View as:
View as:

Commentary iMGP Alternative Strategies Fund Second Quarter 2022 Commentary

The iMGP Alternative Strategies Fund (Institutional Share Class) declined 5.60% in the second quarter of 2022. During the same period, the Morningstar Multistrategy Category was down 3.04% and the ICE BofA 3-Month Treasury Bill Index returned 0.10%. For the first half of the year, the fund was down 8.51%, compared to a loss of 10.35% for the Bloomberg US Aggregate Bond Index, a loss of 4.18% for the category and a 0.14% gain for the ICE BofA 3-Month Treasury Bill Index.

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit www.imgpfunds.com.

Quarterly Review

For Q2, the Alternative Strategies Fund declined 5.6%, leaving returns for the year down about 8.5%. Without mincing words, this is disappointing to us, both as stewards of your capital as well as fellow shareholders. Part of our goal is preserving capital, while generating good absolute returns over a full market cycle. This recent absolute performance is short of what we would have hoped to deliver. But since the Fund’s inception, we have also been clear that shareholders could expect the fund to be down in the mid-single digits during an equity bear market. And we have seen that play out so far this year.

For context, and while you cannot invest in an index, a very conservative 20/80 stock/bond mix, was down 7.0% for the quarter (as measured using the Bloomberg Aggregate Bond Index -4.69%and S&P 500 Index -16.1%) and a stunning 12.2% (Bloomberg Aggregate -10.35% and S&P 500 -19.97%) for the year. We think this is relevant since this we know many Alternative Strategies Fund investors fund their allocation from some stock/bond mix in this ballpark range. And although the fund trailed the Agg slightly in Q2, it is still outperforming by nearly 200 basis points through the first half of the year (and roughly 13 percentage points cumulatively over the last two years).

We hesitate to use the word ‘unprecedented’ since it seems to be this year’s version of ‘transitory,’ but the simultaneous poor performance of nearly all asset classes (excluding commodities, which themselves have recently started to roll over) is striking. We point this out not to make excuses, but to provide context. We all recognize the main drivers, clear in retrospect: stubbornly high and persistent inflation, exacerbated by Russia’s war in Ukraine, which drove accelerated aggressive monetary tightening by the Fed. This in turn punished long-duration assets: bonds obviously, but also previous market leaders like dominant large cap growth stocks, which had been seen as relative safe havens compared to more cyclical assets, resulting in rich valuation multiples that have been crushed by higher discount rates and fear of slowing growth.

The virtuous cycle of Quantitative Easing is also reversing, draining liquidity from the system and tightening financial conditions when consumer confidence is already extremely low. Much of the financial market commentary and discussion now is of the other shoe dropping, whether it be a technical recession or “just” slowing growth accompanied by falling corporate profits, which would presumably result in further equity market losses. Losses in one or multiple areas of financial markets often drives selling in other parts, causing risk premia to widen even in areas not directly impacted, even including those with reasonably strong fundamentals, producing contagion. The chances of the Fed “threading the needle” and controlling inflation without significantly hurting the economy seem remote at this point. None of this is breaking news, of course, but negative headlines abound. However, without minimizing the challenges (and of course the related “real-world” pain), we think there is reason for cautious optimism.    

There is a lot of bad news and negative sentiment already priced into financial markets. Things can always be worse than consensus expectations, and we fully recognize the Fed seems committed to breaking inflation, almost regardless of the cost to equity markets. However, we think the Alternative Strategies fund may well be set up to potentially produce attractive performance over the next multiple quarters or more going forward. (This is not to say that returns couldn’t decline further from here in the short or even medium term – they absolutely could.) In the past we have bristled at managers seemingly brushing off periods of weak performance and focusing only on the glorious outlook going forward, as if no one experienced the painful road traveled to arrive at the precipice of the promising future. That is absolutely not our intention, having acknowledged the challenges both in the fund’s performance and the economy and markets, we think it is worth maintaining some balance in perspective.

The fund’s portfolio has rarely been as attractive as it is currently, in our view. The credit strategies are yielding in the upper single digits on a blended basis (and have some dry powder in cash) with a blended duration under three years. The merger arbitrage portfolio offers an average annualized deal spread well into the teens after holding up relatively well during the difficult first half of the year. Deals can break, spreads can widen, and defaults can increase, but these levels have historically been very attractive entry points even if they don’t necessarily mark “the bottom” for returns, which is of course impossible to time with any precision. The long-short credit strategy has protected capital well through market turmoil, and its fundamental drivers now appear to be at their most attractive since late 2018/early 2019 (preceding the strategy’s strongest year of performance): credit spreads are wide, volatility is increasing, and there is wide dispersion in company fundamentals and default probabilities, which are still in the early stages of being fully reflected by the market. Lastly, FPA’s portfolio, the largest contributor to returns since inception but the most volatile and highly correlated with the equity market, has unsurprisingly been hit the hardest this year. Without going into detail here, we believe it is also attractive, with a mix of value and quality growth businesses at reasonable valuations, pockets of special situations, and the optionality of a healthy cash balance. Again, the FPA sleeve the most market-dependent, but is the smallest allocation within the fund. It also has the highest short-term upside in the event of positive surprises relative to market expectations.

We should also note that we are in the later innings of research and discussions about adding a new strategy to the fund and will very likely be able to announce something later this year. The strategy would have been extremely beneficial over the last two to four quarters,  is not so geared to a particular environment that it would have detracted from the fund’s performance in other periods. It seeks to improve the fund’s risk-adjusted returns across different environments and reduce drawdowns like the current one. We have always tried to avoid overreacting to recent events (for example, we evaluated but didn’t add tail-risk strategies following March 2020, to the benefit of returns the rest of the year and in 2021), so we wouldn’t say this is a reaction to performance this year. However, strategies of this type have been the subject of our interest and research for several years, and 2022 certainly did nothing to temper our enthusiasm. We are excited about the prospects for the fund going forward, even more so as we envision it with the likely addition we have discussed.

Thank you for your investment in the fund. We look forward to updating you next quarter, hopefully with significantly better results.

iMGP Alternative Strategies Fund Risk/Return Statistics 6/30/2022

Statistics of 6/30/2022MASFXBloomberg US Agg Bond IndexMorningstar US Fund MultistrategyHFRX Global Hedge Fund IndexRussell 1000 Index
Annualized Return 3.721.762.711.8613.99
Total Cumulative Return 48.1520.6433.2721.88308.70
Annualized Std Dev 4.723.414.254.2414.15
Sharpe Ratio (Annualized)0.670.350.500.310.96
Beta to Russell 1000 0.280.030.270.251.00
Correlation of MASFX to 1.000.260.910.870.84
Worst 12-Month Return-8.78-10.29-5.71-8.19-13.04
% Positive 12-Month Periods0.83%0.70%0.78%0.71%0.92%
Upside Capture vs Russell 100027.346.6525.3822.12100.0
Downside Capture vs Russell 1000 27.740.0431.4531.27100.0
Upside Capture vs Agg 83.64100.069.2446.45238.74
Downside Capture vs Agg 22.07100.028.3617.70-14.02

Quarterly Portfolio Commentary      

Performance of Managers

For the quarter, four of the five sub-advisors produced negative returns. The Blackstone Credit Systematic Group’s Long-Short Credit strategy was essentially flat (down 0.04%). Water Island’s Arbitrage and Event-Driven strategy was down 2.88%, DoubleLine’s Opportunistic Income strategy fell 6.01%, the Loomis Sayles Absolute Return strategy was down 7.41%, and the FPA Contrarian Opportunity strategy declined 10.88%. (All returns are net of the management fee charged to the fund.)

Year to date through June 30, the returns are as follows: Blackstone Credit Systematic Group down 1.07%; Water Island down 2.73%; DoubleLine down 10.50%; Loomis Sayles down 12.07%; and FPA Contrarian Opportunity strategy down 13.73%.

Key performance drivers and positioning by strategy

Blackstone Credit Systematic Group (DCI):

The Long-Short Systematic Credit portfolio was essentially flat in Q2, even as the S&P 500 declined 16% and the U.S. 10-year Treasury dropped 5%. Risk-repricing dominated the market as the Fed moved forward rate hikes in response to the inflation news and recession fears emerged for next year. High yield index spreads were about 250 bps wider over the quarter, equity prices crumbled, and the VIX index jumped to end the quarter at 29. Treasury yields were also up on the quarter, driven by the torrid inflation data and the Fed’s move to jumbo-sized rate hikes. Interest rate volatility hit crisis levels as the ICE BofA MOVE index matched its COVID heights.

The portfolio continued to deliver mixed performance and was about flat in both the bond sleeve and Credit Default Swap (CDS) overlay for the quarter. The long-short CDS was flat as alpha traction continued to be challenging amidst the beta-dominant market moves, delivering on consumer short positions but declining on energy and transportation names. Alpha in the bond sleeve was more positive as long positions, especially in energy, held up well. But beta in the bond sleeve offset those gains and month-end pricing was a bit noisy. The rates component was about flat, as the rate-hedging performed as expected. The bond portfolio is well-hedged out the rate curve but retains some exposure to front end yields. This net duration has been close to a half year, which, while flat in Q2, accounts for most of the portfolio’s underperformance for the first half of the year.

The model’s views have not changed much over Q2 and DCI expects the portfolios may generate more consistent alpha as the market differentiates along fundamentals in the second half. The opportunity set has gotten large as spreads, volatilities, and dispersion of fundamentals and default probabilities are all elevated. The team continues to see balanced positioning across pandemic recovery names in the portfolio. Energy continues to be attractive, despite the market rally, because the sector recovery has gained traction and the longer-term prospects – particularly so given higher oil prices – look positive relative to spread levels. The portfolio risk spend is, as usual, primarily in idiosyncratic names and the portfolio continues to be unusually neutral in most sectors. It remains long energy and newly long again in consumer goods (favoring some selective retail and consumer brands), while running a bit underweight in financials. It also remains long technology (especially consumer-facing and networking) and short in telecoms.

DoubleLine:

For the quarter the DoubleLine Opportunistic Income portfolio was down about 6%, underperforming the Bloomberg US Aggregate Bond Index loss of 4.7%. This period in the markets was yet another challenging environment for financial assets of all kinds. US inflation readings remained persistently high, causing the Federal Reserve to continue pressing its hawkish policy agenda. The Fed raised its policy rate by 125 basis points over the quarter and also began tapering its asset purchasing program. As a result, US Treasury yields and fixed income credit spreads rose while equity indices experienced broad declines. The primary driver of the portfolio’s relative underperformance was asset allocation as the Fund held more credit-related assets than the Agg in a consistently risk-off market.

The top-performing sectors in the portfolio were shorter-duration, securitized credit sectors such as Asset Backed Securities (ABS) and Commercial Mortgage Backed Securities (CMBS). These sectors still experienced slightly negative total returns, but sharply outperformed comparable credit indices due to their high levels of interest income and muted spread volatility. The largest detractors from quarterly performance were Agency Mortgage Backed Securities (MBS)  and US Treasury exposures. These assets experienced duration-related price declines as 10-year US Treasury yields rose 68 basis points over the quarter. Non-Agency Residential MBS and Collateralized Loan Obligations (CLO) also detracted from performance as their spreads widened due to concerns of a recession stemming from tightening financial conditions. The portfolio ended the quarter with a duration of 3.8 and a yield of 8.3%, while maintaining a cash balance of almost 11%.  

FPA:

The Contrarian Opportunity portfolio followed the downward path of equity markets during the quarter, dropping by almost 11%. The top contributors for the quarter were again relatively minor. Sound Holdings (0.7%), a shipping container partnership, was the only contributor above half a percentage point. Naspers and Prosus (0.3% combined) were the only other significant contributors. Not surprisingly, the largest detractors for the quarter were mainly high growth/tech names like Alphabet (-1.2%), Amazon (-0.7%), Broadcom, Meta Platforms, and Netflix (-0.6% each).

The portfolio largely retains its general “barbell” of high-quality, dominant franchise positions at reasonable valuations (much cheaper now, of course after significant valuation compression), largely in the tech and communications spaces, balanced with cheap but more cyclical value stocks like financials and industrials. There are also smatterings of interesting option-like positions, such as the basket of pre-merger Special Purpose Acquisition Companieis (SPACs) and a handful of cheap convertible bonds (new positions that are a good example of FPA’s flexible mandate to find value), in addition to the healthy cash balance, a “call option” on the ability to add risk exposure at significantly cheaper valuations if markets fall further. Despite some movement in underlying positions, overall exposures changed little over the quarter. Equities account for about 71% (over one-third in non-US positions), credit about 2%, private positions 2%, and cash 25%.

Loomis Sayles:

The Absolute Return strategy experienced another challenging quarter, falling 7.4%. High yield corporate bond spreads significantly widened during the second quarter, reflecting risk- off sentiment driven by challenging macroeconomic and technical dynamics. The portfolio’s high yield corporates detracted the most from performance. Consumer and communications issues were primarily responsible for the sector’s negative performance. Equities also faced a difficult environment due to hawkish Fed policy in response to persistent inflation. Within the portfolio’s equity allocation, communications and technology names had particularly negative impacts as those continued to suffer valuation compression in the face of higher discount rates. Despite supportive fundamentals, investment grade corporate bond spreads meaningfully widened over the second quarter amid uncertainty about inflation and the pace of central bank tightening. Consequently, Investment Grade corporates also weighed on the portfolio’s performance, with financial and communications names being particularly responsible.

The yields of the benchmark 10-year and 30-year US Treasuries experienced volatility during the quarter as a result of the persistent elevated inflation and Fed hawkishness. These key yields increased from 2.32% to 2.98% and 2.44% to 3.14% respectively. The portfolio’s global rates tools, primarily hedges using sovereign bonds and interest rate futures, contributed to performance.  The portfolio ended the quarter with a duration of 1.8 and a yield of 6.4%.

Water Island:

The Water Island Arbitrage and Event-Driven portfolio was down approximately 2.9% in the quarter. Merger arbitrage generated a gross loss of about 2.6% while special situations lost about 0.3%.

Deal Highlights

The top contributor in the portfolio for Q2 was a position in the acquisition of Sanderson Farms by Cargill. In August 2021, Sanderson Farms – a US-based maker of fresh and frozen chicken products – agreed to be acquired by Cargill – a US-based conglomerate involved in agriculture, industrials, and financial services – for $4.5 billion in cash. Although this transaction is a vertical merger in which Cargill currently has no lines of business that directly compete with Sanderson (Sanderson produces chicken, Cargill makes chicken feed), the deal has undergone extensive regulatory reviews at the Federal Trade Commission (FTC) and US Department of Justice (DOJ), which have become increasingly stringent under the Biden administration. In the nearly 11 months since the announcement of the deal, Sanderson’s shares have traded higher on rising chicken prices and increased consumer demand. The spike has led to gains for the fund, though the shares now trade at a level where they exceed the deal value; as such, Water Island is closely monitoring the situation for further developments.

The second largest contributor for the period was a position in the merger of Change Healthcare and UnitedHealth Group. In January 2021, Change Healthcare, a US-based medical software and technology provider, agreed to be acquired by OptumInsight, a subsidiary of UnitedHealth Group (which also owns the country’s largest health insurer) providing medical information technology services, for $8.8 billion in cash. After a lengthy regulatory review, the DOJ sued to stop the transaction in February 2022, alleging the combination would harm competition in multiple markets. Despite the DOJ’s attempted block, Change Healthcare shares have rallied in 2022 based primarily on improvements to the company’s underlying fundamentals in the time since the deal announcement, leading to gains for the fund. During Q2, the companies agreed to revise the merger agreement to bump the deal value by $2 per share via a special dividend due at closing; implement a hefty break fee for Change Healthcare should the deal ultimately fail; and extend the merger date once again to allow time to fight the DOJ in court. Water Island is maintaining the position as UnitedHealth’s commitment to the deal is clear, although they are watching carefully and looking out for any changes in potential downside.

Conversely, the top detractor in the portfolio was a position in the terminated acquisition of Momentive Global by Zendesk. In October 2021, Zendesk – a US-based developer of software for customer support and customer communications – agreed to acquire Momentive Global – a US-based developer of software for conducting web-based surveys – for $4.1 billion in stock, after an activist investor in Momentive pushed for a sale process. In January, however, yet another activist investor – this time at Zendesk – began to push Zendesk’s board of directors and management to reject the acquisition, believing the company should instead be put up for sale itself. The very next month, Zendesk management rejected an offer from a private equity consortium that would have valued the company at $17 billion – yet Zendesk shareholders appear to have agreed with the activist, as they overwhelmingly rejected the Momentive deal mere days later. Subsequent share price volatility has led to mark-to-market losses for the fund; however, Water Island is maintaining the Momentive exposure as not only has its activist reemerged, but the proxy background of the Zendesk merger indicated there were at least two other interested parties who put forth bids for the company before Zendesk won the initial sale process. The Water Island team believes there is more left to the story.

The second largest detractor for the period was a position in the acquisition of Twitter by Elon Musk. In April 2022, Elon Musk – CEO of Tesla and SpaceX and one of the richest people in the world – launched an unsolicited bid to personally acquire the 91% of US social media company Twitter that he did not already own for $41.3 billion in cash. Musk put together a financing package combining commitments from a group of banks led by Morgan Stanley and private equity firms with his own personal assets, including loans backed by his holdings in Tesla stock. Musk’s commitment to the deal has seemingly wavered in line with the fortunes of Tesla shares, which traded down significantly after Twitter’s board agreed to the transaction. Musk’s capriciousness has led to significant volatility in this deal’s spread, and as of this writing he has officially attempted to back out of the deal. That said, merger contracts have become increasingly strong since the Global Financial Crisis, and it has become exceedingly difficult for even the most remorseful buyer to extricate itself from a definitive merger agreement.

Water Island Market Commentary

For the trailing three months leading to the halfway point of 2022, market challenges that commenced in the first quarter of the year continued. There has been no shortage of pressures conspiring to drive swings in broader credit and equity markets, including geopolitical tensions, runaway inflation, rapidly rising interest rates, and fears of an impending recession, to name just a few. Yet while our event-driven strategy has thus far largely adhered to its typically low beta nature, mitigating the worst of the market’s moves, it has not been immune to volatility spikes of its own. When capital market drawdowns extend beyond corrections into bear market territory, forced and panicked selling can cause correlations to converge across asset classes. Within the universe of announced mergers and acquisitions, for example, during Q2 spreads gapped wider as arbitrageurs exited positions en masse, even in deals where there has been no change to the underlying fundamentals of the transaction. We have seen similar behavior before – for example, in the midst of the Global Financial Crisis of 2008, and more recently at the onset of the COVID-19 pandemic in the first quarter of 2020. The magnitude of the spread widening has been dramatic, though we view these movements as mere mark-to-market losses. We continue to have conviction that the vast majority of pending deals will reach a successful conclusion (as over 90% of announced M&A has done, historically, according to Dealogic data), at which point their spreads will narrow to zero and losses will reverse.

In the months ahead, we do anticipate relatively higher levels of volatility to remain present, but we also view the current environment as favorable for our strategy, as the recent dislocation is presenting merger arbitrage investors with outsized return opportunities based on current spread levels. We believe deal spreads remain attractive both on an absolute basis and relative to other asset classes, and ongoing volatility may allow for opportunistic trading. We are also optimistic about the level of expected M&A activity in the latter half of the year, as deal pipelines remain robust. Fears of a recession and the accompanying market effects have not yet interrupted the appetite for corporate consolidation. While global M&A fell 17% in the first half of 2022 from the prior year, to $2.1 trillion in value according to Bloomberg data, 2021 was an unprecedented year for dealmaking. Despite the drop, the total value of deal flow in 2022 is still above historical averages for similar time periods. Furthermore, rising interest rates have historically served as a tailwind for merger arbitrage returns; thus, based on recent and anticipated Fed moves, we expect spreads in newly announced deals to remain attractive.

As we seek to deliver non-correlated return streams sourced from the outcomes of idiosyncratic corporate events, our goal, as always, is to do so with as little volatility as possible. We have minimized the portfolio’s exposure to soft catalyst opportunities – which tend to be more sensitive to broader market moves – and would only consider adding to our soft catalyst investments with appropriate risk mitigation strategies in place. That said, in the near term, the current environment for rates, volatility, and deal flow leads us to believe merger arbitrage and other hard catalyst merger-related investments remain the appropriate area toward which to direct our focus.

Strategy Allocations

The fund’s capital is allocated according to its strategic target allocations: 25% to DoubleLine, 19% each to DCI, Loomis Sayles, and Water Island, and 18% to FPA. We use the fund’s daily cash flows to bring the manager allocations toward their targets when differences in shorter-term relative performance cause divergences.

Sub-Advisor Portfolio Composition as of June 30, 2022

Blackstone Credit Systematic Group (DCI) Long-Short Credit Strategy

Bond Portfolio Top Five Sector Exposures
Energy                                                           14.7%
Consumer Non-Discretionary                                                       11.7%
Consumer Discretionary                             11.0%
Materials                  9.1%
Investment Vehicles/REITs                                               8.2%
CDS Portfolio Statistics
                                                                 Long  Short
Number of Issuers                                     7373
Average Credit Duration                           4.54.5
Spread                                                              255 bps244 bps
DoubleLine Opportunistic Income Strategy
Sector Exposures            
Cash                                                              10.9%
Government                                             3.5%
Agency Inverse Interest-Only                   6.9%
Agency CMO                                                 0.3%
Agency PO                                                    0.3%
Non-Agency Residential MBS                33.2%
Commercial MBS                                      14.4%
Collateralized Loan Obligations                                                   10.8%
ABS                                                    5.6%
Bank Loan                                       5.8%
Emerging Markets                    5.4%
Other                                                        2.9%
TOTAL                                                       100.0%
FPA Contrarian Opportunity Strategy
Asset Class Exposures
U.S. Stocks                                        47.0%
Foreign Stocks                                           24.7%
Bonds                                                       1.8%
Limited Partnerships                                  1.6%
Cash                                                             24.9%
TOTAL                 100.0%

Loomis Sayles Absolute Return Strategy

Strategy Exposures

 Long TotalShort TotalNet Exposure
Securitized29.4%0.0%29.4%
High-Yield Corporate26.2%-0.7%25.6%
Investment-Grade Corp.17.4%0.0%17.4%
Dividend Equity10.0%-0.7%9.4%
Emerging Market5.7%-2.2%3.5%
Convertibles5.7%0.0%5.7%
Global Rates1.5%0.0%1.5%
Bank Loans0.4%-0.2%0.2%
Global Credit0.3%-0.3%0.0%
Subtotal96.7%-4.1%92.6%
Cash & Equivalents6.3%0.0%6.3%

Water Island Arbitrage and Event-Driven Strategy

Sub-Strategy Exposures

 LongShortNet
Merger Arbitrage – Equity91.7%-2.0%89.7%
Merger Arbitrage – Credit2.9%0.0%2.9%
Total Merger-Related94.6%-2.0%92.6%
    
Special Situations – Equity0.5%0.0%0.5%
Special Situations – Credit1.5%0.0%1.4%
Total Special Situations1.9%0.0%1.9%
Total96.5%-2.0%94.5%

Stay Informed

iMGP Funds emails provide investors a way to stay in touch with us and receive information regarding the funds and investment principles in general. Topics may include updates on the funds and managers, further insights into our investment team’s processes, and commentary on various aspects of investing.

DISCLOSURE

Must be preceded or accompanied by a prospectus. Read it carefully before investing.

Although the managers actively manage risk to reduce portfolio volatility, there is no guarantee that the fund will always maintain its targeted risk level, especially over shorter time periods and loss of principal is possible. The performance goals are not guaranteed, are subject to change, and should not be considered a predictor of investment return. All investments involve the risk of loss and no measure of performance is guaranteed. The fund aims to deliver its return over a full market cycle, which is likely to include periods of both up and down markets.

Though not an international fund, the fund may invest in foreign securities. Investing in foreign securities exposes investors to economic, political and market risks, and fluctuations in foreign currencies. 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. The fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. Multi-investment management styles may lead to higher transaction expenses compared to single investment management styles. Outcomes depend on the skill of the sub-advisors and advisor and the allocation of assets amongst them. Investing in derivatives could lose more than the amount invested. The fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. Merger arbitrage investments risk loss if a proposed reorganization in which the fund invests is renegotiated or terminated.

Dividends, if any, of net investment income are declared and paid quarterly. The Fund intends to distribute capital gains, if any, to shareholders on a quarterly basis. There is no assurance that the funds will be able to maintain a certain level of distributions. Dividend yield is the weighted average dividend yield of the securities in the portfolio (including cash). The number is not intended to demonstrate income earned or distributions made by the Fund.

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

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.

Alpha is an annualized return measure of how much better or worse a fund’s performance is relative to an index of funds in the same category, after allowing for differences in risk.

An asset-backed security (ABS) is a financial security collateralized by a pool of assets such as loans, leases, credit card debt, royalties or receivables.

A basis point is a value equaling one on-hundredth of a percent (1/100 of 1%)

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Commercial mortgage-backed securities (CMBS) are fixed-income investment products that are backed by mortgages on commercial properties rather than residential real estate.

Contagion is the spreading of a harmful idea or practice.

Correlation is a statistical measure of how two securities move in relation to each other.

Credit Default Swap (CDS) A credit default swap (CDS) is a financial derivative or contract that allows an investor to “swap” or offset their credit risk with that of another investor. For example, if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk

Credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality.

Deal spread refers to the difference between the acquisition price of the shares and the market price at the time of investment.

Drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity.

Dry Powder is a slang term referring to marketable securities that are highly liquid and considered cash-like. It can also refer to cash reserves kept on hand. 

Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Securities with a longer duration generally have more volatile prices than securities of comparable quality with a shorter duration.

Collateralized Loan Obligation (CLO) is a security backed by a pool of debt, often low-rated corporate loans. Collateralized loan obligations (CLOs) are similar to collateralized mortgage obligations, except for the different type of underlying loan

Market capitalization (or market cap) is the total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding.

Mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages

Options are a financial derivative sold by an option writer to an option buyer. The contract offers the buyer the right, but not the obligation, to buy (call option) or sell (put         option) the underlying asset at an agreed-upon price during a certain period of time or on a specific date.

A Recession is a period of economic decline measured by a drop in  the GDP (Gross Domestic Product which measures the total value of goods and services produced in a country for at least two consecutive calendar quarters.

Risk Premium a measure of excess return that is required by an investor to compensate for being subjected to a level of risk.

Standard deviation is a statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns.

Sharpe ratio is the measure of a fund’s return relative to its risk. The Sharpe ratio uses standard deviation to measure a fund’s risk-adjusted returns. The higher a fund’s Sharpe ratio, the better a fund’s returns have been relative to the risk it has taken on. Because it uses standard deviation, the Sharpe ratio can be used to compare risk-adjusted returns across all fund categories.

A short sale is the sale of an asset or stock the seller does not own.  It is generally a transaction in which an investor sells borrowed securities in anticipation of a price decline; the seller is then required to return an equal number of shares at some point in the future. Contrastingly, a seller owns the security or stock in a long position.

Upside/downside capture is a statistical measure that shows whether a given fund has outperformed–gained more or lost less than–a broad market benchmark during periods of market strength and weakness, and if so, by how much.

The BofA High-Yield Constrained Index  is a market value-weighted index of all domestic and yankee high-yield bonds, including deferred interest bonds and payment-in-kind securities.

The Bloomberg Barclays Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. The index includes US Treasury Securities (non TIPS), Government agency bonds, Mortgage backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S.

CDX Indexes track North American and emerging market credit derivative indexes.

The Ibbotson Associates SBBI U.S. Intermediate-Term Government Bond Index is an unmanaged index representing the U.S. intermediate-term government bond market. The index is constructed as a one bond portfolio consisting of the shortest-term non callable government bond with less than 5 years to maturity.

The ICE BofA MOVE Index is a measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries.

The ICE BofAML U.S. T-Bill 0-3 Month Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months.

LIBOR stands for London Interbank Offered Rate. It’s an index that is used to set the cost of various variable-rate loans.

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

The VIX Index is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period.

Each Morningstar Category Average represents a universe of Funds with similar investment objectives.

You cannot invest directly in an index.

Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Mutual fund investing involves risk. Principal loss is possible.

iM Global Partner Fund Management, LLC. has ultimate responsibility for the performance of the IMGP Funds due to its responsibility to oversee the funds’ investment managers and recommend their hiring, termination, and replacement.

The IMGP Funds are Distributed by ALPS Distributors, Inc.