January 28, 2013
Dear clients, friends and family:
Following is the 2012 fourth quarter and year-to-date net performance information for CMG’s Tactical Investment Strategies along with our thoughts on each strategy over the past quarter. In addition, we have provided the net performance for the CMG Managed Blends and the CMG Classic Blends. We have also reflected the net performance for our tax deferred variable annuity tactically managed programs. Market index performance is presented at the bottom of the chart.
Within the total portfolio construction process, we believe it is important to include a number of non-correlating risk diversifiers (equity, fixed income and tactical exposure), that performance evaluation should be considered over a three to five year period vs. months and quarters, and that one should compare equity performance against an equity benchmark, bond against a bond benchmark and tactical against a tactical benchmark. Asset classes are non-correlating for a reason and should be viewed from that perspective. Of course, past performance does not predict or guarantee future returns.
* Please note all strategy returns are reported net of a 2.50% management fee.
CMG Tactical Fixed Income Strategies
The CMG Managed High Yield Bond Program (“CMG HY”) returned +1.22% for the fourth quarter and finished the year +10.28%, net of fees. We remain in a long HY position in January, participating in the continued positive trend. High yield spreads remain relatively attractive against the backdrop of a Federal Reserve zero interest rate policy and QE3 plan to buy $85 billion per month of mortgages and government bonds. Needless to say, demand remains strong.
There is reason to keep an eye on forward risk as HY yields are now the lowest in history, yielding close to 6%. While default rates remain low (a positive) there remains considerable recession risk which may negatively impact the HY market in 2013. This favors a keen eye on risk management to preserve capital when HY prices decline. If we are correct in our outlook, we anticipate moving defensively to cash, avoiding significant decline and remaining patient for a re-entry at what we anticipate might be materially lower prices and higher yields.
For now, we remain long HY exposure benefiting from both price gain and current yield.
CMG Tactical Equity Strategies
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned -2.48% for the quarter and finished the year +7.56%, net of fees. As equity markets declined in October, Scotia Dynamic incurred losses from positions in transportation, energy services and basic materials during the month and reduced risk in the portfolio heading into November. The strategy reduced exposure during November as conflicting long- and intermediate-term equity market trends capped individual position sizes at 25%. Scotia Dynamic generated strong returns in December from allocations to electronics (semi-conductors) and small cap U.S. equities. The past year proved challenging for long only momentum based strategies such as Scotia Dynamic, with quarterly returns alternatingly positive and negative. As a result, Scotia Dynamic’s risk management overlays kicked in several times during the year to limit portfolio exposure and attempt to reduce volatility.
The Heritage Capital Gold Equity Strategy (“Heritage”) returned 1.30% for the quarter and -0.68% for the year, net of fees. Gold and silver miners declined significantly during the quarter with the Philadelphia Gold and Silver Miners Index declining -13.01% and finishing the year -1.67%. Trading opportunities were limited for the strategy during the quarter as technical reversals were infrequent and were tied to policy announcements (Fed, ECB, Bank of Japan) that don’t necessarily align with technical market indicators. Heritage attempts to identify selective and high probability trade set-ups with a focus on risk management. After a strong sell-off in the miners in October and November, Heritage traded long at the end of December off a strong buy signal. The strategy remains in a modest long position as of this writing. As it relates to the allocations we have to this strategy within our managed blends (conservative, moderate, aggressive), we materially reduced allocations to the strategy more than a year ago and continue to underweight this strategy.
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund allocation strategy, returned +0.78% for the quarter in the Multi-Platform portfolio (available at Schwab, TD Ameritrade, Pershing and NFS / Fidelity), -0.18% for the quarter in the TCA (Trust Company of America) portfolio and -1.60% in the TD Ameritrade portfolio, net of fees. The Multi-Platform, TCA and TD Ameritrade portfolios returned +7.39%, +10.82% and +12.65% in 2012, net of fees.
The CMG Opportunistic portfolios performed well during the fourth quarter and have continued to perform well in early January. During the fourth quarter the strategy moved from a modest overweight towards bond exposure to an overweight in equities in December and remains overweight equities today. Additionally, equity positions in the portfolio have migrated from more defensive holdings such as healthcare and balanced large cap funds into higher beta funds with exposure to international and emerging markets, natural resources, small caps and real estate. For a snapshot of current allocations in the CMG Opportunistic portfolios, please visit our website at the following links: Multi-Platform, Jefferson National, TCA and TD Ameritrade.
Recently, we hosted a webinar about our CMG Opportunistic All Asset Strategy entitled A Solution for 2013. The webinar is a discussion with Jim Ruff, the former President of Oppenheimer Funds, about the Opportunistic All Asset Strategy and why to allocate a portion of your portfolio to this strategy in 2013. Jim has both business and personal experience with this unique investment process. To listen to the webinar go to our website or follow this link.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) finished the quarter -4.59% and -6.51% year to date, net of fees. Scotia finished the year with a challenging quarter as equity markets were choppy, creating several trend reversals. In particular, uncertainty about the fiscal cliff allowed for increased volatility tied to policy action (or inaction).
In October, trends favored a bullish position for Scotia generating core model long trades. By early November the strategy traded the market to the down side as the model measured the market’s trend as bearish before again favoring the up side as the model turned bullish. The strategy generated thirteen trades during the quarter: eight core model trades and five mean reversion trades (mean reversion trades signal when the market is overbought and oversold). The winning percentage remains in line with the strategy’s historical rate and the majority of trades generate gains. Those gains were outsized by larger losses on several of the losing trades resulting in net loss for the quarter. The S&P trended higher to finish the year with strong momentum and Scotia continues to trade with a long bias as the model identifies the trend as bullish.
The System Research Treasury Bond Program (“SR”) returned -3.48% for the quarter and +9.29% year to date, net of fees. SR alternated between long and short positions during October. From November through year end, SR was in a short bond position (via an inverse Treasury Bond fund) and reduced short exposure towards year end. Today the strategy is back to 100% short U.S. Treasury bond exposure.
We were also happy to announce this quarter that Pension and Investment Magazine rated the CMG SR strategy atop its peer group for the last five years.
The Anchor Capital Long/Short High Yield Bond Program (“Anchor”) returned -1.02% during the fourth quarter and +1.94% for 2012, net of fees. Although the strategy has shown an ability to generate returns during declining periods in high yields, Anchor was unable to capture as much upside as we would have liked over the past year. The strategy has been on our platform for three years and the performance has not met our expectations. As a result, we have removed the Anchor strategy from our managed account platform.
Conclusion
In spite of the fiscal cliff, equity markets rallied to finish the year in a strong uptrend. A last minute deal by Congress addressed taxes but postponed the spending cuts that were mandated by sequester by a couple months. The next government showdown on the debt ceiling is likely to hit in the first quarter (although Congress is now in the process of kicking that can down the road yet again). We believe that the inability of our government to resolve its fiscal challenges remains the top threat to global growth in 2013.
Ten year forward equity returns look to be just 5% to 6% due to low dividend yields, historical earnings per share growth, and low inflation. Forward fixed income returns are the lowest in history. When your starting place is a 1.8% yield (10-year Treasury), earning less than inflation, there is no way bonds can repeat what they have done the last 5, 10 or even 30 years. Combined, the expected 60/40 return is just 4.37%, the lowest return in the last 14 decades (as in 140 years). *Source: Robert Shiller, Federal Reserve, BEA, Research Affiliates; Data as of 8/29/11.
With governments in the EU, Japan and the U.S. unable to cope with fiscal challenges (unmanageable debt, entitlements and deficit spending), the response to slow growth and high unemployment is unlimited quantitative easing. The risks tied to the creation of new money units are real. The unintended consequences of global currency manipulation are currency war, trade protection, and inflation. To have a blind eye towards past lessons learned would be irresponsible. The developed world finds itself in the same debt mess at the same time. Keep a close watch on inflation data and interest rates in 2013. The seeds are planted and the risk is real.
Despite some of these headwinds there are many positive signs in the U.S.: the housing market has stabilized, unsold supplies have come down and homebuilder confidence is rising along with home prices. Corporate balance sheets are healthy and many companies are lean after years of cost cutting, consumers continue to pay down debt, jobless claims have continued to drop and the unemployment rate has ticked down, albeit slower compared to recent recessions.
A positive resolution to our fiscal crisis and surprise trade deal with the EU could spark stocks higher in spite of rich valuations. We continue to believe the market remains in a cyclical bull market uptrend. Equity valuations remain above historical averages and with corporate profit margins peaking and top line sales in most areas slowing, it looks unlikely that earnings growth will continue to drive stocks higher without some larger correction or catalyst.
Fixed income markets remain priced to perfection as monetary policy has driven interest rates to record lows. The fixed income portfolio for most investors at current interest rates is a decidedly negative risk / return bet. We believe an allocation to tactical fixed income strategies like the CMG HY and SR, which can manage risk, move to cash or benefit from rising interest rates through inverse bond funds, has never been more essential.
With kind regards,
Steve Blumenthal
Founder & CEO
PJ Grzywacz
President
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc (or any of its related entities-together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
CMG Absolute Return Strategy Fund and CMG Tactical Equity Strategy Fund: Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Absolute Return Strategy FundTM and CMG Tactical Equity Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456. Please read the prospectus carefully before investing. The CMG Absolute Return Strategy FundTM and CMG Tactical Equity Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA. NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).