COMMENTARY: Managed Futures Strategy Fund October 2018
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Commentary in PDF format.


HIGHLIGHTS

    Contributors
  • Equities: Short Spanish IBEX, China A50, and MSCI Emerging Markets
  • Commodities: Short Lead, Copper, and Soybean Oil
  • Currencies: Long U.S. dollar versus Swiss franc, Norwegian krone, and British pound
  • Fixed income: Long German 5 and 10 Year Bonds, and Short U.S. Ultra Bond
    Detractors
  • Long Taiwan Index, OMX30, and CAC 40
  • Commodities: Long Crude Oil, Cocoa, Gasoline
  • Currencies: Long U.S. dollar versus Brazilian real and Japanese yen, Long British pound versus Australian dollar
  • Fixed income: Short Canadian 10 Year Bond

Past Commentaries

October 2018

September 2018

August 2018

July 2018

June 2018

May 2018

April 2018

March 2018

February 2018

January 2018


RECAP

The fund returned a loss of -5.76% during the month as losses from equities and commodities offset gains in currencies and fixed income.

Equity markets were under pressure globally during the month. Much of this weakness has been attributed to tightening of global monetary policies, specifically by the Fed. Federal Reserve Chairman Jerome Powell ratcheted up these concerns early in the month when he said the central bank is “a long way” from neutral interest rates. These equity market moves were significant enough to cause us to exit our fourteen remaining long equity positions and enter ten new short positions during the month. This resulted in our equity exposure switching to net short for the first time in years.

Recent volatility has kept all eyes on equities; however, commodities, currencies, and fixed income are being impacted by shifting macro themes. In commodities, the equity sell-off caused gold to rally and benefit from safe haven status, while crude oil weakened due to renewed oversupply concerns. The U.S. dollar finished the month stronger versus its major counterparts and the Federal Reserve’s gradual rate hikes have caused U.S. yields to continue to outperform other developed markets, despite the selloff in equities.

Performance (as of 10/31/2018)
*INCEPTION DATE: 6/27/12 **INCEPTION DATE: 3/22/13
The Total Annual Fund Operating Expenses for the Longboard Managed Futures Strategy Fund class A and I are 3.12% and 2.88% respectively. The maximum sales charge for Class A (Max Load) shares is 5.75%. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. For performance information current to the most recent month-end, please call toll-free 855-294-7540 or visit our website, www.longboardfunds.com. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.

OUTLOOK

As we mentioned last month, cracks continue to emerge in the equity markets. Over the past decade, we have occasionally seen equity weakness similar to October. However, this weakness has generally caused limited portfolio adjustments and equity markets have remained in an uptrend. October was different. We saw full trend reversals in many international equities. These portfolio adjustments have caused short term losses. These types of losses are as expected when we see significant position changes. The portfolio is adjusting to provide more “crisis alpha” if the equity sell-off continues.

Looking ahead, the domestic and international political backdrop will likely continue to drive market sentiment. Midterm elections in the U.S. and ongoing geopolitical tensions will likely set the tone for the remainder of 2018.


EQUITIES

Global equities fell sharply during the month and erased all of their gains for the year. In the U.S., equities fell by nearly -7% and posted their worst monthly returns in more than seven years. Similarly, emerging market stocks continued to underperform while Chinese equities fell by more than -11% as tensions surrounding tariffs took hold.

During the month we experienced significant position changes. Domestically, we exited long positions in futures for the following futures markets:

  • S&P 500
  • DJIA
  • Nasdaq
  • S&P 400 mid-cap
  • Russell 2000

Internationally, we exited positions in:

  • FTSE (Europe)
  • CAC40 (France)
  • AEX (Amsterdam)
  • TSX 60 (Canada)
  • SPI (Australia)
  • OMX (Sweden)

We also entered new short positions in:

  • MSCI Emerging Markets
  • FTSE/MIB (Italy)
  • DAX (Germany)
  • MSCI Singapore
  • Hang Seng (Hong Kong)
  • H-Shares (Hang Seng China Enterprise)

The portfolio also reversed positions in the Nifty (India) and MSCI Taiwan, going from long to short during the month. Our overall exposure to the equity sector remained nearly unchanged; however, the portfolio direction change is significant. These changes leave our portfolio flat U.S. equities and short across the rest of the world.


FIXED INCOME

Bonds are a key focus to macro markets at the moment with US yields breaking out of a range and continuing to rise. The knock-on effects remain unknown for the time being but the ability of markets to absorb higher yields may provide insight to the equity markets. Global bonds continue their lackluster performance, particularly in Europe where concerns over Brexit and the Italian budget have impacted performance abroad.

Our number of positions in fixed income remained unchanged as an initiation in US Utlra bonds was offset by a liquidation in German two-year Schatz.


CURRENCIES

Global yields were weighed down by overall risk off sentiment in the equity markets. The U.S. 10-year yield ended the month at 3.14% after having rallied earlier in the month due to continued positive U.S. economic data. As equities remain under pressure, the flat yield curve will likely remain a point of discussion amongst macro followers.

During the month we opened a new short position in Canadian government bonds. Our overall exposure to fixed income persists at historic lows and remains short U.S. and long Germany.


COMMODITIES

Volatility returned to the commodity sector in October. Oil fell by nearly -9% due to concerns about lowered demand while, gold rallied during the month due to “risk off” sentiment in equities. Softs were also a detractor as cocoa, coffee and sugar prices moved contrary to established longer term trends.

During the month we closed long positions in cotton and RBOB gasoline and a short position in London cocoa and Robusta coffee. We opened a new long position in palladium and new short positions in Kansas City wheat and canola oil. These adjustments reduced our exposure to commodities fairly significantly.


GLOSSARY
Commodity Market
A physical or virtual marketplace for buying, selling, and trading raw or primary product such as natural resources, agricultural products, and livestock.
Forward Contract
A non-standardized contract between two parties to buy or sell a specified asset of specified quantity with delivery and payment occurring on a specified date.
Futures Contract
A standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality with delivery and payment occurring on a specified date.
Long
Buying an asset such as a stock, commodity or currency with the expectation that the asset will rise in value.
Risk Allocation
The estimated maximum equity a position could lose, divided by the estimated aggregate equity currently at risk of loss across all positions inthe portfolio.
Short
Selling an asset such as a stock, commodity or currency, with the expectation that the asset will decrease in value.
Long-Term
Holding periods averaging greater than one year.

PROSPECTUS OFFERING DISCLOSURE

Investors should carefully consider the investment objectives, risks, charges and expenses of the Longboard Managed Futures Strategy Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained at https://www.longboardfunds.com or by calling 855-294-7540. The prospectus should be read carefully before investing. The Longboard Managed Futures Strategy Fund is distributed by Northern Lights Distributors, LLC, a FINRA/SIPC member. Longboard Asset Management, LP, is not affiliated with Northern Lights Distributors, LLC.

MUTUAL FUND RISK DISCLOSURE

Mutual funds involve risk including possible loss of principal. The fund will invest a percentage of its assets in derivatives, such as commodities, futures and options contracts. The use of such derivatives and the resulting high portfolio turnover may expose the fund to additional risks that it would not be subject to, if it invested directly in the securities and commodities underlying those derivatives. The fund may experience losses that exceed those experienced by funds that do not use futures contracts, options and commodities. Changes in interest rates and the liquidity of certain investments could affect the fund’s overall performance. The fund is non-diversified and as a result, changes in the value of a single security may have significant effect on the fund’s value. Other risks include credit risks and investments in fixed income securities, structured notes, asset-backed securities and foreign investments. Furthermore, the use of short positions and leveraging can magnify the potential for gain or loss and amplify the effects of market volatility on the fund’s share price. The fund is subject to regulatory change and tax risks. Changes to current regulation or taxation rules could increase costs associated with an investment in the Fund.

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