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Fund Watch: Balter And Natixis/ASG Prep New Funds

By DailyAlts Staff In this edition of Fund Watch, new fund filings for: Balter European L/S Small Cap Fund ASG Dynamic Allocation Fund Balter European L/S Small Cap Fund On September 15, Balter Liquid Alternatives filed a Form N-1A with the Securities and Exchange Commission (“SEC”) announcing its intent to launch its third mutual fund , the Balter European L/S Small Cap Fund. As is evident by its name, the new fund will take both long and short positions in small-cap European stocks, in pursuit of its objective of absolute returns. The fund is the successor to the S.W. Mitchell Small Cap European Fund, a hedge fund, which will transfer its assets to the institutional shares of the new fund upon its launch. S.W. Mitchell Capital LLP will continue to manage the fund as the sub-advisor. Typically, the Balter European L/S Small Cap Fund’s portfolio will consist of roughly 60 such stock positions, which may include both listed and non-listed equities; and the fund’s managers can also invest in debt securities, options, warrants, convertibles, and other derivatives. Its net-long exposure can be as great as 150%, and while its net-short exposure could rise to as much as 50%. The fund will have short positions at all times. The Balter European L/S Small Cap Fund’s predecessor fund has performance dating back to 2008. Its shares returned -6.5% that year, but then posted successive annual gains of 44.6% and 23.8% in 2009 and 2010. After losing 7.7% in 2011, the fund roared back with successive gains of 11.1% and 24.8% in 2012 and ’13, and then returned -0.5% last year. Shares of the new fund will be available in institutional and investor classes, with respective net-expense ratios of 2.24% and 2.54%. ASG Dynamic Allocation Fund Natixis Funds Trust II recently filed a Form N-1A with the SEC, announcing its plan to launch the ASG Dynamic Allocation Fund. The new fund’s objective will be long-term capital appreciation, with the protection of capital during unfavorable market conditions a secondary goal. It will pursue this end by means of dynamic tactical allocation across global markets and asset classes, overseen by investment advisor AlphaSimplex Group’s portfolio managers Alexander Healy, Robert Rickard, and Derek Schug. Healy, Rickard, and Schug will also be charged with the task of managing the fund’s annualized volatility, which is targeted at no more than 20%, as measured by the standard deviation of the fund’s returns. The fund will also use leverage, which will not exceed 200% of assets. Currently, ASG operates nine alternative mutual funds , including the ASG Global Macro Fund (MUTF: GMFAX ), which was launched in partnership with Natixis . That fund, which debuted on December 1, 2014, returned -3.45% in the first eight months of 2015, ranking in the bottom quintile of funds in its category. Over the three months ending August 31, the fund’s performance was better, in the top quartile, but still negative at -2.03%.

A Cure May Be In Store For The SPDR S&P 500 Trust ETF

When I warned about market correction in mid-August, I also discussed what factors would eventually cure what ails us. One of those factors is presenting itself Thursday, as the Federal Reserve offers clarity on an uncertainty weighing on investors’ minds and weighing down stocks. The probability of Fed inaction on interest rates or the possibility of a minor action with the removal of concern about October should serve stocks immediately. I expect such a scenario should provide immediate & significant upside to the SPDR S&P 500 Trust ETF, returning it toward its highs above $210 and higher as longer term factors. Risk to this thesis could come from a Fed rate action of 0.25% or if the Fed does not clear away concern about a potential action in October. When I authored my warnings about market correction in early to mid-August, I also indicated what the cure for stocks would eventually be. One of those factors appears to be about ready to help out, and that is clarification from the Fed. No matter what happens Thursday afternoon, the Federal Open Market Committee (FOMC) will provide some clarity to investors. Stocks should benefit from the removal of some uncertainty, and I see immediate upside of 2.5% to 5.0% probable for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) post the Fed meeting. But any gains and the length of duration of upward direction will depend on the specifics of what the Fed does and says. The longer term for stocks and the SPY will continue to depend on the U.S. economy, energy sector issues, emerging market implications, seasonal capital flow factors and the Fed path and accuracy moving forward. 1-Year Chart of SPY at Seeking Alpha In my early to mid-August warnings of imminent market correction (see several links within the summary piece), I suggested the eventual cure for stocks would require a cocktail of medicines. I discussed the implications of seasonal capital flows and that the passing of time toward November 1st and a more welcoming capital flow environment would serve stocks then. I also suggested the U.S. economy mattered far more than the Federal Reserve, and that we would need to see health in the economy to gain traction. That means that the U.S. energy sector must heal or at least not meaningfully infect the rest of the economy. It also means that China only stumbles and does not fall, and that growth recovers in that important sector of the global economy. Finally, I said we needed Fed clarity, and that uncertainty about the Fed’s path was not serving stocks. Thursday, we will receive some clarity on the Fed’s path. Most likely, the Fed will succumb to market pressures and refrain from raising rates at this meeting. However, I’m not sure that is the best case scenario. Rather, I believe a minor rate hike of less than a quarter of a percentage point would serve to satisfy expectations that Fed action is happening this year while also easing concern that the Fed could act prematurely. If the Fed makes a minor move and indicates it is not likely to act in October, pushing expectations for the next hike to possibly December or March, it will serve stocks well. It is also likely to reiterate its data dependence and to note risks to the U.S. economy including China and emerging markets, the U.S. energy sector, and the strength of the dollar. But I also anticipate the Fed will note the strength of U.S. labor and the lack of inflation, which are positives. I suggest such an outcome would be just what the doctor ordered for the stock market. The result, in my view, would be a surge in stocks and a marching of the SPDR S&P 500 Trust ETF back towards previous highs certainly above $205, and probably to $210 or higher without much disturbance. Much depends on the specifics of the very complex data set we will get from the Fed. A risk lies in the possibility that the Fed raises rates by a quarter of a point. Such a scenario, I believe, would send a shock through the market and spur a selloff back to correction lows. That is not perfectly clear, given that investors would like to see the Fed finally get started at some point. However, I expect that given the latest poor indications from China and emerging markets, the Fed will refrain from further disturbing the global economy and the U.S. economy as a result. Despite the likelihood of inaction, in my opinion, the FOMC vote could be closer than in previous meetings. Investors will need to have some indication that October is not a threat as well, or this period of volatility will simply extend to the next Fed meeting. So if the Fed does not act, but leaves the possibility of an October action on the table for investors to worry and debate about, stocks could see their upside limited or completely erased. Over the long-term, what matters far more than the Fed are the health of the U.S. economy and the health of sectors of the global economy that threaten the U.S. economy. That means, not only must U.S. data continue to reflect progress, especially in the labor market and GDP data, but weakness in the U.S. energy sector and manufacturing (relative to it) must dissipate. Also, China must stabilize rather than deteriorate; if this occurs, expect global stocks to rally significantly. Finally, as September and October pass, significant capital flow pressure from institutions ending their fiscal years will dissipate and likely offer support to stocks as the institutions look forward with many securities trading at relative value. We are in a complex period now, where the market is supersensitive to news flow. It is the worst possible time for the Fed to be contemplating action, but it is our situation. Long-term investors should be patient now, but remain focused on the matters discussed herein. I cover the market closely, and invite relative interests in the SPY security and the market to follow my column here at Seeking Alpha . Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Are There Any ‘Safe’ CEF Bond Funds?

Investors looking for yield in the CEF bond space are often attracted to high-yield funds. But those aren’t the only options available. Here’s a trio of bond CEFs that don’t play the high-yield game—so much, anyway. The one thing that closed-end funds, or CEFs, do really well that open-end mutual funds don’t do so well is income. That’s true across multiple investment approaches, but particularly in the stock space, where high-yielding CEFs are very common. However, bond CEFs often have very high yields, too. In recent years the search for high-yields has drawn investors to the junk bond arena, an area that hasn’t fared so well lately. And, thus, the question I recently got from a reader: “Are there any high-quality bond CEFs around?” Treasuries The answer to that question is yes, there are. However, you’ll need to know what you are buying. For example, the Federated Enhanced Treasury Income Fund (NYSE: FTT ) invests essentially all of its assets in U.S. treasures. Those are ultra safe investments, giving it an average credit quality of AAA. Now that said, FTT’s yield is a less than inspiring 2.5% or so. But, with so much money in super-safe bonds, what would you expect? The only thing to keep in mind here is the word “enhanced” that sits in front of “treasury” in the fund’s name. This isn’t just a treasury fund, it’s a little bit more. Closed-end funds often make use of tactics that open-end funds don’t. FTT does three things . First, it owns treasury securities. Second, it tries to adjust its duration to take advantage of interest rate shifts. Third, it writes options to enhance income. None of these things is particularly odd or frightening, but they are notable because they can change the dynamics of the investment. For example, if the fund makes a bad call on interest rate movements performance would suffer. But a lot of funds do this very same thing. And options can limit upside potential, though I wouldn’t expect a treasury fund to rocket higher over a short period of time. So this is something to note, but I wouldn’t lose too much sleep over it. However, from a bigger picture, if you are looking at a CEF, you’ll want to know if they do things that similar open-end funds aren’t. Is now the time to look at FTT? Well… If you are concerned about high-risk investments, you might want to consider FTT. But you’d clearly be in good company, since the fund’s average discount has narrowed pretty steadily since last year. It’s currently trading at an around 3% discount versus its three year average of 9% or so. And it’s annualized net asset value, or NAV, performance over the past five years through August is a loss of around 1% a year. That’s not exactly inspiring. So, if you do look at FTT it’s more about a flight to safety than anything else. Investment grade bonds If you are looking for a bond CEF beyond high yield and want a little more than what FTT has to offer, the Invesco Bond Fund (NYSE: VBF ) is another high-quality bond fund that you might want to look at. Around 85% of the fund’s assets are invested in bonds rated BBB or better. Another 10% or so is in BB bonds, the highest quality of the high-yield debt spectrum. So is it a pure investment grade bond fund? No. But it’s a far cry from a junk bond fund. The fund can invest up to around 20% of assets in lower grade debt, if it wants to. But, in general, if you are looking to minimize your exposure to junk bonds, this fund will accomplish that. Like FTT, though, don’t expect a lot of distribution. VBF’s distribution yield is around 4.8% or so. That’s a lot better than the 2.5% offered by FTT, but a far cry from the 10%+ yields you can find in junk bond CEFs. Interestingly, VBF’s discount is currently nearing 9%. That’s slightly wider than its three-year average discount of just under 8%. So investors haven’t been showing this CEF much love of late. The fund actually has a lot more going for it on the performance side of things than FTT, too. For example, over the trailing five years through August the fund’s annualized NAV return was about 5.25%. It’s an older fund than FTT, so it also has a trailing annualized 10-year return of around 5.75% and a trailing 15-year return of 6.25%. All numbers assume reinvested distributions. The fund, for the most part, is pretty boring. It owns bonds. The management team mixes a top-down approach to the bond market with a bottom-up approach to individual bond selection. That’s pretty common stuff in the bond world. So, if you are looking for a long-term bond holding that isn’t junk and isn’t just a flight to safety play, VBF is worth a closer look. Just to prove the case Just to prove there’s more than one option in the investment grade CEF space, here’s another: the Morgan Stanley Income Securities Inc. (NYSE: ICB ). Like VBF it can invest in high yield, but generally doesn’t do so to a material degree. As of March, around 12% of the portfolio was in bonds rated BB or below, a weighting management described as opportunistic. ICB’s distribution yield was recently in the 3% range. It’s discount was about 10%, in-line with its trailing three-year average. Trailing NAV performance, meanwhile, was fairly close to that of VBF, with an annualized return of 5.1% over the trailing five years, 5.7% over the trailing 10 years, and 6.3% over the trailing 15-year period through August. The two funds have fairly similar risk profiles, as well. Yes, there are options… All in, I’d give the edge to Invesco Bond Fund here, but that doesn’t mean you shouldn’t take the time to compare all three funds I’ve noted. And, frankly, there are other CEFs that invest in investment grade debt, too, so I wouldn’t stop my search with this trio. The idea here was to whet your appetite, not sate it. But FTT, VBF, and ICB are all solid, come from well-known families, and would suit the needs of an investor looking for an alternative to a high-yield CEF. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.