The 1st quarter of 2022 was a powerful reminder that risk is an ever-present reality in the markets. The concerns in our Q4 2021 note, that the normalization of interest rates would be significant and could last for years, is coming to fruition. We believe the Fed now clearly has its hands full attempting to bring an elevated level of inflation under control. The added geopolitical stress of the Russian invasion of Ukraine and accompanying Chinese tacit support has added trade concerns to an already inflation impacted commodity short squeeze. However, the S&P 500 was down 4.60% for the quarter. In comparison, for the quarter, JDIEX was only down 2.28%. Those figures belie the depth of the January through mid-March fear where JDIEX defended both equity downside and volatility well. While some of the equity declines could be attributed to risk aversion in the face of a geopolitical uncertainty, we believe much of the market drop was due to a meaningful lifting of the U.S. yield curve that entered the year assuming 25 basis point Fed hikes in 2022, and progressed to 8-9 moves of that size. In the depth of the move down through mid-March, it was not unusual to find tech and high PE stocks (consumer and biotech as well) down 40-50% from their peaks in 2021 as the penalty for being a long to deliver company was doled out mercilessly.
The quarter’s bearishness, however, was interrupted by a change in the market’s narrative that the Fed will be able to staunch inflation while at the same time engineering a “safe landing”. The idea that a faster, more aggressive set of hikes and balance sheet reductions would be well accepted is, we believe, controversial at best. During this late month rally that cut the depth of market losses by more than half, we also saw levels of volatility (VIX) reduce significantly from about 36 at the peak to 20 at the end of the month. While for many managed volatility strategies, such a whipsaw in the markets proved to be a challenge. The systematic yet flexible and nimble approach our fund utilizes, provided solid defensive qualities, yet participated with the market as it rose the last two weeks of the quarter. To that point, the level of volatility associated with our fund and the shorter-term and longer-term Sharpe ratios continue to show the potential benefits of the fund’s approach compared to allocating to an index or competitive funds.
While some of the COVID oriented fears seem to have receded (at least, in the U.S.) we remain concerned that a hawkish Fed, elevated inflation and an economic backdrop that might include a larger decrease in consumer spending than anticipated by the market, could lead to lowered corporate EPS guidance. Certainly, diminished fiscal support, inflation sticker shock, the Fed’s balance sheet reduction and the effects of the Russian sanctions are hard to quantify. In that environment, we continue to see JDIEX as a very solid diversifier, providing an excellent combination of equity participation and downside risk mitigation. With the rate hiking process already in motion, we continue to believe using JDIEX as a component of market diversification because of its lack of interest rate sensitivity and greater correlation to volatility when equity declines occur. As we experience additional adjustments to market valuations, from interest rate hikes and potential earnings downgrades, we believe these characteristics will serve our investors well. We feel this is particularly important for investors that have traditionally relied on fixed income for diversification. Many traditional fixed income sectors struggled in Q1 2022, and we believe these sectors will experience stress for the foreseeable future until the Fed reaches what it considers an equilibrium rate. With Fed Funds Futures markets perceiving at least 2% of additional rate hikes in 2022 we think JDIEX can also serve as a fixed income complement.
|3/31/2022||QTD||1-Year||3-Year||5-Year||Since Inception 8/3/2015|
|Morningstar Options Trading Category||-2.17%||5.44%||7.48%||5.57%||4.29%|
|S&P 500 TR||-4.60%||15.65%||18.92%||15.99%||14.36%|
Performance data quoted above is historical. Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. Investors cannot directly invest in an index, and unmanaged index returns do not reflect any fees, expense, or sales charges. For performance information current to the most recent month-end, please call 888-814-8180.
Source: Morningstar Direct.
Total return for all periods less than one year is an aggregate number (not annualized) and is based on the change in net asset value plus the reinvestment of all income dividends and capital gains distributions.
The Fund’s management has contractually waived a portion of its management fees until March 19, 2023 for I, A, C and R6 Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.92%, 2.12%, 2.76% and 1.92% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.38%, 1.63%, 2.38% and 1.12% respectively. 5.75% is the maximum sales charge on purchases of A shares.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least March 19, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.25%, 1.50%, 2.25% and 0.99%, respectively, subject to possible recoupment from the Fund in future years.
About EAB Investment Group, LLC
EAB Investment Group, LLC specializes in risk mitigation strategies and works with hedge funds, family offices, high-net-worth individuals, investment companies and other advisors. EAB Investment Group uses equity and index option strategies based on a proprietary process with the goal to reduce portfolio risk and increase the probability of success. A deep understanding of options pricing enables EAB Investment Group to manage carry and attempt to mitigate costs over time, and potentially optimize monetization.
VIX: The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting www.EasterlyFunds.com.
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC and EAB Investment Group, LLC are not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
Risks & Disclosures
The Fund will borrow money for investment purposes. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity. Derivatives may be volatile, and some derivatives have the potential for loss that is greater than the Fund’s initial investment. If the Fund sells a put option, there is risk that the Fund may be required to buy the underlying investment at a disadvantageous price. If the Fund purchases a put option or call option, there is risk that the price of the underlying investment will move in a direction that causes the option to expire worthless. The Fund’s ability to achieve its investment objective may be affected by the risk’s attendant to any investment in equity securities.
Shares of ETFs have many of the same risks as direct investments in common stocks or bonds. In addition, their market value is expected to rise and fall as the value of the underlying index or bonds rise and fall. It is possible that the hedging strategy could result in losses and/or expenses that are greater than if the Fund did not include the hedging strategy. The use of leverage by the Fund or an Underlying Fund, such as borrowing money to purchase securities or the use of derivatives, will indirectly cause the Fund to incur additional expenses and magnify the Fund’s gains or losses. Because a large percentage of the Fund’s assets may be invested in a limited number of issuers, a change in the value of one or a few issuers’ securities will affect the value of the Fund more than would occur in a diversified fund.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.