Altegris Managed Futures Strategy Fund

Transcription

1 Altegris Managed Futures Strategy Fund Market + portfolio Commentary Q Market Commentary Investors often ask: What is the worst market environment for your Fund? The answer is now clear: this past year. Performance was frustrating for the fourth quarter and for 2012 as a whole. However, single-digit losses are well within expectations for the strategy in such a less-than-ideal market environment for trend following strategies. In fact, only ten of Altegris 40 Index constituents were up in Cantab Capital Partners was one of two managers up double digits, with the remainder of the positive managers up 1.66% on average and the losing managers down -7.09% on average. The Altegris Managed Futures Strategy Fund is trend-following biased; therefore, the Fund tends to perform best when trends are strongest and most persistent. Throughout 2012, however, such trends were few and far between. Our colleagues at Winton Capital Management quantified this phenomenon particularly well, as delineated in the graph below. Based on Winton s research, this graph shows for each year on the x-axis how often an up was followed by another up, or a down followed by another down across 16 major markets, expressed as a percentage. 1 The further a data point lies above the 50% line, the more quarterly trends there were in a year. Conversely, the further a data point sits below the 50% line, the more quarterly reversals there were. Looking across the entire period, you can see that this group of markets had a propensity for quarterly trends, because there are more data points above the 50% line than below. Looking at the final data point for 2012, you can see that the markets have been mean reverting more than at any other point in the last 20 years. 2 At the same time, the chart also makes it clear that we have seen these near trendless environments before and we will see them again. Markets are cyclical, and of late heavily influenced by policy uncertainty both in the US and abroad. Persistence of quarterly market trends As of November % 70% 60% 50% 40% 30% 20% Major markets used: SANDPE, TNOT10Y, EURO, JYEN, CRUDE, CORN, WHEAT, DAX, BUNDS, GOLD, COPPER, ALUMIN, NIKKEI, JGBT, EURO$, and EURIBOL. 2 Source: Winton Capital Management, Winton Futures Fund November 2012 Fund Update. Winton Capital Management. Winton neither represents nor warrants the accuracy or completeness of the information contained in this exhibit and accepts no liability for any inaccuracy or omission. 1[1]

2 Fund Performance The Fund s Class A (at NAV), Class C and Class I shares returned -2.60%, -2.84%, and -2.58%, respectively, while the Altegris 40 Index, the MSCI World Index, and the S&P 500 TR Index returned % (estimated), 2.06%, and -0.38%, respectively, for the quarter. For the year-to-date through December 31, 2012, the Fund s Class A (at NAV), Class C and Class I shares returned %, -4.74%, and -3.68%, respectively, while the Altegris 40 Index, the MSCI World Index, and the S&P 500 TR Index returned -4.75% (estimated), 13.18%, and 16.00%, respectively. Portfolio Performance Review In contrast to previous quarters, the Fund s positive attribution came from foreign exchange (FX), primarily in the form of short yen positions. Stock index futures were also a significant contributor to performance, with gains in long positions both domestically and in Europe. The largest losses came from long grains futures, most notably corn futures. Trend following managers in particular were long coming into the quarter after grains experienced a breakout at the end of June, leading to a positive trend in grains for Q3. Residual long positioning in Q4 led to losses on the heels of a better-than-expected crop yield report, as well as profit-taking from some discretionary managers. Longer-dated interest rate contracts were also detractors, as yields rose due to positive investor sentiment regarding the fiscal cliff in late November coupled with bullish economic news generally. Fund Performance As of December 31, 2012 Quarter to Date Year to Date Since Inception * 1-Year Class A (NAV) -2.60% -3.89% -3.89% -2.56% Class A (max load)** -8.22% -9.46% -9.46% -4.99% Class I (NAV) -2.58% -3.68% -3.68% -2.32% BofA Merrill Lynch 3-Month T-Bill Index 0.04% 0.11% 0.11% 0.11% Altegris 40 Index -2.88% -4.75% -4.75% -0.83% S&P 500 TR Index -0.38% 16.00% 16.00% 16.55% MSCI World Index 2.06% 13.18% 13.18% 9.69% 02/01/11 12/31/12 * Class C (NAV) -2.84% -4.74% -4.74% -6.56% *The inception date of Class A and Class I is 08/26/10; the inception date of Class C is 02/01/11. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Returns for periods longer than one year are annualized. The Altegris 40 Index is a monthly index; its since inception performance is shown from 08/31/10. ** The maximum sales charge (load) for Class A is 5.75%. Class A Share investors may be eligible for a reduction in sales charges. This agreement may be terminated by the Fund s Board of Trustees on 60 days written notice to the adviser. The total annual Fund operating expense ratio, gross of any fee waivers or expense reimbursements, is 4.54% for Class A, 5.29% for Class C, and 4.29% for Class I. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. 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. The Fund s adviser has contractually agreed to reduce its fees and to reimburse expenses, at least until October 31, 2013, to ensure that total annual Fund operating expenses after fee waiver and reimbursement (exclusive of any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, indirect expenses, expenses of other investment companies or Underlying Pools in which the Fund may invest, or extraordinary expenses such as litigation) will not exceed 1.90%, 2.65% and 1.65% of average daily net assets attributable to Class A, Class C and Class I shares, respectively, subject to possible recoupment in future years. Results shown reflect the waiver, without which the results could have been lower. A Fund s performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. For performance information current to the most recent month end, please call (888) The referenced indices are shown for general market comparisons and are not meant to represent any particular Fund. 2[2]

3 Manager Performance Review For the Fund s specialized managers as a group, the EMINI S&P 500 futures contracts proved the most difficult to trade both long and short. This was especially the case for QIM, one of the managed futures managers accessed by the Fund, in November. QIM was also down in October, but made up some ground in December trading both domestic and European interest rate contracts. Ultimately, QIM was up ~5% for the year, a significant achievement in the current environment. CFM was negative for the quarter and experienced difficulties in its short-term trend models throughout Q4; the manager generated losses in all sectors with the exceptions of FX and rates. Cantab provided a strongly positive contribution within the specialized sub-strategy and continued its admirable performance for the year as a whole. That Cantab is the only manager in the Altegris 40 with doubledigit returns for the year is a remarkable feat given the headwinds faced by the asset class. As a group, the specialized managers were down just over 1% for the quarter. In aggregate, the trend following managers accessed by the Fund were down ~1% during Q4. Lynx and Welton were the largest contributors to performance for the quarter. In Welton s case, the manager s shorter-term models did not help offset losses from its trend following positions. Base and precious metals were the largest sources of negative attribution for the manager. Lynx was the only trend follower to not earn meaningful profits in currency trading in Q4, and the manager incurred losses in bonds, energies and grains. Abraham was also down for the quarter, although the manager performed relatively well compared to its peers given its commodity futures bias. Winton added positive attribution to the Fund during Q4, with gains in both November and December from stock index futures and FX. Portfolio Exposure As of December 31, 2012, allocations were as follows: 35% to the Winton Program, 16.5% to the QIM Program (3.5% reduction since the quarter ending September 30, 2012), 15% to the Capital Fund Management (CFM) Program (an increase of 5%), 7.5% to the Abraham Program, 7.5% to the Lynx Program, 7.5% to the Welton Program and 11.0% to the Cantab Program (a 6% increase). As of October 16, 2012, the Fund no longer allocated to the Altis Program after the manager continued to underperform versus its peers. Overall, the Fund has increased its allocation over the course of 2012 to specialized and hybrid trend strategies given the lack of trends in current markets. Portfolio Positioning In our Q3 portfolio commentary, we discussed how for the last two years, one could almost view the positioning of the Fund in the context of a seesaw, tilting between risk-on and risk-off market environments. As inconsistent markets rock back and forth, the Fund has been positioned on one side of the middle, ready to weigh down the other end of the seesaw should markets begin to exhibit meaningful follow-on trends. At the end of Q3 2012, the Fund again sat near the middle of the seesaw, although modestly positioned towards positive economic outcomes. At the end of Q4 2012, however, the Fund s positioning had inched closer towards one end of the seesaw, with its trend following managers positioned long risk-on assets such as stock index futures, commodity currencies and commodity futures. In spite of a slight move towards being more risk-on, the Fund is still quite balanced, waiting to find trends where they persist. Trend following managers remain somewhat long fixed income futures, with significant positions in both the US and in Germany in particular. In addition, the increased exposure to specialized managers over The Fund may invest up to 25% of its total assets in a wholly-owned subsidiary, which in turn invests the majority of its assets in a portfolio of investments selected by an experienced portfolio management team at Altegris Advisors. These include investments in a combination of (1) securities of one or more commodity futures trading companies (e.g., underlying pools), (2) swaps, notes or similar derivatives structured to provide exposure to and the returns of managed futures strategies, and (3) investments intended to serve as collateral for such derivative positions (collectively, managed futures investments ). These investments are selected with the aim of providing aggregate exposure to managed futures sub-strategies and programs of the managers, as if 100% of the Fund s total assets were invested in those programs. See page 5 for managed futures manager exposure. This commentary reflects the views of the portfolio managers through December 31, The managers views are subject to change as market and other conditions warrant. This commentary is provided for informational purposes only and should not be construed as investment advice. No forecasts are guaranteed. There is no guarantee that any investment will achieve its objectives, generate profits or avoid losses. 3[3]

4 the fourth quarter of 2012 should help capitalize on the meanreverting environment, should it continue. Drama surrounding policy-making influenced markets heavily over the past year. Stimulus fed the US equity markets and kept interest rates low, while political wrangling created sideways price action across most other major markets. While the taxation aspect of the fiscal cliff was averted in the final hours of 2012, debates over the debt ceiling and spending cuts still loom. Based on our due diligence and industry experience it is our belief that this Fund offers a premier mix of managed futures managers. Should the recent market uncertainty continue, we feel strongly that the Fund has the potential to limit downside risk. We are optimistic that there will come a time in which markets might finally transition from a mean-reverting phase to a trending phase providing a ripe environment of opportunity for trend followers in particular and the Fund as a whole. 4[4]

5 Fund Objective The Fund seeks to achieve positive absolute returns in rising and falling equity markets with less volatility than major equity market indices. Managed Futures Manager Exposure 1 Winton QIM CFM Cantab Abraham Lynx Welton Exposure % 16.5% 15.0% 11.0% 7.5% 7.5% 7.5% The Fund s access to managers and the percentage exposures to each listed above are presented to illustrate examples of the diversity of managers accessed by the Fund through its managed futures investments, but may not be representative of the Fund s past, or its future, access and exposure to managed futures managers, sub-strategies and programs. It should not be considered a recommendation or investment advice. With respect to the remainder of Fund assets not invested in managed futures investments via a wholly-owned subsidiary, the Fund pursues a fixed income strategy intended to generate interest income and to diversify returns generated by the managed futures managers listed above. The Fund s fixed income strategy investments, including holdings of fixed income securities, cash, and cash equivalents, are not reflected or included in the table above. 1 The managed futures investments selected by Altegris Advisors to gain exposure to the managed futures managers, sub-strategies and programs are subject to change at any time, and any such change may alter the Fund s access and percentage exposures to each such manager, sub-strategy and program. Although the Fund currently pursues its managed futures strategy by investing up to 25% of its total assets in a wholly-owned subsidiary, the Fund may also make managed futures investments directly, outside of such subsidiary. 2 As a percentage of the Fund s managed futures strategy allocation. The Fund s holdings of cash, cash equivalents and fixed income securities pursuant to its fixed income strategy are excluded from percentage exposures listed in the table. Index Descriptions An investor cannot invest directly in an index. Moreover, indices do not reflect commissions or fees that may be charged to an investment product based on the index, which may materially affect the performance data presented. Global Equity. MSCI World Index is a free float-adjusted market capitalization weighted index that measures equity market performance of 24 developed market country indices. Treasury Bills. BofA Merrill Lynch 3-month T-Bill Index is an unmanaged index that measures returns of three-month Treasury Bills. Managed Futures. The Altegris 40 Index tracks the performance of the 40 leading managed futures programs, by ending monthly equity (assets) for the previous month, as reported to Altegris Investments, Inc. The Altegris 40 Index represents the dollar-weighted average performance of those 40 programs. The Index started in July 2000; data is available back to US Stocks. The S&P 500 Total Return Index is the total return version of S&P 500 index. The S&P 500 index is unmanaged and is generally representative of certain portions of the U.S. equity markets. For the S&P 500 Total Return Index, dividends are reinvested on a daily basis and the base date for the index is January 4, All regular cash dividends are assumed reinvested in the S&P 500 index on the ex-date. Special cash dividends trigger a price adjustment in the price return index. Representative Index Characteristics Key Risks Global Equity MSCI World Index Measures equity market performance of 24 developed markets Market risk. Prices may decline. Country / regional risk. World events may adversely affect values. Treasury Bills BofA Merrill Lynch 3-month T-Bill Index Short-term debt obligations of the US government with a 3-month maturity Interest rate risk. Value will decline if interest rates rise. Managed Futures Altegris 40 Index 40 top AUM managed futures programs, monthly, as reported to Altegris Market risk. Prices may decline. Leverage risk. Volatility and risk of loss may magnify with use of leverage. Country / regional risk. World events may adversely affect values. US Stocks S&P 500 Total Return (TR) Index 500 US stocks; Weighted towards large capitalizations Stock market risk. Stock prices may decline. Country / regional risk. World events may adversely affect values. Based upon the analysis of long-term historical returns and volatility of various asset classes, the Fund will allocate approximately twenty to twenty-five percent of its assets to the managed futures strategy and approximately seventy to eighty percent of its assets to the fixed income strategy. However, to stay flexible and to respond to various changes in market conditions, the allocation ranges to each strategy may be higher or lower. 5[5]

6 Risks and Important Considerations Investors should carefully consider the investment objectives, risks, charges and expenses of Altegris Managed Futures Strategy Fund. This and other important information is contained within the individual Fund s Prospectus, which can be obtained by calling (888) The Fund Prospectus should be read carefully before investing. Altegris alternative strategy mutual funds are distributed by Northern Lights Distributors, LLC member FINRA. Altegris Advisors, J.P. Morgan Investment Management Inc., and Northern Lights Distributors are not affiliated. MUTUAL FUNDS INVOLVE RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL. The Fund is non-diversified for purposes of the Investment Company Act of 1940, which means that the Fund may invest in fewer securities at any one time than a diversified fund. When the Fund invests in fixed income securities or derivatives, the value of your investment in the Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of fixed income securities or derivatives owned by the Fund. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter term securities. Other risk factors include credit risk (the debtor may default) and prepayment risk (the debtor may pay its obligation early, reducing the amount of interest payments). These risks could affect the value of a particular investment by the Fund possibly causing the Fund s share price and total return to be reduced and fluctuate more than other types of investments. To respond to adverse market, economic, political or other conditions, the Fund may invest 100% of its total assets, without limitation, in high-quality short-term debt securities and money market instruments. The Fund s indirect and direct exposure to foreign currencies subjects the Fund to the risk that those currencies will decline in value relative to the U.S. Dollar, or, in the case of short positions, that the U.S. Dollar will decline in value relative to the currency that the Fund is short. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates and the imposition of currency controls or other political developments in the U.S. or abroad. In addition, the Fund may incur transaction costs in connection with conversions between various currencies. The Fund will invest a percentage of its assets in derivatives, such as futures and options contracts. The use of such derivatives 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 losses experienced by funds that do not use futures contracts and options. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures. Although futures contracts are generally liquid instruments, under certain market conditions there may not always be a liquid secondary market for a futures contract. As a result, the Fund may be unable to close out its futures contracts at a time which is advantageous. Trading restrictions or limitations may be imposed by an exchange, and government regulations may restrict trading in futures contracts and options. Because option premiums paid or received by the Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities. Over-the-counter transactions are subject to little, if any, regulation and may be subject to the risk of counterparty default. A portion of the Fund s assets may be used to trade OTC commodity interest contracts, such as forward contracts, option contracts in foreign currencies and other commodities, or swaps or spot contracts. A substantial portion of the trades of the programs are expected to take place on markets or exchanges outside the United States. Some foreign markets present additional risk, because they are not subject to the same degree of regulation as their U.S. counterparts. Trading on foreign exchanges is subject to the risks presented by exchange controls, expropriation, increased tax burdens and exposure to local economic declines and political instability. An adverse development with respect to any of these variables could reduce the profit or increase the loss earned on trades in the affected international markets. International trading activities are subject to foreign exchange risk. The Fund may employ leverage and may invest in leveraged instruments. The more the Fund invests in leveraged instruments, the more this leverage will magnify any losses on those investments. Leverage will cause the value of the Fund s shares to be more volatile than if the Fund did not use leverage. The Fund may take short positions, directly and indirectly through the Subsidiary, in derivatives. If a derivative in which the Fund has a short position increases in price, the underlying Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. Structured notes involve leverage risk, tracking risk and issuer default risk. Taxation Risk involves investing in commodities indirectly through the Subsidiary, through which the Fund will obtain exposure to the commodities markets within the federal tax requirements that apply to the Fund. However because the Subsidiary is a controlled foreign corporation, any income received from the Subsidiary s investments in Underlying Funds/Pools will be passed through to the Fund as ordinary income, which may be taxed at less favorable rates than capital gains. Underlying Funds/Pools in which the Subsidiary invests will retain investment managers and be subject to investment advisory and other expenses which are indirectly paid by the Fund. As a result, the cost of investing in the Fund may be higher than other mutual funds that invest directly in stocks and bonds. Each Underlying Fund/Pool will pay management fees, brokerage commissions, operating expenses and performance based fees to each manager it retains. Performance based fees will be paid without regard to the performance of any other managers retained or to the overall profitability of the Underlying Fund/Pool. Underlying Funds/Pools are subject to specific risks, depending on the nature of the managers they retain. There is no guarantee that any of the trading strategies used by the managers retained by an Underlying Fund/Pool will be profitable or avoid losses. Altegris Advisors Altegris Advisors, LLC is an SEC-registered investment adviser that advises alternative strategy mutual funds that may pursue investment returns through a combination of managed futures, equities, fixed income and/or other investment strategies _ NLD-1/17/2013 6[6]