How TMNIX Complements Tax Free Income

   

When considering tax-free tactical high yield strategies in general, like the Counterpoint Tactical Municipal Fund (TMNIX), investors often ask where it fits within a tax-free fixed income portfolio, or what category it belongs to. Because TMNIX is designed as a low-correlation diversifier of tax-free fixed income portfolios, it defies neat categorization.

However, this challenge can be balanced by the contributions TMNIX (and other systematic diversifier strategies) can make to a variety of bond fund categories. Let’s take a look at the case for assigning TMNIX to a few different buckets as defined by Morningstar categories:

      • High Yield Muni Bonds

      • Short Muni Bond

      • Long Muni Bond

      • Intermediate Muni Bond

      • Bloomberg Municipal Bond Index

    As we’ll see, a tactical high yield municipal strategy’s tactical nature enables it to contribute alongside a number of popular fixed income strategies.

    Return of $100 – 06/11/2018 to 01/31/2023

    Source: Morningstar. For illustrative purposes only. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. “Long Muni Bond”, “Muni High Yield Bond”, “Intermediate Muni Bond” and “Short Muni Bond” are completely composed of the Morningstar US Muni National Long, US High Yield Muni, US Muni National Intermediate and US Muni National Short categories respectively. The “Bloomberg Municipal Bond Index” is represented by the Bloomberg Barclays US Municipal Aggregate Bond Index.


    Is TMNIX Just a Municipal High Yield Fund?

    High yield trend following strategies like TMNIX invest in high yield municipal funds when “risk-on,” so many investors tend to think of these strategies as municipal high yield strategies. But the numbers tell a slightly different story.

    Correlations – TMNIX and Morningstar Bond Categories

    Source: Morningstar. For illustrative purposes only. Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective. No level of diversification or non-correlation can ensure profits or guarantee against losses.

    On the surface, TMNIX has not historically shown a strong overall resemblance to any of its potential categories – including municipal high yield. Its strongest relationships are with US Fund Muni National Long, and US Fund High Yield Muni bond categories – but the correlations are still fairly weak, topping out at 0.32 with the US Fund High Yield Muni category. (As a reminder, correlation is a scale from -1 to +1, where -1 means the strategies move exactly opposite, 0 means they have no relationship, and +1 means they are in lock step.)

    Where Does TMNIX Contribute to Portfolios?

    Typically, a tax-free fixed income portfolio will seek to behave similarly to its category – US Muni Long Bond portfolios should behave like the US Fund National Muni Long Bond category, etc. This objective can balance against another important goal – an optimal risk-return profile.

    The chart below shows how TMNIX has historically contributed to a portfolio’s risk reward profile as compared to other Muni bond categories. The chart measures risk on the x-axis (riskier is further to the right) and return on the y-axis (more return as you go up). The return and standard deviation of a fund improves as they go up and to the left.

    TMNIX vs. Various Muni Categories

     

    Source: Morningstar. For illustrative purposes only. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above.

    Another way to analyze an investment’s fit within a category is to match its risk/volatility/standard deviation against the category. One reason investors use categories is to set expectations, especially expectations around risk. From the risk point of view, TMNIX is historically least like the high yield bond category, and instead has looked more like the nontraditional, multisector, and core-plus categories.

    Whatever the category, adding a sleeve of TMNIX to a muni bond portfolio historically would have contributed on both a risk and return basis – adding return while reducing portfolio volatility.

    Conclusion

    Counterpoint Tactical Municipal’s categorization depends on which criteria are most important to the decision.

      • Correlation analysis: TMNIX’s strongest relationship historically has been with US High Yield Munis.
      • Volatility: When assessing historical risk, TMNIX has the most in common with the US National Muni Short category.
      • Portfolio Contribution: There can be meaningful historical benefits to including Counterpoint Tactical Municipal in a hypothetical model covering any of the four categories.

    In our opinion, TMNIX can be most useful as a diversifier of tax-free bond holdings, and we believe a reasonable allocation could replace up to 40% of an investor’s tax-free bond sleeve. However, in conversations with investors and advisors, there has tended to be a natural gravitation toward thinking of the strategy as a long municipal or high yield municipal bond strategy replacement. This owes in large part to investors’ understanding that the strategy invests in high yield municipal bond markets when risk-on and displays low correlation with other traditional municipal bond categories.

    The performance data displayed here represents past performance, which is no guarantee of future results. 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 investor’s shares, when redeemed, may be worth more or less than their original cost. The Fund’s maximum sales charge for Class A shares is 4.50%. The total annual fund operating expenses are 1.78%, 2.53% and 1.53% for Class A, C and I shares respectively. The Fund’s adviser has contractually agreed to waive its fees and reimburse expenses of the Fund, at least until January 31, 2024 to ensure that Total Annual Fund Operating Expenses After Fee Waiver and Reimbursement but does not include: (i) any front-end or contingent deferred loads; (ii) brokerage fees and commissions, (iii) acquired fund fees and expenses; (iii) borrowing costs (such as interest and dividend expense on securities sold short); (iv) taxes; and (v) extraordinary expenses, such as litigation expenses (which may include indemnification of Fund officers and Trustees, contractual indemnification of Fund service providers (other than the Adviser)) do not exceed 1.25%, 2.00% and 1.00% of average daily net assets attributable to Class A, Class C, and Class I shares, respectively. Without the fee waiver, total annual fund operating expenses would be, 1.93%, 2.68% and 1.68% for Class A, C and I shares, respectively. For performance information current to the most recent month-end, please call toll-free 844-273-8637.
    There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. Important information about the fund is available in their prospectuses, which can be obtained at counterpointfunds.com or by calling 844-273-8637. The prospectuses should be read carefully before investing. Investors should carefully consider the investment objectives, risks, charges, and expenses of the funds managed by Counterpoint Mutual Funds. The Counterpoint Mutual Funds fund family is distributed by Northern Lights Distributors, LLC member FINRA/SIPC. Counterpoint Mutual Funds, LLC is not affiliated with Northern Lights Distributors, LLC member FINRA/SIPC.

     

    Important Risk Information

    Mutual Funds involve risk including the possible loss of principal. 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. Derivative instruments involve risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. There is a risk that issuers and counterparties will not make payments on securities and other investments held by the Fund, resulting in losses to the Fund. Past performance is no guarantee of future results. There is no assurance the Fund will meet their stated objectives.

    Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. The Adviser’s reliance on its strategy and judgments about the attractiveness, value and potential appreciation of particular securities and the tactical allocation among investments may prove to be incorrect and may not produce the desired results. No level of diversification can ensure profits or guarantee against loss.

    The performance data displayed here represents past performance, which is no guarantee of future results. 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 investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please review the fund’s prospectus for more information regarding the fund’s fees and expenses. Investments in the Funds involves risk including possible loss of principal and may not be suitable for all investors.

    A shares (TMNAX) have a Front-End Sales Charge (commission or “load”) of 4.50%, with lower rates for accounts over $25,000. The total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements, is 1.81%, 2.06%, and 2.81%, for Class I, Class A, and Class C shares respectively. Please review the fund’s prospectus for more information regarding the fund’s fees and expenses. For performance information current to the most recent month-end, please call toll-free 844-273-8637.

    Consult a tax professional for tax questions.

    Index Definitions

    The Morningstar US Muni National Long category is made up of portfolios that invest in bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. To lower risk, these portfolios spread their assets across many states and sectors. These portfolios have durations of more than seven years (or, if duration is unavailable, average maturities of more than 12 years). The Morningstar Muni National Intermediate category is made up of portfolios that invest in bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. To lower risk, these portfolios spread their assets across many states and sectors. These portfolios have durations of 4.5 to seven years (or, if duration is unavailable, average maturities of five to 12 years).

    The Morningstar US Muni National Short Category is made up of portfolios that invest in bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. To lower risk, these portfolios spread their assets across many states and sectors. These portfolios have durations of less than 4.5 years (or, if duration is unavailable, average maturities of less than five years).

    © 2023 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

    5180-NLD-02/02/2023

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    Mutual Funds involve risk including the possible loss of principal. Investors should carefully consider the investment objectives, risks, charges and expenses of the funds managed by Counterpoint Funds. This and other important information about the funds is available in their prospectuses, which can be obtained at counterpointfunds.com or by calling 844-273-8637. The prospectuses should be read carefully before investing. The Counterpoint Funds fund family is distributed by Northern Lights Distributors, LLC member FINRA/SIPC. To reach the Counterpoint sales team, please refer to our contact page.

    5516-NLD-09/01/2021

     

     

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