Spectrum Advisors Preferred Fund Hits 5 Year Anniversary with a bang!

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Spectrum Advisors Preferred Fund (SAPEX) celebrated its 5-year anniversary on 6/1/2020, and completed the second quarter of 2020 with its best quarter ever, up 16.60%. Year-to-date through the end of the second quarter, SAPEX was up 1.42%, putting it well ahead of the broad-based New York Stock Exchange Composite Index (NYSE) still down  -13.36%. With these exciting milestones just passed, now it a great time to highlight this unique fund. What is the Spectrum Advisors Preferred Fund (SAPEX) all about? Officially, SAPEX’s objective listed in its prospectus is, “long term capital appreciation”. Another way to put that is the objective is to provide an actively managed equity mutual fund that seeks long-term capital appreciation and a strategy that pursues positive alpha (excess return over a benchmark) while managing return volatility (price variability). A succinct bottom-line is the Fund strives to simply make more and lose less. That seems to be at the heart of what most investors are looking for, especially when it relates to the stock market.

Data:  Bloomberg L.P.

The Spectrum Advisors Preferred Fund (SAPEX) has always centered around tactical adjustments to risk while seeking timely buying opportunities. Even though the Fund primarily holds equity investments, there is a sleeve dedicated to bonds for defensive measures. The exposure chart above shows SAPEX’s nature of quick adjustments. From its 6/1/2015 inception to the end of 2018, SAPEX had a total return of 10.28% versus the 12.54% total return of the NYSE. This underscores the difficulty of beating a benchmark even with active management. During this period, however, SAPEX was much less volatile, having a Beta of 0.69 versus the index. Equity exposure changes have been more rapid and wider over the last year in an attempt to capture more return and offset risk. Since then, SAPEX’s Beta over the trailing twelve months (6/30/19-6/30/20) was only 0.76, a marginal increase, even as it began to outperform the NYSE stock index for that time period.

In addition to the 5-year anniversary milestone, the Spectrum Advisors Preferred Fund has been able to celebrate along the way. As mentioned, comparison to a benchmark while managing risk can prove challenging. Comparing to an index has its place but investors should compare possible fund choices to each other within defined categories. For the 2018 year, SAPEX was given a Refinitiv Lipper Award at the 2019 awards ceremony for being the “Best Fund Over 3 Years: Absolute Return Funds”. Go back to the noted statistic and the chart- SAPEX modestly underperformed the NYSE stock index during the period. Many investors were likely disappointed with their equity mutual funds during that time. This shows how difficult it is for mutual funds, as a whole, to hit the mark but SAPEX was beginning to show separation from its competitors as a prime choice in one’s portfolio. After 2019, the Spectrum Advisors Preferred Fund posted a repeat, once again winning an award for the 3-year Best Absolute Fund.

SAPEX is also tracked by Morningstar and as of the end of 6/30/2020 had a five star rating out of 215 funds for 3-years and a five star rating out of 171 funds for 5-years. We started recording Morningstar’s trailing 3-year performance ranking when the 3-year anniversary was reached.

The Fund received a 5-Star Overall Morningstar Rating as of 6/30/2020. Spectrum Advisors Preferred Fund (SAPEX) was rated against the following numbers of U.S Tactical Allocation funds over the following periods: 215 funds in the last 3 years, and 171 funds in the last 5 years. With respect to these Tactical Allocation funds, Spectrum Advisors Preferred Fund received a 5-Star rating overall and a 5-Star rating for 3 years and a 5-Star rating for 5 years. Past performance is no guarantee of future results.

Near the upper left of the table, SAPEX’s performance was in the top 2 percentile out of 259 funds in Morningstar’s Multialternative category. Through 6/30/2019, SAPEX remained, at worse, in the top 7 percentile. From 7/31/2019 to present, Morningstar has SAPEX in the Tactical Allocation category. Since then, SAPEX has been at least in the top 5 percentile. With June of this year being its first month after its 5-year anniversary, SAPEX now has a trailing 5-year performance ranking — in the top 6 percentile.

More than five years ago, Ralph Doudera challenged the Investment Services team to design an equity focused fund that would allow him or its investors to sit back and “sip a Starbucks coffee” during the bull markets and then have it, to varying degrees, take defensive measures during bear markets. Becoming overly conservative was found to hinder performance. Allowing for more volatility and drawdowns during garden variety corrections but incrementally increasing the use of defensive tactics as bearish market action has allowed SAPEX to post a return since inception (6/1/2015-6/30/20) of 42.77% or 7.25% annualized versus a total return by the broad stock market, the New York Stock Exchange Composite Index (NYSE) of 22.37% or 4.05% annualized.

Disclosures

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value will fluctuate, so that shares, when redeemed, may by worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted and assumes the reimbursement of any dividend and/or capital gains distributions. To obtain performance data current to most recent month-end, please call toll free 1-888-572-8868.

© 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar RatingTM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Morningstar Rating is for the Service share class only; other classes may have different performance characteristics.

The Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Lipper Fund Award.

The currency for the calculation corresponds to the currency of the country for which the awards are calculated and relies on monthly data. Classification averages are calculated with all eligible share classes for each eligible classification. For more information, see lipperfundawards.com. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper.

Lipper Leaders fund ratings do not constitute and are not intended to constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any jurisdiction. As a result, you should not make an investment decision on the basis of this information. Rather, you should use the Lipper ratings for informational purposes only. In addition, Lipper will not be liable for any loss or damage resulting from information obtained from Lipper or any of its affiliates.

Beta: a statistic that measures volatility of the fund, as compared to that of the overall market. The market’s beta is set at 1; a higher beta than 1 is considered to be more volatile than the market, while a beta lower than 1 is considered to be less volatile.

Consider these risks before investing: Bond risk, derivatives risk, equity risk, inverse ETF risk, junk bond risk, leverage risk, management risk, market risk, mutual fund and ETF risk, short position risk, small and medium capitalization risk, and turnover risk. There is no guarantee the fund will achieve its investment objective. You can lose money by investing in the fund. Please carefully review the prospectus for detailed information about these risks.

New York Stock Exchange Composite Index (NYSE) measures the performance of all stocks listed on the New York Stock Exchange. It includes more than 1,900 stocks, of which over 1,500 are U.S. companies. Its breadth therefore makes it a much better indicator of market performance than narrow indexes that have far fewer components. The weights of the index constituents are calculated on the basis of their free-float market capitalization. The index itself is calculated on the basis of price return and total return, which includes dividends.

S&P TR 500 Index is a capitalization weighted index of 500 stocks representing all major domestic industry groups. The S&P 500 TR assumes the reinvestment of dividends and capital gains. It is not possible to directly invest in any index.

*60/40 NYSE Composite/Barclays U.S. AGG. Bond Index: This benchmark gives 60% weight to the NYSE Composite Index and 40% weight to the Barclays U.S. Agg. Bond Index. The NYSE Composite Index (NYA) measures the performance of all stocks listed on the New York Stock Exchange. It includes more than 1,900 stocks, of which over 1,500 are U.S. companies. Its breadth therefore makes it a much better indicator of market performance than narrow indexes that have far fewer components. The weights of the index constituents are calculated on the basis of their free-float market capitalization. The index itself is calculated on the basis of price return and total return, which includes dividends. The Barclays U.S. Aggregate Bond Index measures the underlying index and performance of the total U.S. investment grade bond market. It is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $250 million per amount outstanding and with at least one year to final maturity.

Request a prospectus or a summary prospectus from your financial representative or by calling Gemini Fund Services at 855- 582-8006 or access www.thespectrumfunds.com. These prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Gemini Fund Services serves as transfer agent to the Fund and is not affiliated with the advisor, subadvisor or distributor.

The Fed: Its History & Connection to the Markets Pt 1

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Over the last several market days, there was an increase in volatility and selloff in the equity markets. June 11th the Dow had its biggest one-day loss since March. This came one day after Fed Chairman Jerome Powell and the rest of the board concluded their two-day meeting and held a post-meeting press conference. In his press conference Powell announced that interest rates were left unchanged and near zero, unemployment was at an all-time high, and he projected a very slow economic recovery from this “pandemic-induced” recession. So, what is the Fed’s connection to the markets and economy, and what type of impact can they have? It is always best to start with why the Federal Reserve System was created and for what purpose. This blog will briefly cover the history of America’s central banking system, its structure and its overall purposes.

After the revolutionary war, Alexander Hamilton led several attempts at forming a central bank for the United States, but each attempt failed. Up until 1913, the United States was plagued with frequent financial pandemics, liquidity issues and high rates of bank failures. As a new country with these issues, the U.S. economy became a risky place for capital to be invested both for international and domestic investors. This lack of trust in the banking system was stunting America’s growth in its agriculture and industry. It was finally at the demand of J.P. Morgan, after the panic of 1907, that he pressured the government into acting on a central bank plan. J.P. Morgan, a wealthy financier, had bailed out the federal government several times up to that point. One instance was in 1895 by providing $65 million in gold, and another in 1907 when he convinced other bankers to provided capital and restore liquidity to desperate markets. That was after Morgan had already bailed out several trust companies, a leading brokerage house, New York City and the New York Stock Exchange.

Thus, on December 23, 1913 Congress passed, and President Woodrow Wilson signed, the Federal Reserve Act of 1913. The Federal Reserve website (www.federalreserve.gov) states this, “The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States to provide the nation with a safer, more flexible, and more stable monetary and financial system.” The Federal Reserve, or commonly referred to as the Fed, has the purpose of managing the nation’s monetary policy by manipulating the money supply and interest rates. This was to smooth out the booms and busts of normal economic cycles. Determined to not have one central bank, the Federal Reserve Act purposely established three entities:

  1. A central governing board
  2. A decentralized operating structure of 12 reserve banks
  3. A combination of public and private characteristics (Federal Open Market Committee)

The Federal Reserve board initially consisted of seven members: the Secretary of Treasury and Comptroller of the Currency, and then five others appointed by the US President and confirmed by the Senate. Of those five appointed members, the President would designate one as “governor” and one as “vice governor”. The active executor of the Fed would be the governor. The board leadership structure has gone through several changes to morph into what we are familiar with today which is a Chair, a Vice Chair, and Vice Chair for Supervision and then 4 other board seats, making a total of 7 possible positions. Each are nominated by the President of the United States and confirmed by the Senate. Each member serves a 14-year term, with one term beginning every two years on the 1st of February on even numbered years. The following are the current Board of Governors of the Federal Reserve System:

  • Chair: Jerome H. Powell
  • Vice Chair: Richard H. Clarida
  • Vice Chair for Supervision: Randal Quarles
  • Michelle W. Bowman
  • Lael Brainard
  • Vacant Position
  • Vacant Position

The Act established 12 Federal Reserve banks instead of relying on one “central bank” and they were based on a geographic division of the United States. In 1913, these boundaries were based on the biggest trade regions and their related economic needs. The 12 bank districts are: Boston, New York, Philadelphia, Cleveland, Richmond, St. Louis, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco. These banks operate independently but under the greater supervision of the Federal Reserve Board of Governors. Each bank has a nine-member board of directors and is responsible for gathering data on the economies and businesses of its local communities. This information is used to influence decisions made by the Board of Governors and the other entities of the system.

The Fed is in its 10th edition of The Federal Reserve System Purposes & Functions which details the structure, responsibilities and aims of the U.S. central banking system. The Fed performs five functions to promote the operation of the U.S. economy:

  1. Conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy
  2. Promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad
  3. Promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole
  4. Fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitates U.S.-dollar transactions and payments
  5. Promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

Understanding why the Federal Reserve System was created and for what purpose, establishes a framework to further understand how the Fed and their monetary policy affects the behavior of the markets. No matter the investment style or philosophy (active vs. passive management, technical analysis vs. fundamental analysis) what the Fed decides to do in regards to money supply and interest rates does in fact influence buy and sell decisions for both retail and institutional investors. However, instead of skimming the minutes of Fed meetings or staying glued to a post-meeting press conference or senate hearing, we prioritize the analysis of price movement rather than the underlying fundamentals of a security or economic numbers. It is our belief that what is happening both in the economy and with a particular company (if stock) or a company’s debt (if bond) is all reflected and priced into the security, index, market, etc. By placing our priority on analyzing price trends, we are able to be active traders on what is currently happening. This allows us to manage risk for our clients and shareholders.

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Spectrum Financial, Inc 2020