Rational Funds Converts Third Hedge Fund, Launches Rational Special Situations Income Fund
Fund Invests in Non-Agency Residential Mortgage Backed Securities, Generated 15%+ Annualized Return Over 10-Years
New York, NY – AUGUST 14, 2019 – Rational Funds, a family of funds rooted in the investment philosophy of applying a rational approach to investing, today announced the launch of the Rational Special Situations Income Fund (RFXIX), which utilizes an investment strategy primarily focused on non-agency residential mortgage backed securities. The Fund, which originally launched as a hedge fund in 2009 and was converted into a mutual fund by Rational Funds, retains the same strategy and management team and has an average annualized return of over 16% since inception. The Fund’s investment objective is total return consisting of capital appreciation and income.
RFXIX, which is Rational Funds’ third hedge fund conversion, invests primarily in pre-2008 non-agency residential mortgage backed securities (NARMBS) which have more predictable collateral performance given the underlying loans’ significant age. Typically, investments are in senior tranches and floating rate bonds, therefore minimizing interest rate risk. The Fund is sub-advised by ESM Management LLC.
The Fund’s performance, which has generated in excess of 14% alpha over a decade compared to the Bloomberg Barclays US Aggregate Bond Index, is a result of the management team’s expertise in the NARMBS space. Focused on identifying underpriced securities using independent credit and modeling work, the team also looks for structural flaws in the construction of NARMBS and other asset-backed securities. Returns are enhanced by identifying and correcting bonds in which payments are being handled incorrectly or governing documents are being misinterpreted. In some cases, litigation is used in order to rectify issues.
“As we continue to identify opportunities to bring unique strategies from the hedge fund world to the mutual fund space, this particular investment strategy caught our attention because of its highly specialized approach to fixed income and its unusually strong performance record for 10 years running,” said Jerry Szilagyi, CEO of Rational Funds. “The team at ESM Management has developed a unique expertise in the non-agency mortgage backed security space, and we believe that expertise, now offered via the Rational Special Situations Income Fund, presents a desirable alternative and proven approach to fixed income investing.”
Eric S. Meyer, PhD, founder of ESM Management and RFXIX’s hedge fund predecessor, remains portfolio manager, along with co-portfolio manager William R. Van de Water. Together, Meyer and Van de Water have over 30 years’ experience in the fixed income world. Both previously worked at Susquehanna International Group, and both began trading and investing in mortgage backed securities in 2005.
“Over the last decade, we have focused on finding mispriced securities in the pre-recession, $800 billion NARBMS space,” said Meyer. “These securities are structurally complex, and flaws in the drafting documents or in standard modeling software often go unnoticed by market participants. Our strategy limits generalized credit and interest rate risk and targets idiosyncratic risk, and this approach reduces correlation to traditional fixed income and equities markets. We have developed expertise in quickly identifying the key drivers of a complex security’s value and in unlocking that value. Occasionally this involves taking an activist approach, including threatening, or carrying out, litigation.”
The Rational Special Situations Income Fund trades under the tickers RFXIX, RFXAX and RFXCX. For more information on Rational Funds and its mutual fund products, please visit: www.rationalmf.com.
About Rational Funds
Rational Funds is a family of funds rooted in the investment philosophy of applying a rational approach to investing. The firm currently offers nine mutual fund products, which employ rigorous research backed by sound academic theory and a disciplined and systematic investment approach. The funds strive to deliver superior risk-adjusted returns, at the apex of successful modern portfolio strategies for today’s investor. For more information on Rational Funds and its mutual fund products, please visit: www.rationalmf.com.
Annualized Returns as of June 30, 2019
|Barclays US Agg TR Index||7.87||2.31||2.95||3.89||4.01|
|Bloomberg MBS TR Index||6.22||2.06||2.56||3.23||3.37|
* Inception Date: 02/01/2009
Past performance is not a guarantee of future results.
Maximum sales charge for Class A is 4.75%. Maximum Deferred Sales Charge of 1.00% on Class C Shares applies to shares sold within 12 months of purchase. Total annual fund operating expenses are 2.16%, 2.41%, and 3.16% for Class I, A, and C shares, respectively. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. A fund’s performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. To obtain the most recent month end performance information or the Fund’s prospectus please call 800-253-0412 or visit www.RationalMF.com.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Rational Funds. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling (800) 253-0412 or at www.RationalMF.com. The prospectus should be read carefully before investing. The Rational Funds are distributed by Northern Lights Distributors, LLC member FINRA/SIPC. Rational Advisors, Inc. is not affiliated with Northern Lights Distributors, LLC.
Important Risk Information
Investing in the Fund carries certain risks. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. The Fund is a new mutual fund and has a limited history of operations for investors to evaluate. Investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategies. The Fund is non-diversified and may invest a greater percentage of its assets in a particular issue and may own fewer securities than other mutual funds; the Fund is subject to concentration risk. When the Fund invests in asset-backed securities and mortgage-backed securities, the Fund is subject to the risk that, if the underlying borrowers fail to pay interest or repay principal, the assets backing these securities may not be sufficient to support payments on the securities. Interest rate risk is the risk that bond prices overall, including the prices of securities held by the Fund, will decline over short or even long periods of time due to rising interest rates. Bonds with longer maturities tend to be more sensitive to interest rates than bonds with shorter maturities. Lower-quality bonds, known as “high yield” or “junk” bonds, present greater risk than bonds of higher quality, including an increased risk of default. Credit risk is the risk that the issuer of a security will not be able to make principal and interest payments when due. These factors may affect the value of your investment.
The Fund commenced operations by acquiring all of the assets and liabilities of ESM Fund I, L.P. (the “Predecessor Fund”) in a tax-free reorganization on July 17, 2019 (the “Reorganization”). In connection with the Reorganization, investors in the Predecessor Fund received Institutional Shares of the Fund. The Fund’s investment objectives, policies, guidelines and restrictions are, in all material respects, equivalent to those of the Predecessor Fund. However, the Predecessor Fund was not registered under the 1940 Act and, therefore, was not subject to certain investment restrictions, limitations and diversification requirements that are imposed by the 1940 Act or Subchapter M of the Internal Revenue Code, which, if they had been applicable, might have adversely affected the Predecessor Fund’s performance. The Fund’s Sub-Advisor was the investment adviser to the Predecessor Fund. The Fund’s fees and expenses are expected to be higher than those of the Predecessor Fund, so if the Fund’s expenses were applied to the Predecessor Fund’s performance, the performance would have been lower.
Bloomberg Barclays US Aggregate Bond TR Index: A market capitalization-weighted index that is designed to measure the performance of the U.S. investment grade bond market with maturities of more than one year. Investors cannot directly invest in an index.
Bloomberg Barclays US MBS TR Index: Tracks agency mortgage pass-through securities.