High yield bond prices are not cheap against most measures. Equity valuations (multiples of earnings) are also at cyclical highs. Macro-economic data is suggestive of ongoing (if not robust) economic expansion, healthy household balance sheets and low unemployment. The Fed remains accommodative.

In summary, we are looking for a near-term catalyst to break the existing Goldilocks environment at which time an overweight (substantially leveraged) risk exposure would be warranted. In the interim we are selectively adding exposure where volatility may be muted to bring the fund closer to full allocation.

2016 Performance Since Launch

The fund launched in February of 2016, and began investing on September, 30, 2016, the eve of a precipitous decline in bond prices, driven principally by the marked selloff in US treasuries with the aim of progressively building exposure to fixed income and equity positions per the strategy outlined above.

As of December 31, 2016 the fund was substantially under-allocated with cash holdings comprising 61% of Net Asset Value.

The rationale for the maintenance of the high cash position through the 4th quarter was in keeping with the fund’s overarching mandate to prioritize capital preservation over income and capital growth.

In the 4th quarter volatility and risk associated with what appeared to be a bottoming (at least for the short term) of US treasury rates in July presented limited attractive opportunities in credit or fixed income duration, particularly in light of the uncertainty associated with the looming US presidential election.

In hindsight, the conservative position was warranted. US treasuries experienced their worst selloff since the May 2013 “taper tantrum”, with the US 10y widening over 85 basis points (an 8-9% capital loss) in the period between September 30-December 31, 2016.

The fund’s performance for the 3 months ending December 31, 2016 was a net loss after expenses of 1.45%. On a monthly basis the fund’s performance was -.76% in October, -.89% in November and .19% in December. The fund targets absolute returns and does not seek out performance against prevailing benchmarks. Comparatively, however, in the corresponding 4th quarter period, the Barclays Aggregate Bond Index (AGG) returned -3.87% and the S&P 500 returned 3.25%

The fund’s holdings at December 31, 2016 were cash (61%), high yield corporate bonds (33%), and net equity derivatives (2%).