Active Strategy Review & Insights

As of
April 30, 2022

Internal Use Only
Core Satellite
Prepared By
Tim Schwarzenberger
Robert Netzly, CEO

OVERALL, HOW DID THE STRATEGY DO? WHAT WAS THE PERFORMANCE COMPARED TO EXPECTATIONS/BENCHMARKS (OVERPERFORM, UNDERPERFORM, ETC.)?

The markets continued their descent in April, with most asset classes and sectors in negative territory for the year.  The broad fixed income market (BB US Agg) declined 3.8% as bond yields experienced their largest monthly increase since 2009.  The US large cap market (S&P 500) returned -8.7 % in the month and is down 12.9% YTD, marking the worst start to a year (through the first four months) since 1939. International developed and emerging markets stocks were also negative for the month, but they outperformed the US large-cap market by 2-3%.  With the continued market declines in April, all Core Satellite portfolios posted negative returns for the trailing one- and three-month periods.  Our Select strategies modestly outperformed our Global Strategies.  

WHY DID WE SEE THIS PERFORMANCE?

Our portfolios have generally outperformed relative to their benchmarks.  The “Core” portion of the portfolio has outperformed, especially within the Select Strategies, due to strong performance from our US and Emerging Markets sleeves.  The “Satellite” portion of the portfolio (which includes our sector tilts in Staples and Healthcare) underperformed for the trailing one- and three-month periods as our healthcare holdings significantly underperformed the broader market even though the healthcare sector performed better than the overall market. This was somewhat offset by the strong performance from our consumer staples sleeve.  On the fixed-income side, the benchmark continues to be impacted by rising rates, and our positioning in investment-grade corporate bonds (IBD) shielded us from some of those losses.

ARE THERE ANY ADJUSTMENTS YOU PLAN TO MAKE TO CONTINUE OR CORRECT THIS TREND?

No, we see the current positioning continuing for the near future.

WHAT ARE 3 THINGS YOU ARE MONITORING RIGHT NOW FOR THESE STRATEGIES, AND WHY?

These portfolios are designed to be a core position with the goal of capturing the market beta (systematic risk/return) of global equity markets, with the satellite sleeves providing an alpha (idiosyncratic risk/return) overlay in the form of sector tilts. Sectors we are watching closely are Staples and Healthcare (current overweight), but we are also keeping an eye on Energy, Utilities, and others.

Both Healthcare and Staples have continued to perform well and are still showing positive technical indicators. From a macro perspective, these areas are generally strong late-cycle, and further, our stock selection process allows us concentrated positioning within the sector in those leading stocks.
Energy has outperformed all other sectors significantly YTD. Oil prices reached price highs not seen since the fracking boom leading up to 2014. While prices are significantly above the cost of production in most areas, including the US, given the political headwinds that have restrained capital deployment for the past ~eight years, we do not see a short-term shift from producers to change from their now methodical approach to growing production; knowing the winds could quickly shift again. With no near-term solutions to curb demand, there could be further upside unless the rise in interest rates does the intended task of slowing growth, which will have other implications. From a technical perspective, charts in oil and other commodities have been consolidating. They could break out in either direction, and of course, the energy sector itself is highly correlated to oil prices.
Materials could be a defensive play in the face of inflation, as many players in this market could pass on higher costs to their customers. However, the sensitivity to growth is a much larger factor in this segment, which is more of a concern than any perceived inflation protection. Real assets, or specifically Real Estate, can also be a strong hedge against inflation, but again, the story is not that simple, as rising rates will directly impact demand. So this is another area we are monitoring but not taking active positioning.

Looking at a summary of the returns from the S&P sectors, the dispersion is very evident over shorter periods (1-12 months), though over longer stages those differences begin to disappear. The point is that there is value to be gained by understanding where the momentum is and positioning accordingly.

Source: Bloomberg, data as of May 5, 2022
Source: Inspire Investing, Bloomberg

Quadrant Interpretation:

• Strengthening: Performance < benchmark but momentum is UP
• Leading
: Performance > benchmark, relative strength is UP
• Weakening
: Performance > benchmark, relative strength is DOWN
• Laggard
: Performance < benchmark and momentum is DOWN
• Benchmark
: S&P 500 (S&P 500 Sectors)
12 weeks of data as of May 5, 2022

Tactical Risk Management
Prepared By
Robert Netzly
Robert Netzly, CEO

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)?

Tactical Risk Management strategies were down slightly for the month as our position in lower duration intermediate bonds lost value due to the continued rise in interest rates. However, we gladly accept that small decline relative to the nearly 10% slide of stocks represented by the S&P 500.

Why did we see this performance?

TRM analysis flashed the warning sign all the way back in September, prompting our investment team to move TRM portfolio assets into a defensive posture. This tactical shift to reduce risk in the portfolio has paid off by protecting investors from the damaging volatility of the past several weeks.

Are there any adjustments you plan to make to continue or correct this trend?

At present, both the stock market and the bond market are under significant pressure. Stocks continue to exhibit a high degree of risk, with the probability of further declines seeming very likely. Elliot Wave structure strongly suggests that the high we saw in the stock market in January could have marked a long-term top that perhaps may not be revisited for months, or even years, as the inordinately long bull markets we have experienced over the past many years have (perhaps) finally come to an end and the beginning of a nasty bear market (perhaps) just getting started.

What are 2 things you are monitoring right now for these strategies and why?

We continue to monitor the wave structure and technicals of the market closely for signs of a potential bottom in prices where we might attempt to add stocks back into the portfolio in anticipation of a rebound, even if short-lived. Such tactical positioning could help us add potential gains to the portfolio even in the context of a longer-term decline. Markets do not move in straight lines so that we will maintain a defensive posture but seek to be opportunistic if or when a shorter-term corrective rally materializes within the longer-term downtrend.

While the outlook is gloomy for stocks and on a lesser extent for bonds, investors are well-served by maintaining a calm and collected demeanor. When markets bottom, there will be opportunities to buy quality companies “at a discount,” but fear and panic cloud good judgment and cause investors to miss good opportunities and can even exacerbate the damage done during a bear market. Our defensive positioning in TRM has shielded investors from the brunt of the recent market declines. We will continue to seek to provide that defense should the market continue to sell off, as it appears likely to do.

CW Active Strategies
Prepared By
Jacob Chandler
Jacob Chandler

We hope that you had a great month of April!

We wanted to give you an update on the performance of our CW Active investment strategies. At Inspire Advisors – The Chandler Team, we focus on three main strategies that are all diversified and actively managed “in house” by our team. Below is an overview of how the strategies performed, what changes were made during the month, and what our expectations are for the month ahead.

How did the CW Active strategies perform for the month?

• CW Active Protection: -1.36%
• CW Active Balanced: -1.92%
• CW Active Growth: -2.49%

How did the static blended benchmarks perform for the month?

• DJ U.S. Conservative: -3.91%
• DJ U.S. Moderate: -6.35%
• DJ U.S. Aggressive: -8.74%

How did the individual holdings (assets classes) perform for the month?

• US Large Cap Stocks (BIBL): -10.13%
• International Stocks (WWJD): -7.63%
• US Small/Mid Cap Stocks (ISMD): -7.66%
• US REIT Index (USRT): -6.29%
• US LT Treasuries (VGLT): -9.15%
• US IT Treasuries (VGIT): -1.86%
• US ST Treasuries (VGSH): -0.27%
• US ST Treasuries FLT (USFR): +0.20%
• Gold (GLD): -1.44%
• Div. Commodities (GSG): +4.73%

What changes were made to the investment strategies during this month?

• At the beginning of April our indicators improved, and we added a small allocation to stocks, but it then quickly receded, and we reversed that decision to remain in a limited exposure position. Our indicators all stayed in a “down trend” direction for stocks, real estate, and longer-term treasuries throughout the month. The out-performance of the models compared to the blended benchmarks is due to our more conservative stance given the current state of the economy with possible recession on the horizon.
• We continue to remain in a very small allocation to BRI screened US Large Cap stocks (within RISN), 13-17% in Gold, and the remaining allocations in short-term US Floating Rate Treasuries.

What are our expectations for the month ahead?

• We will keep our eye on the current trend direction and see if any asset classes change direction enough to warrant an increase in our allocations. Due to higher-than-expected inflation, interest rate increases (which we believe will be higher than the FED is predicting), and possible recessionary pressures due to rising rates; we do not anticipate high returns for the more growth focused assets classes the remaining part of 2022.
• We are researching other items to possibly add the models that would do well in rising interest rate situations as well as increasing inflation scenarios. If we find something that our team believes offers a good risk/reward opportunity, we will add those to the models.

CW Asset Allocation – 05/06/2022

CW Active Protection – 3.75% Growth 96.25% Protective

• Large Cap – 3.75%
• Small/Mid Cap – 0%
• Intl. Cap – 0%
• REIT – 0%
• Gold – 13.5%
• Long Term Treas. – 0%
• Inter. Term Treas. – 0%
• Short Term FL Rate Treas. – 72.75%
• Div. Commodities – 0%
• Negative Duration MB Securities – 10%

CW Active Balanced – 5.63% Growth 94.37% Protective

• Large Cap – 5.63%
• Small/Mid Cap – 0
• Intl. Cap – 0%
• REIT – 0%
• Gold – 15.25%
• Long Term Treas. – 0%
• Inter. Term Treas. – 0%
• Short Term FL Rate Treas. – 69.12%
• Div. Commodities – 0%
• Negative Duration MB Securities – 10%

CW Active Growth – 7.50% Growth 92.50% Protective

• Large Cap – 7.5%
• Small/Mid Cap – 0%
• Intl. Cap – 0%
• REIT – 0%
• Gold – 17%
• Long Term Treas. – 0%  
• Inter. Treas. – 0%
• Short Term FL Rate Treas. – 65.5%
• Div. Commodities – 0%
• Negative Duration MB Securities – 10%

Inspire Faithward Large Cap Momentum ETF (NYSE: FEVR)
Prepared By Matt Melott
Inspire Faithward Mid Cap Momentum ETF (NYSE: GLRY)
& Inspire Faithward Large Cap Momentum ETF (NYSE: FEVR)
Prepared By
Matt Melott
Matt Melott

For the month of April, FEVR retreated -12.5%, underperforming the S&P 500, which was returned -8.8% and slightly outperforming the USA Momentum Factor (MTUM) return of -12.7%. GLRY fell -9.6%, landing between the S&P MidCap 400 return of -7.1% and the USA Momentum Factor (MTUM) return of -12.7%.  

Materials and Staples were points of strength in FEVR, specifically along the lines of food production and distribution. Health Care was the biggest drag, and allocations were reduced. For GLRY, the reduction in tech exposure buoyed performance versus larger market cap exposure to the sector. As discussed previously, Consumer Discretionary names have been a major headwind, and results for April improved to mixed performance.

Pressing into the future, markets are already pricing in an economic downturn, mainly via FED policy error. As the probability of recession increases, participants rotate into risk-off assets. However, we believe the crux of determining what part of the economic cycle we are in rests in the hands of consumers. US workers have seen total private wages rise by almost one trillion dollars since the pre-COVID peak. Those wages add (and subtract) from companies’ bottom lines dramatically. As GDP misses expectations and earnings season wraps up an unforgiving quarter, investors will begin seeing what the actual state of the economy is. Will the need to replace physical reserves hold up companies’ supply chains, or will inflated prices keep consumers at home?

We don’t know what the future holds, but we are excited to serve a God who does. In the interim, as we observe how the economy, markets, and consumers duel each other, we will stay rooted in our repeatable FEVRR process and find opportunities in an interesting risk/reward environment.

Inspire Faithward Mid Cap Momentum ETF (NYSE: GLRY)
Prepared By Matt Melott
Inspire Tactical Balanced ETF (NYSE: RISN)
Prepared By
Jacob Chandler
Jacob Chandler

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)?

For the month of April, the Inspire Tactical Balanced ESG ETF (RISN) returned -3.31%. The fund outperformed the S&P Target Risk Moderate Index for the month by +2.02% (according to Morningstar.com). We attribute this performance to the very conservative allocation that the fund held for the month. For much of the month, the fund held a reduced allocation to US equities and a larger allocation to US Treasuries and Gold. The overall stock market (S&P 500) declined by -8.72% for the month reversing its previous rally in March.

For the last twelve months, the Inspire Tactical Balanced ESG ETF (RISN) returned -3.06% and has outperformed its benchmark (S&P Target Risk Moderate Index), which returned -7.09% according to Morningstar.com.

What are 3 things you are monitoring right now for these strategies and why?

Item watching #1:  We continue to monitor the US Large Cap stock market to see if the trend/momentum remains in a downward direction. Again, we do not anticipate that the worst is over and anticipate holding our smaller allocation to stocks for the foreseeable future. We have reduced our stock allocation to the lowest it has been at approximately 10% due to the increasing recession risks.

Item watching #2: We continue to monitor the price movements of gold. We currently hold approx. 20% in gold, but it has recently begun what could become an extended downtrend; if our triggers are hit, we will reduce our gold allocation and move into our short-term floating rate treasury holding.

Item watching #3: We continue to monitor the US Treasury holdings. We are currently only allocated to short-term floating rate treasuries, which have held stable even through the higher-than-expected FED rate hike on May 5th. We expect this holding to help us weather the storm if interest rates continue to increase at a higher-than-expected rate.

Issachar Fund
Prepared By
Dexter Lyons
Dexter Lyons

Issachar lost -3.05% in April, while the IQ Hedge Multi-Strategy Index lost -3.61%, so Issachar outperformed its benchmark by losing less. While winning by losing less is good, my goal is to make money. Issachar was invested in the agriculture, energy, metals, mining, and utility stocks during April, then the market turned south, and our positions came under selling pressure. We sold all positions on April 21st as our stops were triggered. The NASDAQ fell another -6% into month-end since we sold. Risk is high, and opportunity is low, so we will wait for the dynamics to change in our favor before recommitting capital. Patience is a Fruit of the Spirit.  

I believe there are times to go on offense when the market is rewarding risk-takers, and there are times such as now to stay patiently on defense. I also believe that preserving assets and mental capital in a bear market is key to achieving your long-term financial goals. A bull market can hide all sorts of undisciplined trades, whereas a bear market often exposes investors without an exit strategy. While the market has always gone up over time, there have been extended periods where the market will test the resolve of a buy-and-hold strategy. Interest rates have been falling for the last 40 years, but we are now in a new cycle of rising rates. Inflation caused by central banks creating too much money chasing fewer goods has caused unforeseen disruptions in the supply chain. Cash is a viable position, and I believe cash is king for now.      

All major indexes are in down-trends, trading well below their 50-day moving averages. This is a sign of distribution and high risk, but it will not last forever. There will be great opportunities on the other side of this bear market, but one must preserve all capital (mental and physical) to participate when the time is right. I love what I do, looking at stock charts and finding setups to buy or short, but I have not found a better risk-adjusted position than cash. The NASDAQ just had its worst month since October 2008 at the height of the Great Financial Crisis, down over -13%. Opportunity is in the making, but risk may be too high for the potential return, so patience is key.      

The Fed is in a precarious position promising to raise rates to combat the inflation they created, but we just experienced negative 1st quarter GDP growth. I cannot remember when the economy contracted while the Fed raised rates to pre-empt inflation. This could be an economic disaster if the Fed raises rates and unwinds its balance sheet to fight inflation that may already be in decline. We may need to endure more economic pain until we get God-honoring leaders back in power. Please pray for God to raise His mighty hand and bring us closer to Him!

Let your light shine before others so that they may see your good deeds and glorify your Father in heaven. Matthew 5:16

Mutual Funds involve risks, including the possible loss of principal. An investment in the Fund may not be appropriate for all investors. The Adviser's judgment about the attractiveness, value, and potential appreciation of particular asset classes and securities in which the Fund invests may prove incorrect and may not produce the desired results. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Issachar Fund (LIONX). This and other important information about the Fund are contained in the prospectus, which can be obtained by calling 1-866-787-8355. The prospectus should be read carefully before investing. The Fund is distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Horizon Capital Management Inc. and Inspire Investing are not affiliated with Northern Lights Distributors, LLC. NLD Review code: 5199-NLD-02/01/2022

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