Multi-Asset Income NFMAX NFMCX NFMIX NLD Review Code: 5088-NLD-02/03/2016 Newfound Case ID: 4226941 1 December 2015
The Newfound Mission Defensive Simple Consistent Thoughtful In August 2008, Newfound Research was founded based on a simple, but powerful, premise: investors care deeply about capital preservation. Newfound Research offers a full suite of tactically risk-managed ETF portfolios that seek to participate in market growth and avoid significant market declines. We believe in portfolio processes that are simple, consistent, and thoughtfully designed. Most of all, we believe that managing risk is paramount to potentially achieving superior risk-adjusted returns. Volatility happens. Have a plan with Newfound Research. Defensive Simple Consistent Thoughtful Views risk management from the investor s point of view, seeking to participate in bull markets and avoid large losses during bear markets. Volatility will happen. It is the price of admission to the financial markets. Investors need a thoughtful plan to deal with this volatility before it happens. We believe that each strategy should seek to adhere to a simple investment objective, providing transparency both in expected outcome and process. Our research shows that simple processes are more robust to uncertainty than complicated processes an important factor in delivering consistent and repeatable results. To meet a simple objective, a strategy must be governed by a guiding policy. At Newfound, we believe that the best way to ensure consistency in our process is through a quantitatively-enabled, rulebased approach, which can help mitigate the behavioral biases that often compound into investment errors. At Newfound, we recognize the clear distinction between the algorithms that generate our investment signals and the rules we use to translate those signals into portfolios. We believe that it is with these rules the design of the portfolio that we seek to achieve our objective and manage model risk. 2
About Newfound Defensive Simple Consistent Thoughtful 2008 2013 2010 Founded to license output from our core momentum models Began to actively develop and manage customized tactical overlays and portfolios for institutions, asset managers, and large RIAs Made strategies directly available to advisors under the Newfound brand for the first time Full Suite of Tactically Risk-Managed ETF Portfolios Equity Risk Managed Global Sectors Risk Managed U.S. Sectors Risk Managed Small-Cap Sectors U.S. Factor Defensive Equity Alternative Income Multi-Asset Income Bond Alternative Total Return Newfound Strategy Suite Fixed Income 1% Target Excess Yield 2% Target Excess Yield 3% Target Excess Yield 4% Target Excess Yield Liquid Alternatives Dynamic Alternatives 3 Total Portfolio Tailwinds Conservative Tailwinds Moderate Tailwinds Growth Simple Objective Consistent Process Thoughtful Design
Important Disclosures Investors should carefully consider the investment objectives, risks, charges and expenses of the Newfound Multi-Asset Income Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-855-394-9777. The prospectus should be read carefully before investing. The Newfound Multi-Asset Income Fund is distributed by Northern Lights Distributors, LLC, Member FINRA/SIPC. Newfound Research LLC is not affiliated with Northern Lights Distributors, LLC. Investors are not able to invest directly in the indices referenced in this material and unmanaged index returns do not reflect any fees, expenses or sales charges. The referenced indices are shown for general market comparisons and are not meant to represent the Fund. Risk Factors The Fund is a new mutual fund and has a limited history of operations. Adverse changes in currency exchange rates may erode or reverse any potential gains from the Fund s investments. Investments in foreign securities could subject the Fund to greater risks including, currency fluctuation, economic conditions, and different governmental and accounting standards. In addition to the risks generally associated with investing in securities of foreign companies, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues. ETF s are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Similar to ETFs, owning an ETN generally reflects the risks of owning the assets that comprise the underlying market benchmark or strategy that the ETN is designed to reflect. In general, the price of a fixed income security falls when interest rates rise. To the extent the Fund invests in high yield securities (junk bonds), it will be subject to greater levels of interest rate, liquidity and credit risks than funds that do not invest in such securities. A higher Fund turnover will result in higher transactional and brokerage costs. Investments in underlying funds that own small and mid-capitalization companies may be more vulnerable than larger, more established organizations. 4
Multi-Asset Income A Simple Objective A Consistent Process A Thoughtful Design A simple objective The strategy seeks to generate an attractive risk-adjusted income profile within a disciplined risk management framework utilizing alternative income generating asset classes. A consistent process Applies a disciplined, rule-based process to evaluate each asset independently utilizing Newfound s proprietary momentum models. Assets identified as exhibiting negative momentum are removed from the portfolio. A thoughtful design After screening out asset classes exhibiting negative momentum, the remaining ETFs receive an allocation in proportion to their riskadjusted income with single positions capped at 25%. There is no assurance that the strategy will achieve its investment objective. Newfound reserves the right to substitute the ETFs used in the investment universe. 5
Multi-Asset Income An Unconstrained Investment Universe What are MLPs? Master Limited Partnerships are publicly traded partnerships that combine the taxbenefits of limited partnerships with the liquidity of traded securities. MLPs generally derive income from the extraction and transportation of natural resources. What are REITs? Real estate investment trusts are companies that invest in real estate through properties and mortgages but trade like a stock. REITs receive special tax considerations and are a highly liquid way of investing in real estate. What are Preferreds? Preferred equities are a class of equities that has a higher claim on assets and earnings than common stock. They generally have a dividend that must be paid prior to the payment of any dividends on common stock. What are Bank Loans? Bank loans are typically senior - must be paid back before other debt - and secured - backed by collateral, similar to a mortgage - loans issued by a company. The income of this debt typically floats, meaning that it resets to reflect changes in prevailing interest rates. When interest rates rise, income also rises. What are Convertibles? A convertible bond is a bond that may be converted into shares of the issuing company s equity or cash of an equivalent value. Convertible bonds typically pay lower coupons than traditional bonds issued by the same company due to the value of being able to convert to equity ownership. Traditional Equity Income Exposures U.S. Dividend Stocks Intl. Dividend Stocks Traditional Fixed Income Exposures International Treasuries High Yield Corporates 20+ Year U.S. Treasuries IG Corporates Non-Traditional Income Generators MLPs Convertibles Mortgage REITs Bank Loans USD EM Bonds U.S. REITs U.S. Covered Call Local Currency EM Bonds Preferred Stocks International REITs For informational purposes only. Each of these asset classes has its own set of investment characteristics and risks to consider. 6
Universe Risk Factors MLPs The publicly traded units issued by MLPs the predominant way investors gain exposure to them represent the equity capital of a business, and as such, carry a level of risk similar to that of stock in a capital structure. In other words, MLP units are inherently riskier than bonds issued by the same company. Most equity investors in an MLP invest as limited partners. As with corporate shareholders, limited partners have no management responsibilities, are liable only to the extent of their investments, and share in the profits or losses and cash distributions of the MLP. REITs REITs may be subject to a high degree of market risk due to lack of industry diversification. REITs may be subject to other risks including, but not limited to, changes in real estate values or economic conditions, credit risk and interest rate fluctuations, changes in the value of the underlying property owned by the trust, and defaults by borrowers. Preferreds Unlike common shares, preferred equities may not have participation in the upside potential of the issuer, which means that preferred equities are likely to underperform common equities when stock markets are rising. Preferred stocks (and preferred stock ETFs) are highly sensitive to interest rate increases. Bank Loans A borrower's ability to repay may deteriorate and result in a loss. Bank Loans can typically be repaid without penalty at any time and cause the expected income stream to end before the stated maturity. Note: In a declining interest rate environment, prepayment risk may increase with high interest rate loans and other high yielding fixed income instruments. Bank Loans are unregistered securities, trade over-the-counter and may have periods of imbalanced trading activity causing periods of illiquidity and price volatility. Illiquidity, the lack of active trading with equal buyers and sellers, may make it difficult to trade bank loans at a price which represents fair value. This risk may be reduced by not investing assets with a short term investment horizon in a Bank Loan Fund. Convertible Bonds Convertible bonds are subject to the risks of both stocks and bonds and are not suitable for all investors. These bonds can fluctuate in value with the price changes of the company s underlying stock. If interest rates rise, the value of the corresponding convertible bond will fall. Many of the companies that issue convertible bonds are below investment grade, which means the bonds can be more risky than investment-grade issues. Convertible bonds are often issued by smaller companies and may be more volatile than securities issued by larger companies. 7
Multi-Asset Income Attractive Income Producers and Effective Diversifiers High income exposures can potentially both improve portfolio yield and help to diversify core stock and bond positions. Our investment universe has an average yield of 5.1% with an average correlation of 0.60 to the S&P 500. Asset Class Asset Class Yield Correlation to S&P 500 U.S. Dividend Stocks (VYM) 3.16% 0.96 Intl. Dividend Stocks (IDV) 4.99% 0.88 International Treasuries (BWX) 0.19% 0.43 High Yield Corporates (HYG) 5.88% 0.73 IG Corporates (LQD) 3.48% 0.21 20+ Year U.S. Treasuries (TLT) 2.62% -0.30 MLPs (AMJ) 7.95% 0.61 Bank Loans (BKLN) 4.11% 0.70 Convertibles (CWB) 5.07% 0.90 Local Currency EM Bonds (EMLC) 6.33% 0.64 USD EM Bonds (PCY) 5.44% 0.44 Preferred Stocks (PFF) 5.87% 0.57 Mortgage REITs (REM) 14.12% 0.58 U.S. REITs (VNQ) 3.85% 0.74 International REITs (VNQI) 3.49% 0.69 U.S. Covered Call (PBP) 4.66% 0.88 Source: Yahoo! Finance. Analysis provided by Newfound Research. Yields are defined as the income received from owning an asset expressed as a percentage of the price. Yield on a given day is calculated using smoothed 12-month trailing dividends. Yield presented in the table is computed as of 12/31/2015. The S&P 500 index is an unmanaged composite of 500 large capitalization companies. The index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Correlation is calculated as Pearson correlation of monthly returns between the asset class ETF and the S&P 500 TR index from ETF inception to 12/31/2015. The Pearson s correlation coefficient between two variables is defined as the covariance of the two variables divided by the product of their standard deviations. A positive Pearson s correlation implies that when one of the variables is above its mean, the other variable also tends to be above its mean and vice versa. Correlation is a statistical measure showing how closely different types of investments move together over time. A correlation of 1 means they move in perfect unison, 0 means their movements are random, and minus 1 means they move in opposite directions. 8
Multi-Asset Income The Weekly Portfolio Process* Newfound s models generate a buy or sell signal on each of the sixteen exposures each week. Exposures with sell signals are excluded from the portfolio. The process of de-risking the portfolio Short-term U.S. Treasuries 16 ON 7 ON 2 ON 0 ON The process of re-risking the portfolio 0 ON 2 ON 7 ON 16 ON * For demonstration purposes only of how the over-arching portfolio process works. Exact allocations may not exactly reflect these portfolios. An on signal refers to an asset class exhibiting positive momentum as measured by Newfound s proprietary model. 16 On means that as measured by Newfound s model, all sixteen asset classes in the universe are exhibiting positive momentum. 2 On means that as measured by Newfound s model, two of the sixteen asset classes in the universe are exhibiting positive momentum. 9
Multi-Asset Income The Weekly Portfolio Process* Allocations are adjusted by the yieldto-risk ratio of each ETF. By using yield-to-risk, we reinforce our focus on generating riskadjusted income while also biasing towards undervalued asset classes a nice complement to our momentum models. 7 ON Newfound s proprietary models used to exclude exposures deemed to be at an increased risk of loss. Measure yield-to-risk ratio of all exposures included in the portfolio. Over-weight exposures with higher yield-to-risk and under-weight exposures with lower yield-to-risk. * For demonstration purposes only of how the over-arching portfolio process works. Exact allocations may not exactly reflect these portfolios. There is no guarantee that the strategy will achieve its objectives. There are no guarantees that the strategy will be positioned correctly for any given market environment. The strategy utilizes various rebalance techniques designed to reducing transaction costs and turnover, which may result in the strategy s actual allocation straying from its target allocation. Yield is defined as the income received from owning an asset expressed as a percentage of the price. Risk is defined as the asset s volatility, which is a statistical measure of the amount of variation around the average asset price. The yield-to-risk ratio is defined as the yield divided by the risk. Higher yield-to-risk ratios indicate that higher yield is generated per unit of risk. 10
Using Multi-Asset Income Harnessing the Power of Tactically Risk-Managed Strategies Use MAI Example Allocations 1 to diversify total return sources in a low growth environment where income may be a key component. In a diversified portfolio, divide the return generators between price return (equity) and income return. Fixed Income Risk Mitigators Equity MAI Return Generators 2 as a sleeve in a comprehensive retirement distribution strategy. A retiree wants to focus on stability and growth with the ability to cover discretionary expenses in a low yield environment. Equity Stable Returns Fixed Income MAI Long-Term Short-term Intermediate-term 3 in a core/satellite approach to complement a strategic asset allocation. An client wants exposure to alternative assets such as MLPs, REITs, bank loans, convertibles, and preferreds but is concerned about riskmanagement. 11 Equity Strategic 60/40 Fixed Income Other Alts. MAI The ideas presented on this slide should not be considered investment advice.
Historical Allocations Cash Equivalents 62.5% EM Bonds (USD) 24.6% Preferreds 13.0% Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 U.S. Dividend Int. Dividend Infrastructure Int. Treasuries High Yield Corporates U.S. Treasuries MLPs Preferreds Mortgage REITs U.S. REITS Int. REITs Covered Call Bank Loans Convertibles EM Bonds (Local) EM Bonds (USD) Cash Equivalents Past performance does not guarantee future results. Data is through 12/31/15. The allocations are presented to illustrate examples of the securities that the fund has bought and the diversity of areas in which the funds may invest, and may not be representative of the fund s current or future investments. Portfolio holdings are subject to change and should not be considered investment advice. 12
Fund Facts and Performance A Share C Share I Share Ticker NFMAX NFMCX NFMIX CUSIP 66538G825 66538G817 66538G791 Investment Minimum $2,500 $2,500 $1,000,000 Net Expense Ratio 1.60% 2.35% 1.35% Net Assets $13.2mm Returns in percent (as of 12/31/15) 4 th Quarter 2015 6 Months 1 Year Inception* NFMAX NAV -0.20% -2.40% -3.60% -3.13% NFMAX LOAD -5.94% -8.01% -9.14% -8.70% NFMCX -0.26% -2.66% -4.24% -3.84% NFMIX -0.15% -2.31% -3.32% -2.91% S&P 500 Index 7.04% 0.15% 1.38% 3.74% Barclays U.S. Aggregate Bond Index -0.57% 0.65% 0.55% 1.63% There is no guarantee that the Fund will achieve its objectives. * Inception for NFMAX, NFMCX and NFMIX is September 8, 2014. Inception for the S&P 500 and Barclays US Aggregate Bond is calculated from September 8, 2014. The maximum sales charge (load) for NFMAX is 5.75%. The performance data quoted here represents past performance. For more current information, please call toll-free 1-855-394-9777 or visit our website, www.thinknewfoundfunds.com. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that investors shares, when redeemed, may be worth more or less than their original cost. The Fund s investment advisor has contractually agreed to reduce its fees and/or absorb expenses until at least July 31, 2016, to ensure that net annual, operating expenses of the Class A, C and I Shares will not exceed 1.60%, 2.35%, and 1.35%, respectively, subject to possible recoupment from the fund in future years. Without these waivers, the Class A, C and I Shares total annual operating expenses would be 2.28%, 3.03%, and 2.03%, respectively. Please review the Fund s prospectus for more information regarding the Fund s fees and expenses. The Barclays US Aggregate Bond Index is an index that covers the U.S. investment-grade bond universe. 13
Important Disclosures 1) Performance at net asset value ( NAV ) does not include the effect of sales changes. Class A share performance, including sales charges, reflects the maximum applicable front-end sales load of 5.75%. 2) Performance results include the effect of expense reduction arrangements for some or all of the periods shown. If those arrangements had not been in place, the performance results for those periods would have been lower. 14