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Managed Risk Domestic Equity Fund Q1 2021 Commentary

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The U.S. equity markets were strong during the first quarter of 2021 but far from calm as concerns about the Biden administration’s ability to get fiscal stimulus passed and the FED’s ability to execute its run hotter inflation policy gave the markets pause. During the quarter, JDIEX provided a 3.72% return vs the S&P 500’s 6.17% return. That return represents a very solid 60% of the market’s Q1 return while the fund’s 3-year risk continues to run at under 33% of the S&P’s volatility. With instances during the quarter where the S&P experienced 3-5% drawdowns from short term peaks, the Fund was able to mute downside and participate solidly as equities recovered. Given the continuing concerns around COVID-19 variants, high valuations, tax policy increases, and steepening yield curves, we think the Fund is well positioned to provide solid risk adjusted returns.

As the market has begun to recognize the better current fundamentals and the laissez faire FED policy, the VIX dropped through the quarter.  Although the VIX dropped from the low 30s to about 19 in the quarter, it remains at relatively high historical levels. The Fund’s investment team continue to maintain the systematic structure and short durations for potential opportunities. So, while volatility generally dropped through the period, the spikes experienced in late January and February – early March provided opportunities for the portfolio to limit the drawdowns and improve participation.

Looking ahead, we believe the importance of managing risk is further highlighted by the potential of U.S. interest rates normalizing as the lingering effects of COVID-19 are literally and figuratively being overcome. Unfortunately, this may also heighten some of the tapering concerns we saw in late February which realistically shouldn’t be ignored if the U.S. treasury yields rise in response to better economic data and increased supply. The implications of rising yields are impactful to corporate and high yield securities as are the potential for higher tax rates. We think the next few months will bring greater clarity to both these issues and a rise in volatility should not be unexpected. Certainly, the systematic approach we take works to reduce drawdowns in market declines. We think investors should consider their credit exposures when they evaluate their portfolio equity correlation risk and consider bolstering JDIEX positions. Studies we have done show that increasing the core allocation to our approach helps offset the increasing risks of market decline when investors use higher Beta or equity related risk profile funds.

 

3/31/2021 YTD 1-Year 3-Year 5-Year Since Inception

8/3/2015

I Shares 3.72% 19.50% 8.00% 6.82% 5.57%
Morningstar Options-based Category 3.55% 26.56% 6.94% 5.75% 4.59%
S&P 500 TR 6.17% 56.35% 16.77% 16.30% 14.13%

 

Source: Morningstar Direct. 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. 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 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 invest directly into an index. 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 1.70% for I Shares, 1.95% for A Shares, 2.69% for C Shares, and 1.69% for R6 Shares; total annual operating expenses after the expense reduction/reimbursement are 1.70% for I Shares, 1.95% for A Shares, 2.69% for C Shares, and 1.45% for R6 Shares. 5.75% is the maximum sales charge on purchases of A shares. For performance information current to the most recent month-end, please call 888.814.8180.

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 1.79%, 1.99%, 3.00%, and 1.34%, 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.

 

RISKS AND DISCLOSURES

 

The portfolio 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 Portfolio’s initial investment. If the Portfolio sells a put option, there is risk that the Portfolio may be required to buy the underlying investment at a disadvantageous price. If the Portfolio 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 Portfolio’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 Portfolio 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 Portfolio’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 Portfolio more than would occur in a diversified fund.

Past performance is not a guarantee or a reliable indicator of future results. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges. As with any investment, there are risks. There is no assurance that the portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. Certain members of James Alpha Advisors, LLC are also registered representatives of FDX Capital, LLC, member FINRA/SIPC. James Alpha Advisors, LLC and EAB Investment Group, LLC are not affiliated with Ultimus Fund Distributors. The James Alpha Funds are distributed by Ultimus Fund Distributors, LLC, member FINRA/SIPC.

 

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.JamesAlphaAdvisors.com.

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.

 

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