Catalyst Insider Income Is a Bond Fund for a Time of Rising Interest Rates

In an environment of rising interest rates, where government bonds prices are falling, investors looking for a bond fund to offset the equity portion of their portfolio should take a look at the Catalyst Insider Income Fund (IIXIX).

Year to date, the Insider Income Fund is up 3.29% as of October 31. This return is beating the benchmark for the U.S. investment-grade bond market, the Bloomberg Barclays U.S. Aggregate Bond Index, which is down 2.38%, a differential of 5.67 percentage points.

According to fund analysis firm Morningstar, on a three-year annualized basis, the Insider Income Fund is up 2.4% compared to the AGG index’s 0.99% return.

The Catalyst Insider Income Fund is the top fund in the Morningstar’s short-term bond fund category, year-to-date and for the 1-year period, out of 539 funds. On an annualized basis, for the 3-year period it’s the sixth-best performing fund, out of 504 funds in the Morningstar’s short-term bond fund category.

The fund has a unique strategy that seeks to achieve its objective of high current income with low interest rate sensitivity. We look for SEC Insider Form 4 reports to find companies where the top executives are net buyers of their company’s stock with their own money. This doesn’t include option buying.

Insider buying, which is legal, is not the same as insider trading, which is not. An insider is defined as any officer and/or beneficial owner. These people have material knowledge about the company and are not allowed to buy shares right before earnings or some positive material event. But they are allowed to buys shares most other times, and they must file documents with the Securities and Exchange Commission.

According to An officer is the company’s president, principal financial officer, principal accounting officer, any vice-president of the issuer in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. Officers of the issuer’s parent(s) or subsidiaries shall be deemed officers of the issuer if they perform such policy-making functions for the issuer. A beneficial owner is a person who owns more than 10% of the stock, or who, directly or indirectly, through any contact, arrangement, understanding, and relationship or otherwise, has or shares a direct or indirect pecuniary interest in the stock.”

Since insiders know best what is going on inside the company, we believe they have a better view of the how well the company is performing and its future prospects.

The Insider Form 4 report shows the insider’s name, the relation to the firm (usually the insider’s job title), the transaction’s date, the type of transaction (buy or sell), the number of shares traded, the share price at the time of transaction, and the number of shares held by the insider after the transaction.

By looking at the filings with the most insiders buying their company’s stock, we discovered that these companies have a fraction of the defaults or downgrades on their debt, compared with firms of the same credit rating where insiders have not been buying their own stock.

We look at all the companies with bonds rated single-A or triple-B, by Standards & Poor’s or Moody’s. This is the low end of the investment grade scale. We’ve found that if an executive in the C-suite has bought more than 1,000 shares of stock, compared to companies where no insiders are buying, buying smaller amounts, or even selling, that these corporate bonds perform better than their peers, rarely default on their debt, or experience bond-rating downgrades.

To clarify, when the executives buy stock, we buy bonds in the same company.

The second component of the strategy is a common sense approach to credit analysis, which compares how much cash is on the balance sheet to the short-term debt. How much debt is coming due vs. the debt we want to buy?

If a company has enough cash to pay off short-term debt without a problem and insider buying, the bonds will do better than those with more short-term debt than cash and people dumping stocks. While some insiders do sell shares to diversify their holdings, large sales may indicate executive concerns about the firm where they work.

The fund tries to keep its duration short by buying investment-grade bonds with a 2-year average maturity. Currently, the fund has duration of 1.79 years and a trailing twelve-month yield of 2.42%.

The upside with AAA-rated bonds, investment-grade bonds with the highest rating, is that an investor usually receives the interest and principle, but the return isn’t much better than U.S. Treasury bonds. However, on the downside, a bond can get downgraded, which can lead to a big price decline.

While all bonds can be downgraded, bonds rated A or BBB also have the potential to get upgraded, giving them a better risk-to-return profile. We find a company with insider buying and healthy cash flows, gets a credit upgrade a third of the time. But, even if it should be rated better, but isn’t, we find the spread on its bonds tightens.

Currently, the fund has 84% of the portfolio in corporate bonds and 12.3% in convertible bonds, which can be changed into stock when the shares hit a specific price.

The top five holdings make up 39% of the fund. They are Nabors Industries 5%, Herbalife Nutrition 2%, Synchrony Financial 3%, FiServ 2.75%, and Arconic 6.15%.

In general, the fund is doing better than its peers in the short-term bond category because of its shorter duration. Many of the fund’s peers have been negatively hit by the interest-rate hikes.

Also, the convertible bonds give us the potential for a kick to the upside, especially if the convertible bond is outside the money.

The 30-Day SEC Yields were 2.70%, 2.33%, and 1.69% for Class I, A, and C shares, respectively. SEC Yield calculated according to SEC form N-1A. The Advisor and the Fund have entered into an expense limitation agreement. The Fund’s SEC Yield without expense limitation is (1.45%) (A), (2.34%) © and (1.39%) (I) as of September 30, 2018.

The performance, which is annualized if greater than a year, ending September 30, 2018 were as followed:

Class I — 3.73%, 3.87%, 2.63%, 0.95% for YTD, 1 year, 3 year, and since inception, respectively.

Class A — 3.32%, 3.39%, 2.31%, 0.66% for YTD, 1 year, 3 year, and since inception, respectively.

Class C — 3.01%, 2.87%, 1.61%, (-0.03%) for YTD, 1 year, 3 year, and since inception, respectively.

Class A w/ Sales Charge — (-1.56%), (-1.47%), 0.66%, -0.51% for YTD, 1 year, 3 year, and since inception, respectively.

Morningstar Short-Term Bond — 0.43%, 0.40%, 1.24%, 0.99% for YTD, 1 year, 3 year, and since inception, respectively.

*Inception: 07/29/2014

The Fund’s maximum sales charge for Class “A” shares is 4.75%. Gross expense ratios for the fiscal year were 6.12%, 6.87% and 5.87% for Class A, C and I shares respectively. Investments in mutual funds involve risks. Performance is historic and does not guarantee future results. Investment return and principal value will fluctuate with changing market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month end performance information or the Fund’s prospectus please call the Fund, toll free at 1–866–447–4228. You can also obtain a prospectus at

Important Risk Disclosures

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 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 may invest in lower-quality, non-investment grade bonds. Non-investment grade corporate bonds are those rated Ba or lower by Moody’s or BB or lower by S&P (also known as “junk” bonds). Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. 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. These factors may affect the value of your investment.

©2018 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.