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Rational Funds launches Rational Special Situations Income Fund

Wednesday, August 14, 2019
Opalesque Industry Update - 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."

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