Past performance is not indicative of future results. SMH Capital Advisors, Inc., a Registered Investment Adviser, is a wholly owned subsidiary of the Edelman Financial Group, Inc. Request Form ADV Part 2A for a complete description of SMH Capital Advisors, Inc.’s management services. Market and economic factors can change rapidly producing materially different returns. No inference should be drawn that managed accounts will be profitable in the future or that the Investment Team will be able to achieve its objectives. Investing involves risk, you may experience a profit or a loss. Please be aware of the specific risks associated with investing high yield bonds, such as the issuer may not be able to meet its principal and interest obligations. As such, your investments may lose value or you may lose the principal investment.
Investment Strategy Risks
Investing in securities involves risk of loss that clients should be prepared to bear. SMHCA is a value-oriented investment adviser that specializes in fixed income management. However, SMHCA also offers advice on: equity securities, including exchange-listed, over-the-counter, and foreign issuer securities; warrants; corporate debt securities; commercial paper; certificates of deposit; municipal securities; investment company securities, including variable life insurance, variable annuities, and mutual fund shares; United States government securities; high yield corporate bonds; and collateralized mortgage obligations (“CMOs”). Management does not expect to hold all, if most bonds to full maturity. As trading opportunities exist, managers will attempt to maximize the total return over time while maintaining the established risk parameters. High yield bonds rated BB or lower involve greater risks and may not be suitable for all investors. The investment strategy will have prescribed asset allocation ranges in which the manager can allocate the assets. Within these ranges, the manager may have discretion to underweight or overweight allocations to asset classes from a risk perspective. There is no assurance that its decisions in this regard will be successful when the manager determines to do so. This could have a material adverse effect on the ability to implement this portfolio strategy. There are specific risks associated with investing in high yield bonds and CMOs. An Investors Guide to CMOs, outlining the characteristics and risks of CMOs and important issues to consider prior to investing in CMOs is available upon request. This section discusses some of the specific risks inherent in high yield bonds and CMOs, but is not intended to be all-inclusive of such risks. For example, a bond issuer may not be able to meet its principal and interest obligations. In addition, CMOs carry interest rate and prepayment risks and, as such, an investment may lose value. Fluctuations in interest rates may increase or decrease the return of a portfolio.
Collateralized Mortgage Obligations (CMOs).
(SMHCA Diversified Income, SMHCA Diversified Income with Individual Bonds, SMHCA Diversified Income with SMHRT, SMHCA Socially Responsible Diversified Income, SMHCA Core Plus Intermediate Term, SMHCA AAA). There are specific risks associated with investing in high yield bonds and CMOs. An Investor’s Guide to CMOs, outlining the characteristics and risks of CMOs and important issues to consider prior to investing in CMOs is available upon request. This section discusses some of the specific risks inherent in high yield bonds and CMOs, but is not intended to be all-inclusive of such risks. For example, a bond issuer may not be able to meet its principal and interest obligations. In addition, CMOs carry interest rate and prepayment risks and, as such, an investment may lose value. Fluctuations in interest rates may increase or decrease the return of a portfolio. CMOs carry interest rate and prepayment risks although they have an implied AAA-rated (investment grade). This rating however is subject to upgrades and downgrades based on credit rating of the US Government debt. Rising interest rates tend to extend the duration of mortgage-related securities, making them more sensitive to changes in interest rates (known as duration extension risk). In addition, mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce returns because SMHCA then has to reinvest the money at the lower prevailing interest rates.
High Yield Corporate Bonds. High yield bonds may not be suitable for all clients. As a result of SMHCA’s investment in high yield securities and unrated securities of similar credit quality, a portfolio may be subject to greater levels of interest rate, credit, and liquidity risk than portfolios that do not invest in such securities. High yield securities are considered predominantly speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for high yield securities and reduce SMHCA’s ability to sell them without potentially significant price concessions. If the issuer of a security is in default with respect to interest payments or principal payments, the security may lose its entire value. High Yield Convertible bonds are bonds that can be converted into a predetermined amount of the company’s equity at certain times during its life, usually at the discretion of the bondholder.
Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase or sell, based on a lack of dealers and traders in the marketplace. Investments in illiquid bonds may reduce a client’s return if SMHCA is unable to sell such illiquid securities at an advantageous time or price. Many of the holdings trade over-the-counter and the trading volume in some is relatively low. A client should not expect to get same day liquidity as in listed securities. The sooner the client wants his/her cash, the more detrimental it may be to execution prices. Market values may be volatile in periods of market illiquidity. Depending on the size of the account, a liquidating client often may not receive the full market value of recently priced securities because illiquid securities priced less accurately and are typically valued for larger size transactions.
Economic Uncertainty/Asset Class Cyclicality. Opportunities in the high yield bond market vary with economic and liquidity conditions and therefore client expectations should be realistic. As perceived deterioration or improvement of the economy occurs, yield spreads over higher quality issues increase or decrease. The combination of spreads (yields) and trading gains or losses result in realized returns which may be above or below investors’ expectations. Clients must understand that SMHCA’s investment approach can go in and out of favor for several years at a time.
Volatility Caused by Concentration of Holdings. As more names, or diversification, are added to a portfolio, credit risk decreases while systematic risk [correlation with the market] increases. SMHCA’s objective is to provide less systematic risk than an index type manager and ‘alpha’ over a complete cycle. Less names, or a more concentrated portfolio, can bring increased volatility on the upside and downside versus the an index or the average high yield mutual fund which might typically holds hundreds of different bonds. SMHCA’s fixed income strategies may not be suitable for all clients, and generally should only be a part of the client’s total invested assets. Each client should review the client’s investment objectives, risk tolerance, tax objectives, and liquidity needs before selecting an investment style or manager. In making an investment decision, a client should utilize other information sources and the advice of their investment professional. All investments carry a certain degree of risk and no one particular investment style or manager is suitable for all types of investments.
(SMHCA Diversified Income, SMHCA Diversified Income with Individual Bonds, SMHCA Diversified Income with SMHRT, SMHCA Socially Responsible Diversified Income, SMHCA Core Plus Intermediate Term, SMHCA AAA). The AAA portion of the portfolio is comprised of Collateralized Mortgage Obligations (CMOs). CMOs are not rated by any of the rating agencies. SMHCA uses the rating for the underlying agency of the bonds to allocate these securities to the AAA portion. CMO interest payments are guaranteed by the respective government enterprises, Freddie Mac (FHLMC) and Fannie Mae (FNMA). Agency (or Government sponsored Enterprise (GSE)) bonds are not normally rated. GSE bonds are not explicitly backed by the full faith and credit of the U.S. Government, but they have implied government backing and an implied Aaa/AAA rating. As of September 7, 2008 FNMA and FHLMC are currently under conservatorship of the Federal Housing Finance Agency and have received financial assistance from the U.S. Treasury. Please request an Investors Guide to Mortgage Backed Securities and Collateralized Mortgage Obligations (CMOs) for more information. The AAA or AAA implied bonds purchased will reflect the current credit rating of the United States government; subject to changes of upgrades or downgrades in ratings.
It can take from 30-90 days to fully invest a client's portfolios. Our model portfolio statistics are based on what SMHCA is attempting to execute for new accounts; actual execution and realization of those goals is depending upon numerous factors including availability of bonds at the quoted prices in the marketplace. Model statistics and results do not represent actual trading and do not reflect the impact of material economic and market factors that might impact an adviser’s decision in the actual management of client accounts. The maturity of the model portfolio stated is assuming that all bonds in the model will reach their final maturity. The annual income assumes that all issuers in the model are able to make interest payments, but actual interest payments cannot be predicted. Market and economic factors can change rapidly producing materially different returns. No inference should be drawn that managed accounts will be profitable in the future or that Investment Team will be able to achieve its objectives. Credit Ratings and Sector Weightings are quoted for the “Model Portfolio”. Model statistics do not reflect actual client portfolios.