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Announcement Alternative Strategies Fund Allocation Change

We are making tactical changes to the subadvisor allocations in the iMGP Alternative Strategies Fund [MASFX, MASNX] to take advantage of the dislocation in fixed income, particularly in many sectors of the securitized market. As a reminder, we always maintain the ability to tactically adjust the allocations away from our long-term targets based on risks or opportunities, but we maintain a very high bar to make changes. 

The Current Allocations Are:
DoubleLine20%
DBi20%
Water Island18%
Blackstone Credit – Systematic (DCI)15%
Loomis Sayles15%
FPA12%
The New Allocations (And Changes) Will Be:
DoubleLine27% (+7%)
DBi17% (-3%)
Water Island17% (-1%)
Blackstone Credit – Systematic (DCI)13% (-2%)
Loomis Sayles15% 0%
FPA11% (-1%)

We will overweight DoubleLine based on their very high yield (almost 12% YTM as of the end of November) and potential for strong outcomes across a variety of environments. (Our base case expectation is a potential for a low-teens 12-month return, with a reasonable chance of significantly higher returns and a very low chance of negative returns over that timeframe.) Given the positive asymmetry, we want the change to be meaningful to performance, but not be irresponsibly large in case we are wrong.

The tables below provide more detailed information on the DoubleLine portfolio’s characteristics. Of particular interest is its relative attractiveness when compared to the Bloomberg US Agg Bond index (eg., average weighted market price, coupon, duration, YTM, etc.)    

DoubleLine Opportunistic Income Portfolio

MASFX – DoubleLine Opp. Income portfolioBloomberg US Agg Bond Index
Market Price$80.86$86.39
Coupon8.73%2.62%
Duration3.916.11
Weighted Average Life4.928.43
Yield to Maturity11.70%5.01%
As of 9/30/2022

Sector Breakdown & Yield to Maturity% of PortfolioYTM
Securitized67.3%12.0%
Non-Agency RMBS33.9%8.2%
Non-Agency CMBS14.1%15.1%
CLO13.1%15.0%
ABS6.1%20.4%
Govt Guaranteed/Backed17.6%6.0%
Agency RMBS9.1%8.5%
US Treasuries0.0%0.0%
Agency CMBS3.8%6.3%
Cash4.7%0.8%
Corporates15.2%16.8%
Bank Loans6.3%15.4%
Emerging Markets5.0%19.2%
High Yield3.9%15.8%
Total100.0%11.7%
As of 9/30/2022
Credit Quality Breakdown (%)
Cash4.7%
Government7.6%
Agency5.2%
AAA0.0%
AA0.0%
A0.7%
BBB7.2%
BB17.9%
B and below30.3%
Not Rated26.3%
Total100.0%
As of 9/30/2022
Issuers with credit ratings of AA or better are considered to be of high credit quality, BBB or
better are considered to be of good credit quality, and issuers with credit ratings below BBB are
considered speculative with higher risk.
Source: TruView Analytics
Ratings are provided by Moodys, Standard & Poors and Fitch. In circumstances where the
ratings are not consistent, the rating reported represents the median rating.

In terms of funding, the sources will be diversified rather than concentrated from a single subadvisor. With that being said, we suspect the next twelve months will be less favorable to managed futures than 2022 has been, which we don’t consider a bold “bet,” so the funding will be drawn somewhat more from DBi than pro rata. We recognize that this exposes the fund to slightly more downside if trends resume as they were for the majority of 2022. However, even if that happens, the carry from the credit managers and Water Island may provide a significant cushion to returns.

While not quite as dramatic as DoubleLine’s, the Loomis Sayles portfolio also has a very attractive yield and expected return profile, and one where we have higher degree of confidence in the 12-month results than we do for equities, so we will not fund at all from Loomis Sayles. Not surprisingly, Water Island’s expected return profile is strong as well, but not quite as high as the credit-oriented managers in what we consider the fat part of the expected return distribution. Our expectations for DCI are also quite good, but with lower returns in our base and upside cases. While the potential for somewhat better performance on the downside is appealing, our intent is to “move the needle” in terms of generating gains while we think the odds are skewed in our favor.

While FPA offers the most short-term upside in a sharp market recovery, we think the chance of seeing a sustained equity bull market from these valuation levels with a slowing economy is fairly low, while the chance of additional downside in equities is not trivial. As such, we include FPA as a small funding source despite their current allocation already being relatively low.

As a result of these changes, our 12-month base case return estimate increases by over 70bps, while our downside return estimate decreases by only 20bps, and our upside return estimate increases by 140bps. There is of course considerable subjectivity in the assumptions used to reach these estimates, and we know we will be wrong whenever trying to create point estimates. However, even adjusting the assumptions significantly, the positive asymmetry is consistent, which is what we want to see before making tactical adjustments.

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DISCLOSURE

This material must be preceded or accompanied by a prospectus. iMGP Fundsʼ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company, and it may be viewed here or by calling 1-800-960-0188. Read it carefully before investing.

Effective July 31, 2020 the name of the Litman Gregory Masters Funds was changed to iMGP Funds.

Mutual fund investing involves risk. Principal loss is possible.

Diversification does not assure a profit nor protect against loss in a declining market.

Each of the funds may invest in foreign securities. Investing in foreign securities exposes investors to economic, political, and market risks and fluctuations in foreign currencies. Each of the funds may invest in the securities of small companies. Smallcompany investing subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies.

Investments in debt securities typically decrease when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in mortgage-backed securities include additional risks that investor should be aware of including credit risk, prepayment risk, possible illiquidity, and default, as well as increased susceptibility to adverse economic developments. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management, and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The Alternative Strategies Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested.

Investment in absolute return strategies are not intended to outperform stocks and bonds during strong market rallies.

Merger arbitrage investments risk loss if a proposed reorganization in which the fund invests is renegotiated or terminated.

Leverage may cause the effect of an increase or decrease in the value of the portfolio securities to be magnified and the fund to be more volatile than if leverage was not used.

Multi-investment management styles may lead to higher transaction expenses compared to single investment management styles. Outcomes depend on the skill of the subadvisors and advisor and the allocation of assets amongst them.

The iMGP Funds are distributed by ALPS Distributors, Inc. iMGP and ALPS are unaffiliated.