CommentaryAudio-April Page 1 of 9 Jazmine Woodberry, Eric Crittenden

Transcription

1 CommentaryAudio-April Page 1 of 9 Jazmine Woodberry: Hello. I am Jazmine Woodberry and welcome again to Longboard Radio. We re here with Longboard CIO, Eric Crittenden to talk a little bit more deeply about what we saw again in April. Hello again. Eric. Hi Jazmine. Jazmine Woodberry: So I m going to jump straight into equities. We saw a lot of major gains in European equities and even in some of those large cap funds that have a lot of international exposure like Facebook or Amazon or even Tesla. So how does our ability to go long in a bunch of different markets around the world help us capture that kind of momentum? It s a good question. We follow 25 different global equity markets. And I m going to bring up Japan for a moment as an example of how dangerous it can be to just stick with your own domestic equity market. Now most people that have been in this business for a while know that Japan has been a treacherous place to invest in equities for many, many decades now. But that wasn t the sentiment back in the late 1980s. The sentiment back then was that Japan, the Japanese companies were amongst the best in the world and that you could probably do no wrong by investing in Japanese equities. So the reason that we cast our net very wide again, we follow 25 different markets around the globe. Some unusual markets like Taiwan and India. We re trying to avoid getting trapped in the situation where there s a lack of opportunity. It is possible for big, mature domestic economies to stagnate. You could have a loss decade. Meanwhile you could have big, high breadth bull markets and emerging markets. So what we re seeing right now is a very strong momentum, pretty significant bull markets in European equities specifically in Spain, Italy and Sweden and whatnot. So another thing I want to point out about these trends is that they are unloved. It s very psychologically it s very difficult right now to really get behind long positions in some of these European markets but that is something that we re good at. We re very disciplined. We re rules based and we re going to go to where the trends are and right now they re developing in Europe. Jazmine Woodberry: And Robert Schiller actually said something like that about PE valuations and that you should probably be looking for opportunities in international markets. So why are they so Page 1 of 9

2 CommentaryAudio-April Page 2 of 9 unloved? What s that thing that s stopped people from really jumping in outside of the US? Well, in my experience if the fundamentals aren t glaringly obvious, it becomes difficult for people to become enthusiastic about trends. And specifically, in equities right now in Europe there s a lot of uncertainty. And this drives home a point that I like to make from time to time. Trend following is contrarian at the beginning of the trend. Psychologically and socially it s very difficult to allocate to new trends. And the trends that we re seeing in Europe are especially difficult right now. Jazmine Woodberry: Speaking of uncertainty in Europe, we saw that play out a little bit in currencies. There s some uncertainty about the French election between Le Pen who is a bit more of a populist candidate and the more established and friendly Macron and there is a little bit of tension that s playing out in those equity markets. I know we like to stay out of the political fray but what should investors look out for? Will they be prepared for a Brexit or a Trump-like election event should things go one way or the other? Well, now that s a tough topic to talk about. As I mentioned before we have a love hate relationship with politics here at Longboard. Politics create fear, uncertainty, risk and that creates risk premium. So for that reason, we like politics because it s our job to go collect risk premium. So we like the opportunity that politics creates. That being said we re not in the prediction business. Now we were positioned correctly for the Brexit and we also were positioned correctly for the Trump presidential victory. I don t know if we re going to be positioned correctly. It is it s a very dangerous risk on, risk off environment right now and predictions are tough. Not only do you have to get the prediction right about the event but you also have to get the prediction right about the market s reaction to the event. And from what I can see not a lot of people are having a lot of success with predictions. Our plan is to just stay disciplined, stick with the trends, manage our risk and accept the results. Jazmine Woodberry: And I know when you re in a more discretionary fund, there is that temptation to try and time those things. So is that part of the benefit of being more systematic in this kind of trend following way? It s one of the benefits. Being systematic and rules based allows us to cast our net very wide and not get married to positions and not Page 2 of 9

3 CommentaryAudio-April Page 3 of 9 have emotion influencing the investment decisions. It makes it very easy to close positions out with no regret if you re wrong on a position. So in environments like this where and I know a lot of fundamental investors and they re having a very tough time and it s been going on for quite a while now. I m very happy to be a rules based trend follower right now. Jazmine Woodberry: So a rules based trend follower but it doesn t seem like the commodities markets are giving us a whole of trends at least on a larger level. You see that classic supply demand pricing that s pushing cattle up. You re seeing even despite the OPEC commitments downward pressure on crude oil and that half and half seems to be playing out a lot even in the positioning of the fund. So what does a trend follower do when the commodities markets aren t giving you a large overall trend? Well, you re pointing out the reason that I love commodities. Not only are commodities uncorrelated with traditional assets which is very helpful for diversification purpose, but they re also uncorrelated with each other. There s no reason for cotton and silver to move together or for industrial rubber and soybeans to move together or live cattle and kerosene to move together. Commodities are a fantastic asset class because of their nature to move according to their own fundamentals. So you pointed out that we don t have one general theme going on across the entire commodity space. That s actually very healthy. What we have right now is a mild bull market in industrial metals like aluminum, copper and zinc and whatnot. We have a pretty entrenched, somewhat long in the tooth bear market in grains like wheat and corn. We have a mess in energy, energy markets of which we have no exposure to those right now. They re extremely volatile, extremely political and there s not a lot of risk premiums that we see on the long or short side in energy. But that being said we ve seen opportunities in many other sectors in the commodity space and you brought one of them up, the cattle. Live cattle and feeder cattle both appear to have entered very powerful bull markets. So I love the commodity space. I love the opportunity that is presents and I would caution people against treating them all as one homogenous group. They re independent assets that move off their own fundamentals. Jazmine Woodberry: So I shouldn t be consistently tracking oil to try and pick up on some different signs? Page 3 of 9

4 CommentaryAudio-April Page 4 of 9 No. I would recommend that if you want to maintain your sanity don t pay attention to oil until it actually enters some sort of a trend. Right now, that is not the case. Jazmine Woodberry: So we re seeing also a little bit, speaking of trend of a bit of countertrend movement against a longer-term downtrend in treasuries. April has shown us a little bit of a bump up. And then you have these rumors of another possible fed rate hike in June. So what should people be looking out for? Is this just a countertrend movement or is this pointing to something possibly more distinct and larger? Well, I won t have a good answer to that for a while. Fixed incomes base is very dangerous right now. Bonds had been in an uptrend for a very long period of time and people have grown accustomed to that. Bonds have been both a profit center and also a very effective hedge against a stock market decline. And people have become used to that and in fact have relied on bonds. I think that s a dangerous perspective to carry into the future. There have been times in the past when bonds have not been a good hedge against an equity market decline. And I think some of the pressure that you see on risk parity funds right now drive that point home. I would caution people against assuming that bonds are going to help them in hostile market conditions. In fact, if I had to guess, I would say there s a good chance that bonds could actually be the problem this time around. So I would watch out for increasing correlation between bonds and stocks going forward. Right now, we are mildly short bonds. We re short the whole yield curve in the United States. We have a few long positions in Europe but nothing meaningful and we re short Asian bonds in a relatively meaningful way. But in aggregate, fixed income exposure for us is smaller than the other three asset classes. So we re basically waiting for something to happen. Either interest rates are going to get a bid and start to go up meaning bond prices are going down. Or this little downtrend that we ve seen develop over the last five or six months, it might not develop further. So right now, we just have very small exposure to bonds. Jazmine Woodberry: So you re not anxiously holding your breath waiting for Janet Yellen s decision in June? Absolutely not. Page 4 of 9

5 CommentaryAudio-April Page 5 of 9 Jazmine Woodberry: So I know you mentioned a little bit about some of the history of bonds and their impact on let s say a traditional 60/40 portfolio. So I want to do a little bit of this month or this period in investing history. So you re looking at a space or a time that might point to what the trends will do in the future. Does this market environment seem like anything else to you? I know past performance doesn t indicate future results. But there s always something to possibly be gleaned from possible historical times and what they ve taught us for the markets. Right? Potentially. This is a dangerous concept. I ve seen people use it to do far more harm than good. Markets do have a tendency to rhyme from time to time. But I ve never seen markets exactly repeat. And one valuable lesson that I learned a long time ago is that the current market environment typically has very little to do with the previous market cycle. Meaning don t use the last market cycle as a road map for where you are now. That being said, if you go back two or maybe four market cycles, there does tend to be some rhyming going on. So if I had to associate the current environment with something out of the past, I would choose I would say 1995 to There s some similarities. So the early 90s is when I entered the business and for those listening that have been in the business for a while, think about what was going on back then. You had the crash of 1987 and all the pessimism that came after that. You had the first Gulf War. You had the savings and loans crisis. Orange County went bankrupt. You had all the anxiety around the Federal Reserve raising rates in I mean there was whole host of things that were going wrong. And I can tell you that in late 1995 I didn t know a single person who was particularly bullish on the stock market and that was the beginning of a really big bull market, a hated bull market, an unloved bull market. That bull market did not become popular until I would say the second half of 1998 which is kind of typical of bull markets. They re people are skeptical at first. Apply that to today. The bull market that took off in the second half of 2012, people were very skeptical. I mean they don t feel that way now but back then you had the Greek there was a whole bunch of stuff that was going wrong in the global economy back then. And here we are in the later innings. You had 2013 and then we re here in the second quarter of 2017 and I would say that you re seeing a lot of the same things that we saw in the mid 90s, some deflation, commodities struggling, trend following, managed Page 5 of 9

6 CommentaryAudio-April Page 6 of 9 futures struggling, government intervention. A lot of the same things, the same concepts are coming up. So what does all this mean? Well, if I had to guess I would say that we are probably in the later innings of an unhealthy bull market. But I want to caution people against reading too much into that. That doesn t mean go short. It doesn t mean be under allocated. I say that because historically a lot of the market moves happen in the later innings. It s not a linear event where you make ten percent of the bull market in the first inning and ten percent in the second. No. It s very lumpy and it s very dangerous. So I wouldn t be surprised at all if we have what s referred to as a melt up. And that means stock markets appreciating rapidly from here. That wouldn t surprise me. And I say that because that based upon the current sentiment, that is what would cause the most amount of pain. And let s be honest, the markets today are moving off of pain, not pleasure. Jazmine Woodberry: And I know you talk a lot about uncomfortable trades. So I m guessing those later innings are where those uncomfortable trades tend to happen a lot too, right? Well, in the early innings and the later innings is where the discomfort can really rise. And in our discipline, I can tell you have probably 70 to 80 percent of the long-term returns come from 20 to 30 percent of the positions. And generally speaking, those are the most uncomfortable positions. If it s comfortable, you re probably paying your risk premium, not collecting one. So that s why we are long equities right now. Most of our portfolio is not in equities but we have a health allocation of global equities right now. And just because I think that it might be an unhealthy bull market in the later innings doesn t mean that it s not right to be long right now tactically. Jazmine Woodberry: So it s funny you bring up equities because I wanted to ask you one more question about that before we end. In the last five years, especially you ve seen a lot of up trend in the stock market in a slightly more challenging environment for managed futures. Right? But we want those all to be working together in a portfolio. So what can investors think about or point to or take solace in knowing that you see this outsized returns happening in the stock market and maybe it s a little bit lumpier like you said for managed futures. Page 6 of 9

7 CommentaryAudio-April Page 7 of 9 Well, it hasn t been slightly challenging. Let s be honest. Managed futures has been very challenging for the last five years. But it s like any other asset class. Sometimes it s in favor. Sometimes it s out of favor. Right now, it s out of favor and it has been for a pretty extended period of time. I see that as an opportunity. I mean you can look at the returns from the managed futures asset class going back into the 1970s and see this to be true. It s really no different than any other asset class. Psychologically it s tough to buy something that s been out of favor and it s very easy to buy something that s in favor. But people that have been in this business for a while know that doing what s comfortable doesn t lead to good results long term. So in my experience, most people that use managed futures that have been successful just pick an allocation and they stick with it. And they have realistic expectations and they just stay disciplined. The people that try to time their allocations for the most part really regret trying to do that. Jazmine Woodberry: Well, thank you so much for chatting again, Eric. And to our loyal audience, thank you so much for tuning in. Laura Ingalls: This has been a broadcast of Longboard Asset Management, LP. Now please listen to the following disclosures and performance information on the Longboard Managed Futures Strategy Fund: 1 Year Performance for WAVIX for the quarter ending 3/31/17 was 1.79%. 1 Year performance for WAVIX ending 4/30/17 was 6.56%. 3 Year Performance for WAVIX for the quarter ending 3/31/17 was 8.00%. 3 Year performance for WAVIX ending 4/30/17 was 6.84%. WAVIX s inception date is o The Since Inception performance for WAVIX through 3/31/17 was 4.60%. o The Since Inception performance for WAVIX through 4/30/17 was 4.30%. PERFORMANCE (Performance as of 4/30/2017) Page 7 of 9

8 CommentaryAudio-April Page 8 of 9 *INCEPTION DATE: 6/27/12 **INCEPTION DATE: 3/22/13 The Total Annual Fund Operating Expenses for the Longboard Managed Futures Strategy Fund class A and I are 3.12% and 2.97% respectively. The maximum sales charge for Class A (Max Load) shares is 5.75%. The performance data quoted here represents past performance. Current performance may be higher or lower than the performance data quoted. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. For performance information current to the most recent month-end, please call tollfree or visit our website, There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. PROSPECTUS OFFERING DISCLOSURE Investors should carefully consider the investment objectives, risks, charges and expenses of the Longboard Managed Futures Strategy Fund. This and other important information about the Fund is contained in the prospectus, which can Page 8 of 9

9 CommentaryAudio-April Page 9 of 9 be obtained at or by calling The prospectus should be read carefully before investing. The Longboard Managed Futures Strategy Fund is distributed by Northern Lights Distributors, LLC, a FINRA/SIPC member. Longboard Asset Management, LP, is not affiliated with Northern Lights Distributors, LLC. MUTUAL FUND RISK DISCLOSURE Mutual funds involve risk including possible loss of principal. The fund will invest a percentage of its assets in derivatives, such as commodities, futures and options contracts. The use of such derivatives and the resulting high portfolio turnover may expose the fund to additional risks that it would not be subject to, if it invested directly in the securities and commodities underlying those derivatives. The fund may experience losses that exceed those experienced by funds that do not use futures contracts, options and commodities. Changes in interest rates and the liquidity of certain investments could affect the fund s overall performance. The fund is non-diversified and as a result, changes in the value of a single security may have significant effect on the fund s value. Other risks include credit risks and investments in fixed income securities, structured notes, asset-backed securities and foreign investments. Furthermore, the use of short positions and leveraging can magnify the potential for gain or loss and amplify the effects of market volatility on the fund s share price. The fund is subject to regulatory change and tax risks. Changes to current regulation or taxation rules could increase costs associated with an investment in the Fund. [End of Audio] NLD- 5/10/ Page 9 of 9