April 30, 2010

Dear Fellow Shareholders,

The KCM Marco Trends Fund employs a flexible investment strategy with the freedom to invest globally in companies of all sizes and in all sectors, long or short.  The Fund’s primary objective is long-term growth of capital.  As a secondary but equally important goal, the Fund seeks to manage volatility and risk. 

Performance current to the most recent month-end may be lower or higher and can be obtained by calling 1-800-945-2125. 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 KCM Macro Trends Fund’s total annual operating expense ratio is 1.90%. The Fund's Investment Advisor has contractually agreed to reduce its fees and/or absorb expenses of the Fund, at least until August 30, 2010, to ensure the net annual fund operating expenses will not exceed 1.70%, subject to possible recoupment from the Fund in future years. Please review the Fund's prospectus for more detail on the expense waiver. The S&P 500 TR is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market. You cannot invest directly in an index.

Fund Availability

We have added and continue to add distribution channels. The Fund is currently available on a No Transaction Fee (KCMTX) and Transaction Fee (KCMBX) basis through investment advisors only on several platforms, including Charles Schwab, Fidelity, Pershing, TD Ameritrade, Trust Company of America, Southwest Securities, and a number of other broker-dealers. 

Investment Philosophy

The KCM Macro Trends Fund differs from most mutual funds in that it has a flexible investment policy. The Fund’s objective is to maximize reward while minimizing risk. As with any investment, it is not possible to avoid risk completely so we seek to minimize and manage risk. The Fund strives to be nimble and responsive to major market cycle changes by moving out of “Harm’s Way” during recessions and to capitalize on best performing sectors in stronger markets.

Investment Strategy

We employ a risk-averse investment strategy predicated on the belief that strong long-term investment results are best achieved through the avoidance of major losses and the compounding of reasonable gains. If we can miss the majority of major market cycle downturns and capture the majority of major cycle upturns, we will not only protect shareholder assets, but the long-term growth of those assets should be substantially greater than market growth.

We look at companies of all sizes and types located throughout the world. We want the flexibility to invest in great ideas regardless of size and do not see any reason to restrict our investing to “Style Boxes”.

Our focus in the current market environment remains on companies with high free-cash-flow plus dividend yields, 10% being very attractive. Companies with high free-cash-flow can finance their own growth, an attractive attribute in an environment where borrowing is difficult even for the best companies. High free-cash-flow also allows companies to maintain and increase their dividends, buy back their own stock or acquire other companies. We also believe that high free-cash-flow companies make attractive acquisition targets.

We also look for growing earnings and sales. Increasing sales can make up for a multitude of problems in recessionary times and are a necessity for long-term growth in stock price. We are looking for growth, and aim for stocks we feel will double their share price in three to five years. The majority of the upside comes from earnings growth.

In order to manage risk and volatility during market declines, we are willing to hold high percentages of cash if we feel the market offers more risk of loss than opportunity for gain. Additional risk-management includes hedging market risks through the purchase of securities such as futures or ETFs that move in the opposite direction of the market. Through market downturns, these tools allow us to hold stocks of companies we feel have good long-term growth potential. Statistics show that when markets go down, three out of four stocks go down – even the good ones. Therefore, having the ability to “hedge out” market risk greatly reduces potential market losses.

This approach worked very well during the 2008-2009 bear market when the Fund missed 67.5% of the market downturn as measured by the decline in the S&P 500 Index from its high following the date the Fund was opened through its low on March 9, 2009. During this period, the S&P 500 Index was down 44.92%; KCMTX was down 14.61%.

Conversely, the Fund was up 41.34% from the market’s March 9, 2009 bottom through April 30, 2010, leaving shareholders with a positive return of 19.41% since Fund inception. Significantly, many buy-and-hold investors were still in the red notwithstanding the S&P 500 historical 79.84% rise over the same period.

The Fund also has the ability to be slightly net-short if we feel that severe market declines are eminent. Being net-short when the market is declining means that the Fund should increase in value. It is not anticipated that we will be in this position very often if at all.

Our objective is to hold approximately 100 stocks with initial positions around 1% of the portfolio. Diversifying risk among this number of holdings reduces the stock-specific risk of holding too much of a single company. When positions grow beyond 2% of the portfolio, consideration is given to reducing the position.

Our use of fundamental stock analysis combined with technical analysis of the market is then overlaid with our Macro approach to investing. We pay close attention to the strength of the US economy compared to other economies around the world as well as the growth or decline in the value of different world currencies. Geopolitical risk is also considered in picking or holding stocks.

Historical Tax Efficiency

Long-term capital gains and qualified dividends are currently taxed at 15%. Short-term capital gains are taxed at the shareholder's higher marginal rate. The investment process we follow is designed to help minimize taxes.

This process produced an extremely tax-efficient result for 2009. Even though the Fund grew by 26.16% during 2009, the total taxable distribution to shareholders was less than three cents per share. To put this into perspective, a $1,000,000 portfolio held for the entire year would have grown to $1,261,600 but would have had a taxable distribution of only $3,010.03 - all taxable at only 15%. This resulted in taxes of $451.00.

Dividend and Capital Gains Distributions:

Currency: USD; Source: Morningstar, Inc.®

In Closing

We feel that the ability to utilize all available investment tools and styles enhances our ability to preserve and grow client portfolios. A substantial portion of our personal net worth is invested in the Fund to align our interests with our client’s interests.

We sincerely appreciate the trust and confidence of our investors and believe that our approach to investing will add value to every client’s long-term financial well being.

M. Lane Kerns
Martin L. Kerns, II
Kerns Capital Management, Inc.

Mutual Funds involve risk including possible loss of principal. The Fund may invest in small, less well-known companies, which may be subject to more erratic market movements than large-cap stocks; foreign securities, which are subject to currency fluctuations and political uncertainty; and derivative securities, which may carry market, credit, and liquidity risks. The Fund may also engage in short selling activities, which are more risky than “long” positions because the potential loss on a short sell is unlimited. These risks may result in greater share price volatility. Investors should carefully consider the investment objectives, risks, charges and expenses of the KCM Macro Trends Fund before investing. This and other important information about the Fund is contained in the prospectus, which can be obtained on the Advisor’s website or by calling 1-800-945-2125. The prospectus should be read carefully before investing. The KCM Macro Trends Fund is distributed by Northern Lights Distributors, LLC, member FINRA.