Disturbing Divergences

Transcription

1 Targeting Innovation. Investing in knowledge worldwide. Disturbing Divergences GaveKal Capital, LLC 37 7 th St., Suite 493 Denver, CO 822

2 Summary Please consider the Fund s investment objectives, risks, charges and expenses before investing. The prospectus or summary prospectus that contains this and other information about the Fund, is available by calling and should be read carefully. Investment Objective The Fund s investment objective is to seek long-term growth of capital and to exceed the performance of the MSCI World Index. Fund Investment Strategy The GaveKal Knowledge Leaders Fund seeks to identify global companies that are utilizing a deep reservoir of intangible capital to generate earnings growth and shareholder value. Intangible rich companies often possess some competitive advantages such as a strong brand, proprietary knowledge or a unique distribution mechanism. The Fund manager has developed a methodology to measure and analyze intangible capital investments, and this methodology forms the backbone of the Fund s investment process. Risks The value of the securities held by the Fund will change due to general market and economic conditions and industry perceptions. Investments in non-us issuers may involve unique risks. Currency fluctuation, adverse political, economic or social developments could undermine the value of the Fund s investments. The securities of mid-cap companies may be subject to more abrupt or erratic market movements and may have lower trading volumes. 2

3 Performance as of 3/3/4 The total annual operating expenses of the Fund are.53% and.28% and net expenses are.5% and.25% for the Advisor and Institutional Classes, respectively. The inception date for the GaveKal Knowledge Leaders Fund is 9/3/. The performance data quoted here represents past performance. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain performance information current to the most recent month-end please call or visit our website at A redemption fee of 2.% will be imposed on redemptions or exchanges of shares you have owned for 9 days or less. Please see the prospectus for more information. The Fund s advisor has contractually agreed to waive its fees and/or pay for operating expenses of the Fund to ensure that total annual fund operating expenses (excluding any taxes, leverage interest, brokerage commissions, dividend expenses on short sales, acquired fund fees and expenses (as determined in accordance with SEC Form N-A), expenses incurred in connection with any merger or reorganization, and extraordinary expenses such as litigation expenses) do not exceed.5% and.25% of the average daily net assets for Advisor Class and Institutional Class shares of the Fund, respectively. This agreement is in effect until December 3, 24, and it may be terminated before that date only by the Trust s Board of Trustees. The Fund s advisor is permitted to seek reimbursement from the Fund, subject to limitations, of fees waived for payments made to the Fund for a period of three years from the date of the waiver or payment. The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results. 3

4 Introduction We ve been overweight in counter-cyclical areas of the market and have underperformed while cyclicals had a run. The record high positive correlation between stocks and bonds suggests investors have never been more nervous about deflation. We believe the US$ should have weakened much more, given quantitative easing (QE). The devaluation appears to be incomplete. The US has lost the last few years of the currency war. Since the June 22 lows, risk assets have diverged massively from the economic backdrop. Risk assets appear to be shrugging off the deflationary message. Normally, while the Fed is easing, counter-cyclical groups lead the cyclical areas of the stock market. Stocks appear to have diverged from the real economy. We have numerous technical divergences to note. Net advances are declining, while new 52-week highs and intraday volatility remain subdued all while stock prices have continued higher. This could be a difficult transition for risky assets. The taper seems to offer a negative glide path for the stock market. We think the risk-adjusted performance of counter-cyclicals could be better for counter-cyclicals than for cyclicals. The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results. 4

5 Sector Allocation Consumer staples and health care represent 7% of the market cap of the four counter-cyclical sectors of the MSCI World index. Utilities and telecom only represent 3% of MSCI World counter-cyclical sectors. Fifty percent of our equity allocation is to the health care and consumer staples sector. Allocations are subject to change. 5

6 Record high positive correlation between stocks and bonds suggests investors have never been more scared of deflation. To put it into some context, investors appear more scared of deflation today than the 93s. It is easy to see the beginning of the long deflationary wave that began after the Asian crisis in It doesn t appear that QE has done much to alleviate these concerns Three-Year Rolling Correlation between US Equities and -Year Treasury '72 '77 '82 '87 '92 '97 '2 '7 '2 '7 '22 '27 '32 '37 '42 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '2 '7 '2 - Source: Gavekal Capital, FactSet 6 As of 3/3/24

7 Reflationary policy ended last April. The whole point of quantitative easing (QE) is to manipulate the bond market in such a way as to generate falling real rates and rising inflation expectations. In the wake of the (deflationary) market scare from August-October 2, real rates were pushed lower through QE, thereby generating rising inflation expectations. By simply announcing the taper, Bernanke pushed the whole structure of the bond market into a sequence of rising real rates and falling inflation expectations. - Year TIPS & Breakeven Inflation Beginning October 4, 2 Correlation: Year TIPS & Breakeven Inflation Beginning October 4, 2 Correlation: /2 4/2 7/2 /2 /3 4/3 7/3 /3 /4 4/4 7/4 -Year Tips Breakeven Inflation /2 4/2 7/2 /2 /3 4/3 7/3 /3 /4 4/4 3-Year TIPS implied Breakeven Inflation US Treasury Constant Maturity Inflation-Indexed (TIPS) - 3 Year - Yield (Left) GaveKal Research Source: Gavekal Capital, FactSet 7 As of 3/3/24

8 Stocks appear to have diverged from the real economy. By 27, stocks hadn t recovered all the ground lost to bonds over the previous seven years. They also hadn t achieved the valuation highs of 2. In contrast, today stocks have recovered all the ground lost to bonds since 27 all while employment levels have barely budged from the depths of the global financial crisis (GFC). Valuations are back at highs last seen in Sp5 Total Return relative to JPM GBI Yr. & Employment Ratio Correlation: Shiller P/E & Sp5 Total Return relative to JPM GBI Yr Correlation: '89 '9 '9 '92 '93 '94 '95 '96 '97 '98 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 (INDEX) S&P 5 - Index Total Return Level / JP Morgan GBI (+ Y) (Traded) - Index Total Return Level (Right) Ratio Civilian Employment To Working-Age Population (Pct.) - (Left) Recession Periods - 6 '89 '9 '9 '92 '93 '94 '95 '96 '97 '98 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 Shiller, Standard & Poors 5 Composite Index, Price Earnings (P/E) Ratio - (Left) (INDEX) S&P 5 - Index Total Return Level / JP Morgan GBI (+ Y) (Traded) - Index Total Return Level (Right) Recession Periods - Source: Gavekal Capital, FactSet 8 As of 3/3/24

9 In our opinion, the US$ should have weakened much more, given QE. The devaluation appears to be incomplete. Several years ago, Bill Dudley of the NY Fed suggested that, according to staff research, every $8 billion of QE is equal to a % cut in fed funds. We created a model around that idea to illustrate what QE-adjusted fed funds look like. The whole point of QE is to impact the external price of money (the currency level) because the zero bound has been reached on the internal price of money (interest rates). The USD should have weakened much more given the huge dose of QE. The fact that it didn t suggests that, while the Fed did huge amounts of QE, it wasn t enough to generate a drop in the external value of the USD. This divergence suggests the Fed hasn t been winning the war against deflation for three years. 3 2 Dollar Index Compared to Effective & QE Adjusted Fed Funds Rate '84 '85 '86 '87 '88 '89 '9 '9 '92 '93 '94 '95 '96 '97 '98 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 NYBOT US Dollar Index, Close - (Left) US Effective Federal Funds Rate - Yield (Right) Fed Funds Rate, Adjusted For LSAP, Assuming $ billion less per meeting (Right) Source: Gavekal Capital, FactSet 9 As of 3/3/24

10 The US has lost the last few years of the currency war. Japan is a great example to illustrate our point. At the end of 22, it began a new QE program that today is 4x the magnitude of US QE on an economically equivalent basis. This has caused the Yen to fall and, with it, flattened the long end of the US yield curve. A rising currency and flattening yield curve are very deflationary indicators. 3 Year Minus Year Treasury Yield Spread & USD Correlation: '4 '5 '6 '7 '8 '9 ' ' '2 '3 US Benchmark Bond - 3 Year - Yield - US Benchmark Bond - Year - Yield Japanese Yen per U.S. Dollar - FX Rate - Spot Source: Gavekal Capital, FactSet As of 3/3/24 The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results. 3

11 Evidence suggests the compression is due entirely to longterm inflation expectations falling. 5.5 & 3 Year Treasury Yields & 3-Year TIPS Breakeven Inflation '9 ' ' '2 '3 US Benchmark Bond - 3 Year - Yield US Benchmark Bond - Year - Yield.4 ' ' '2 '3 3-Year TIPS implied Breakeven Inflation Year TIPS Breakeven Inflation.4 GaveKal Research 2.5 & 3-Year TIPS Yields & 3-Year Bonds & Breakeven Inflation Spread / / /2 4/2 7/2 /2 /3 4/3 7/3 /3 /4 4/4 -.5 GOVT ISSUE:,CONSTANT MATURITY,TIPS,-YEAR-YIELD,PERCENT-US - US Treasury Constant Maturity Inflation-Indexed (TIPS) - 3 Year - Yield GaveKal Research.4 ' ' '2 '3 Spread /3 Breakeven Inflation US Benchmark Bond - 3 Year - Yield - US Benchmark Bond - Year - Yield GaveKal Research Source: Gavekal Capital, FactSet As of 3/3/24 The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results.

12 Risk assets appear to be ignoring the deflationary message. Since April 23, risk assets have diverged massively from the economic backdrop..8 3 Year Minus Year Treasury Yield Spread & S&P5 2, , ,6,4,2, 8.6 '9 ' ' '2 '3 US Benchmark Bond - 3 Year - Yield - US Benchmark Bond - Year - Yield S&P 5 - Price Index Source: Gavekal Capital, FactSet 2 As of 3/3/24 The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results. 6

13 Other symptoms of a failed devaluation are falling commodity prices, diverging from stock prices. 2,,8,6,4 Commodities Copper & SP5 Correlation: ,,8,6,4 Commodities Lumber & SP5 Correlation: ,2 2,2 25,, '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 '4 High Grade Copper (NYM $/lbs) Continuous Contract - Futures Price Close (Right) S&P 5 - Price (Left) GaveKal Research 8 6 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 '4 (LEAD 2M) Lumber: Random Length, st Expiration Future Nearby - Settlement - Chicago Mercantile E S&P 5 - Price (Left) 5 GaveK al Research, 9, 8, 7, 6, 5, 4, 3, Baltic Freight Index & SP ,,8,6,4,2 2,,8,6,4,2 Copper/Gold Ratio & SP ,,, , '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 Baltic Dry Index - Price - Last (Left) Recession Periods - S&P 5 - Price (Right) '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 Copper/Gold Ratio (Right) S&P 5 - Price (Left) Source: Gavekal Capital, FactSet 3 As of 3/3/24 8

14 The rise in stocks has simply forced more equity risk onto investors. Since Japanese QE was unleased, the risk-adjusted performance of US stocks has gone nowhere. A rise in stock index values has gone alongside a rise in equity volatility. Whether they realize it or not, investors have been getting compensated for simply taking on more equity risk for a year now SP5 Relative to The VIX In another divergence, the risk-adjusted performance of the S&P5 has not broken above 27 levels. Additionally, in early 23 we saw the same spike in relative equity volatility that we saw in early '94 '95 '96 '97 '98 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 ' SP5 Relative to the VIX ,,9,8,7,6,5,4,3,2, StDev VIX rel StDev S&P5 2-Day based on -Day Returns Correlation:.55 2, 85.96,8,6 9.53,4,2, 8 2 7/ / /2 4/2 7/2 /2 /3 4/3 7/3 /3 /4 4/4 SP5 Relative to VIX (Left) S&P 5 Index - Price (Right), '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 '4 StDev of VIX Rel StDev S&P5 S&P 5 - Price Source: Gavekal Capital, FactSet 4 As of 3/3/24 6

15 Normally, while the Fed is easing, counter-cyclical groups lead the more cyclical areas of the stock market. AS represented by our NY Fed QE-adjusted fed funds rate, the Fed has been easing non-stop since 28, which should have resulted in a long outperformance by counter-cyclicals. This is an interesting divergence. 5 4 SP5 Counter Cyclicals relative to Early, Late & Hyper Cyclicals Compared to Implied Federal Funds Rate based on LSAP '84 '85 '86 '87 '88 '89 '9 '9 '92 '93 '94 '95 '96 '97 '98 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 (INDEX) MSCI World Counter Cyclicals relative to All Cyclicals (Left) Fed Funds Rate, Adjusted For LSAP, Assuming $ billion less per meeting (Right) US Effective Federal Funds Rate - Yield (Right) Recession Periods - Source: Gavekal Capital, FactSet 5 As of 3/3/24 5

16 Normally, when the yield curve is steepening, counter-cyclical groups lead the cyclical areas of the stock market. If we use our QE-adjusted fed funds rate and compare it to the ten year US Treasury bond, another dimension comes out. We can explain why from the end of 29 to mid-22, this term spread compressed somewhat. Beginning again in mid- 22, this curve began to widen again, which again suggests a window of outperformance for counter-cyclicals. Another interesting divergence. 8 Year Treasury - Implied Fed Funds Spread & Counter Cyclicals Relative to All Cyclicals '87 '88 '89 '9 '9 '92 '93 '94 '95 '96 '97 '98 '99 ' ' '2 '3 '4 '5 '6 '7 '8 '9 ' ' '2 '3 -Year to Implied Fed Funds Rate Spread -Year to Effect Fed Funds Rate Spread (INDEX) MSCI World Counter Cyclicals relative to All Cyclicals (Right) Source: Gavekal Capital, FactSet 6 As of 3/3/24

17 The relative volatility of counter-cyclicals compared to cyclicals is near records. The earnings volatility of counter-cyclicals is usually close to half that of cyclicals. The relative volatility of counter-cyclicals tends to rise in a market cycle, and approaches 8-9% that of cyclicals toward the end. The relative volatility of countercyclicals hasn t risen in a year, presenting yet another divergence. The rise in relative volatility from 2 to present has not been accompanied by much of a rise in relative performance MSCI World Price Index 2-Day Standard Deviations of Counter Cyclicals Relative to Cyclicals ,8,6, MSCI World Price Index of Counter Cyclicals Relative to Cyclicals 2-Day Standard Deviations of Counter Cyclicals Relative to Cyclicals ,2, '6 '7 '8 '9 ' ' '2 '3 Counter Cyclicals Relative to Cyclicals 2-Day Standard Deviation (Left) MSCI The World Index - Price Index (Right) 6.5 '4 '5 '6 '7 '8 '9 ' ' '2 '3 Counter Cyclicals Relative to Cyclicals 2-Day Standard Deviation (Left) (INDEX) Countery Cyclicals Relative to Cyclicals (Right) 6 Source: Gavekal Capital, FactSet 7 As of 3/3/24

18 We have numerous technical divergences to note. Net advances are advancing stocks minus declining stocks. Net advances is a good quantification of the thrust of the stock market. When it drops, it means the thrust is fading. Net advances have been declining for a year now, diverging from stock prices. 25 Weekly Net Advances MSCI North America 2, Day Net Advances MSCI North America 2, , , ' ' '2 '3 (MOV 3W) MSCI North America Weekly Net Advances (Left) MSCI North America (Right) 65.3,8,7,6,5,4,3,2, ' ' '2 '3 (MOV D) Net Advances MSCI North America 26.64,8,7,6,5,4,3,2, Source: Gavekal Capital, FactSet 8 As of 3/3/24

19 New 52-week highs have diverged from stock prices. We also measure net 52-week highs, which are new 52-week highs minus new 52-week lows. Here again, we ve seen a drop in the internal thrust of stocks for over a year.,2 Month Sum of Net New 52-Week Highs and Price Level MSCI North America 2,5 Quarter Sum of Net New 52-Week Highs and Price Level MSCI North America, ,,5, ' ' '2 '3 (MSUM 4W) MSCI North America Number of Net New 52 Week Highs (INDEX) MSCI North America ' ' '2 '3 (MSUM Q) MSCI North America Number of Net New 52 Week Highs (INDEX) MSCI North America Source: Gavekal Capital, FactSet 9 As of 3/3/24

20 Intraday volatility and the percent of up days have diverged as well. We calculate the intraday spread of the S&P5 and compare it to the price level. Intraday volatility has not risen meaningfully for a couple years. We also calculate the percent of days that stocks are up, the percent of days that stocks are down, and the net percent of up days. For over a year, net up days have diverged from the price index. SP5 2,,8,6,4,2, 8 S&P5 and S&P5 Daily Range % of Index Value Daily Range is Intraday High minus Intraday Low Correlation: '4 '5 '6 '7 '8 '9 ' ' '2 '3 (S&P 5 - Price - True Range / S&P 5 - Price) * (Right) S&P 5 - Price (Left) (Left) Daily Range (%) S&P5 Percent Positive Price Change Days and S&P5 Price Previous 88 Trading Days 4 '4 '5 '6 '7 '8 '9 ' ' '2 '3 Percent Positive Price Change Days S&P 5 - Price (Right) ,,8,6,4,2, 8 6 Source: Gavekal Capital, FactSet 2 As of 3/3/24

21 This could be a difficult transition for risky assets. Here, we calculate the amount of assets the Fed will buy over the next three months if the $ billion/meeting taper schedule holds. We compare it to the relative performance of the S&P5 vs. the JP Morgan -Year Government Bond Index. It looks like bonds should outperform stocks. 35, 3, 25, 2, 5,, 5, -5, -, Sp5 Total Return relative to JPM GBI Yr. Compared to Quarter Change in FRB Total Assets 24 Correlation: , ' ' '2 '3 '4 '5 (INDEX) S&P 5 - Index Total Return Level / JP Morgan GBI (+ Y) (Traded) - Index Total Return Level (Right) (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting (Left) Source: Gavekal Capital, FactSet 2 As of 3/3/24 6

22 The taper seems to offer a negative glide path for the health of the stock market. Using our same taper model again, here we compare to our equity meta-data. This model would suggest we experience declining momentum through the balance of the year, all else equal Percent of Issues Above 2-Day Moving Average MSCI North America Compared to FRB TA 24 ' ' '2 '3 '4 '5 Percent of Issues Above 2-Day Moving Average (Left) (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting (Right) , 3, 25, 2, 5,, 5, -5, -, -5, 3, 25, 2, 5,, 5, -5, -, 2 Day Net Advances MSCI North America Compared to FRB TA 24 ' ' '2 '3 '4 '5 (MOV 2D) MSCI North America - 2 Day Net Advances (Right) (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting (Left) Source: Gavekal Capital, FactSet 22 As of 3/3/24

23 Stocks appear to be in the process of adjusting to the taper. Once more with our taper model, this time compared to the sum of days closing down by over % in the preceding six months (left) and the net percent of up days (right). We would expect to see more days down % or more in the months to come. 3, 25, 2, 5,, 5, -5, -, -5, MSCI North America 6 Month Sum of Days that Finish Down by % or More Compared to FRB Total Assets 24 35, 35 ' ' '2 '3 '4 '5 MSCI North America - 6 Month Sum of Days that Finish Down by % or More (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting MSCI North America 4 Month Cumulative Net Positive Price Change Days Compared to Projected FRB Assets in 24 4, 3, 2,, -, -2, ' ' '2 '3 '4 '5 (MSUM 88D) MSCI North America - 4 Month Cumulative Net Positive Price Change Days (Left) (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting (Right) 6.. Source: Gavekal Capital, FactSet 23 As of 3/3/24

24 We think the risk-adjusted performance could be better for counter-cyclicals than cyclicals over the next year. Finally, using our taper model once more, this time we compare the relative performance of counter-cyclicals vs. cyclicals and the relative volatility of counter-cyclicals vs. cyclicals. These models suggest counter-cyclicals should offer investors better risk-adjusted returns over the next year. 85 MSCI World Counter Cyclicals relative to All Cyclicals Compared to Projected FRB Assets in 24 35, 3, MSCI World Fed Total Assets 24 2-Day Standard Deviations of Counter Cyclicals Relative to Cyclicals 4, 9 25,.95 3, 2, ,, 5, ,, 5-5, -,.7 -, -5, ' ' '2 '3 '4 '5 (INDEX) MSCI World Counter Cyclicals relative to All Cyclicals (Left) (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting (Right).65 ' ' '2 '3 '4 '5 Counter Cyclicals Relative to Cyclicals 2-Day Standard Deviation (Left) (Left) (DIFF 3M) Total Fed Assets, Assuming $ billion less per meeting (Right) -2, Source: Gavekal Capital, FactSet 24 As of 3/3/24

25 Glossary of Definitions Active Share is the percentage of stock holdings in a portfolio that differ from the benchmark index. Active Share determines the extent of active management being employed by mutual fund managers: the higher the Active Share, the more likely a fund is to outperform the benchmark index. Researchers in a 26 Yale School of Management study determined that funds with higher Active Share will tend to be more consistent in generating high returns against the benchmark indexes. Alpha is a measure of the portfolio s risk adjusted performance. When compared to the portfolio s beta, a positive alpha indicates better-than-expected portfolio performance and a negative alpha indicates worse than-expected portfolio performance. Basis Points is /th of %, and is used to denote the change in a financial instrument. Beta is a measure of the funds sensitivity to market movements. A portfolio with a beta greater than is more volatile than the market, and a portfolio with a beta less than is less volatile than the market. Correlation is the extent to which the returns of different types of investments move in tandem with one another in response to changing economic and market conditions. Correlation is measured on a scale of (negatively correlated) to + (completely correlated). Low correlation or negative correlation to traditional stocks and bonds may help reduce risk in a portfolio and provide downside protection. Max Drawdown is the maximum single period loss incurred over the interval being measured. MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. Sharpe Ratio uses a fund s standard deviation and its excess return (the difference between the fund s return and the risk free return of 9 day Treasury Bills) to determine reward per unit of risk. The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results. 25

26 Glossary of Definitions (cont d.) Standard Deviation is a calculation used to measure variability of a portfolio s performance. Treynor Ratio is a risk-adjusted measure of return based on systematic risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses beta as the measurement of volatility. The information and companies listed on this slide are for example purposes only and should not be construed as the Investment Advisor s opinion or investment outlook related to any of the companies or securities listed. Past performance is no guarantee of future results. 26

27 Important Disclosures The value of the securities held by the Fund will change due to general market and economic conditions and industry perceptions. Investments in non US issuers may involve unique risks including, foreign securities that trade in, and receive revenues in, foreign currencies are subject to the risk that those currencies will decline in value relative to the US dollar. Currency fluctuation, adverse political, economic or social developments could undermine the value of the Fund's investments. The securities of mid cap companies may be subject to more abrupt or erratic market movements and may have lower trading volumes. The Fund s advisor has contractually agreed to waive its fees and/or absorb expenses of the Fund to ensure that total annual fund operating expenses (excluding taxes, leverage interest, brokerage commissions, dividend expenses on short sales, acquired fund fees and expenses as determined in accordance with Form N-A, expenses incurred in connection with any merger or reorganization, or extraordinary expenses such as litigation) do not exceed.5% and.25% of average daily net assets for Advisor Class and Institutional Class Shares, respectively. This agreement is in effect until December 3, 24, and it may be terminated before that date only by the Trust s Board of Trustees. The Fund s advisor is permitted to seek reimbursement from the Fund, subject to limitations, for fees it waived and Fund expenses it paid for three years from the date of any such waiver or payment. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. Please consider the Fund s investment objectives, risks, charges and expenses before investing. The prospectus or summary prospectus that contains this and other information about the Fund, is available by calling and should be read carefully. The GaveKal Knowledge Leaders Fund is distributed by IMST Distributors, LLC. 27

28 For investors interested in the GaveKal Knowledge Leaders Fund, please contact Shawn Paulk, Head of Distribution, at or GaveKal Capital, LLC 37 7 th St., Suite 493 Denver, CO 822