Fund Profile Quant Allocation Category Diversified Fixed / Credit Strategy Overview Quant is a diversified income solution that targets higher levels of income and capital appreciation and reduced volatility during market downturns. Key Features Diversified Seeking Quarterly Distributions Risk Management Why QMI? 1. Efficient access to a diversified portfolio of income-producing asset classes with a risk-management overlay. 2. Seeks to enhance returns and reduce drawdowns by allocating to the best performing markets and by reducing exposure through holding cash and fixed income during recessions or periods of market turbulence. 3. Use QMI as an alternative to core fixed income exposure or as a compliment to a fixed income portfolio. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses.
Understanding QMI The Quant utilizes our core risk managed framework to attempt to deliver participation in higher yielding asset class performance with downside protection during bear markets. QMI seeks to accomplish this through broad diversification across a range of what we believe to be higher yielding asset classes. In addition, the fund benefits from a proprietary methodology designed to attempt to select the best performing credit asset classes to maximize capital appreciation, while seeking to reduce portfolio volatility during times of market stress. QMI may serve as an important compliment to a core fixed income allocation as it seeks to provide higher yield with downside risk protection. Diversified Diversify Across Multiple Sources of Each source of income has different facets of risk. By actively diversifying across a wide variety of income sources, we believe that it is possible to create a portfolio with more stable income and less volatility over time. We uniquely classify income into five major categories by risk factor: 1 Interest Rate Sensitive Domestic treasury bonds International treasury bonds Cash equivalents 2 Credit Risk Domestic corporate & high yielding bonds Foreign corporate & high yielding bonds Emerging market bonds Bank loans 3 Equity Risk High dividend-paying equities Utilities Preferred/common stock Convertible bonds 4 Real Asset Real estate investment trusts (REITs) Master limited partnerships (MLPs) Royalty trusts 5 Option * Put/write strategies Covered call writing strategies Diversification does not ensure profit or protect against loss. *An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This may be employed when an investor has a short-term neutral view on the asset and for this reason holds the asset long and simultaneously have a short position via the option to generate income from the option premium. Written call and put options may limit the ETF s participation in equity market gains and may magnify the losses.
Diversified Focus on Total Returns, Not On Chasing Yields In a world with historically low-interest rates, investors that need income are mistakenly reaching for the highest yields often regardless of the risk. This can cause, what we believe to be the highest yielding asset classes to become dangerously overvalued. The core of our philosophy is that when designing income portfolios, you must focus on total return and NOT on maximizing yield. A high dividend yield is tempting but it is of little solace when the market is down 30-50%. In the example below, the data shows how total returns were very disappointing for high-yield bonds during the most recent credit crisis when volatility spiked and high-yield bond prices declined in value. 15.00 Yield vs Total Return BOA/Merrill Lynch BBB Bond Yield vs Markit iboxx USD Liquid High Yield Index (9/2007-12/2008) BBB Bond Yield, 9.45 5.00 Yield vs Total Return % Yield Total Return Yield/Total Return -5.00-15.00-25.00-35.00 Total Return of High Yield Bonds (rolling 63-day), -25.39-45.00 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Past performance is not indicative of future results. Shown performance is not meant to represent the Fund. BOA/Merrill Lynch BBB Bond Yield As a result, we focus on appropriately constructing portfolios that are balanced between generating income, protecting capital and maximizing total returns rather than trying to create the highest yielding portfolio at any one time. Quarterly Distributions QMI pays income to investors on a quarterly basis. Quarterly Distributions Future distributions are not guaranteed. Index Rebalance Frequency The underlying index of QMI, the Quant Risk Managed Multi-Asset Index, monitors the underlying asset classes each day. Our proprietary risk management process allows the index to de-risk during turbulent market conditions potentially as frequently as daily. During more normal market conditions the index may selectively adjust the underlying holdings from 2-4 weeks or longer. The tax efficiency inherent in the ETF structure permits the strategy to potentially benefit on a total return basis while remaining fully liquid and agile in the face of dynamically changing marketing conditions. There is no guarantee that this investment strategy will achieve its objectives, goals, generate positive returns, or avoid losses.
Risk Management Managing Allocation to Prevent Volatility Spikes Historically the total portfolio risk of a higher yielding credit portfolio tends to be low and often the higher level of income can provide a buffer against market fluctuation. However, during bear markets, volatility can spike dramatically and an otherwise sleepy high-income portfolio can become as volatile as equities. High-yield bonds are a great example of this phenomenon. Utilizing the Markit iboxx USD Liquid High Yield Index corporate bond index as a proxy, historically during normal market conditions, high-yield bonds tend to have a standard deviation less than 10% which is approximately half of the volatility of the equity market. During bear markets, volatility explodes causing the standard deviation of high-yield bonds to rise above 50%. 25% High Yield Volatility Risk Managed Buy & Hold 20% 15% 10% 5% 0% Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 By reducing portfolio exposure when momentum is falling, it is possible to keep risk more consistent which helps to preserve capital and can also help investors stick with their game plan. In the chart below, we demonstrate a basic risk management strategy - if the high yield bond total return price falls below its 200-day moving average, reduce invested exposure to 25%. If it is above this threshold, remain fully invested. As you can see the risk management strategy helps to keep portfolio volatility consistent when compared to buy and hold. The QMI Index will de-risk and re-risk throughout turbulent markets using our proprietary Macro- Risk Indicator (MRI). The risk-managed strategy has a goal to generate income, reduce drawdowns and participate in market gains. Offense vs. Defensive Exposure Quant Risk Managed Multi-Asset Index (QMII) Offense Defense QMII Markit iboxx USD Liquid High Yield Index 100% 140 90% 130 80% 70% 60% 50% 40% 30% 20% 120 110 100 90 80 10% 70 0% 60 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Volatility Past performance is not indicative of future results. Shown performance is not meant to represent the Fund. Rolling 60-Day Std Deviation Offense Defense % Value Added Index
Investable Universe by Category Interest Rate Sensitive Credit Risk Equity Risk Real Asset Option IEF AGG SCHR TLT LQD ANGL EMB BKLN CWB VYM IDV SDIV PFF MLPA VNQI REM VNQ PBP PUTW HVPW ishares Barclays 7-10 Yr Treas Bnd ishares Core US Aggregate Bnd Schwab US Aggregate Bnd ishares Barclays 20+ Yr Treas Bnd ishares IBoxx $ Invest Grade Corp Bnd VanEck Vectors Fallen Angel ishares JPMorgan USD Emer Mkt Bnd PowerShares Senior Loan SPDR Bloomberg Barclays Convert Secs Vanguard High Dividend Yield ishares International Select Dividend Global SuperDividend ishares U.S. Preferred Stock Global MLP Vanguard Global ex-u.s. Real Estate ishares Mortgage Real Estate Vanguard REIT PowerShares S&P500 BuyWrite Portfolio Wisdom Tree CBOE S&P500 PutWrite Strategy U.S. Equity High Volatility Put Write Portfolio holdings are subject to change and should not be considered investment advice.
Definitions & Terms: Index References: The S&P 500 Index is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The Quant Risk Managed Multi-Asset Index consists of a diversified selection of ETFs focused on generating higher income and overlayed with a proprietary risk management approach. The Markit iboxx USD Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe. (Sources: Bloomberg and Quant) Standard Deviation: This statistical measurement of dispersion about an average, depicts how widely an investment s returns varied over a certain period of time. De-Risk & Re-Risk: This is a process by which we employ our proprietary risk management indicator to reduce or increase portfolio exposure during turbulent markets and allocate from risk assets to fixed income and or cash/cash equivalents. Disclosures: Investors should carefully consider the investment objective, risks, charges and expenses of the QUANT Risk Managed Multi-Asset ETF Fund. This and other information is contained in the prospectus and should be read carefully before investing. For a prospectus please call 866-270-0300. The Fund is distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Northern Lights Distributors, LLC and Blue Sky Asset Management, LLC are not affiliated. A substantial portion of a portfolio is held in cash or cash equivalents, there is the risk that the value of the cash account, including interest, will not keep pace with inflation, thus reducing purchasing power over time. The Fund may focus its investments in securities of a particular industry to the extent the Index does. The use of derivative instruments, such as swaps, involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Investing in emerging markets involves not only the risks described below with respect to investing in foreign securities, but also other risks, including exposure to economic structures that are generally less diverse and mature, and to political systems that can be expected to have less stability, than those of developed countries. Credit risk is the risk that the issuer of a security and other instrument will not be able to make principal and interest payments when due. Fluctuations in the value of equity securities held by the Fund will cause the net asset value ( NAV ) of the Fund to fluctuate. Fluctuations in the value of equity securities held by the Fund will cause the net asset value ( NAV ) of the Fund to fluctuate. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares and will include a bid-ask spread charged by the exchange specialists, market makers or other participants that trade the particular security. ETFs in which the Fund invests are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As a result, the cost of investing in the Fund will be higher than the cost of investing directly in the ETFs and may be higher than other mutual funds that invest directly in stocks and bonds. When the Fund invests in fixed income securities, the value of your investment in the Fund will fluctuate with changes in interest rates. Since the Fund s investments may include foreign securities, the Fund is subject to risks beyond those associated with investing in domestic securities. The Fund does not utilize an investing strategy that seeks returns in excess of the Index. Therefore, it would not necessarily sell a security unless that security is removed from the Index, even if that security generally is underperforming. Lower-quality bonds, known as high yield or junk bonds, present greater risk than bonds of higher quality, including an increased risk of default. The Fund is a new fund with a limited history of operations for investors to evaluate. As the Fund may not fully replicate the Index, it is subject to the risk that investment management strategy may not produce the intended results. Overall stock market risks may affect the value of the Fund. The Fund is not actively managed and the Adviser will not sell shares of an equity security due to current or projected under-performance of a security, industry or sector, unless that security is removed from the Index or the selling of shares of that security is otherwise required upon a rebalancing of the Index as addressed in the Index methodology. A higher portfolio turnover will result in higher transactional and brokerage costs. There are risks associated with the sale and purchase of call and put options. As a seller (writer) of a put option, the Fund will tend to lose money if the value of the reference index or security falls below the strike price. The earnings and prospects of small and medium sized companies are more volatile than larger companies and may experience higher failure rates than larger companies. Swaps are subject to tracking risk because they may not be perfect substitutes for the instruments they are intended to replace. 6378-NLD-3/16/2017