Dear clients, friends and family:
Following is the 2013 first 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.
CMG Tactical Fixed Income Strategies
The CMG Managed High Yield Bond Program (“CMG HY”) returned +0.84% for the first quarter, net of fees. The same strategy managed inside the Jefferson National Tax Deferred Variable Annuity returned +2.01% for the first quarter, net of fees. CMG HY was primarily long during the quarter as high yield bonds continued to rally as investors continue their search for yield. The Federal Reserve has remained committed to its zero interest rate policy forcing many investors into higher yielding investments. The result has been to push yields on high yield bonds to the lowest level on record, 5.70%, as measured by the Merrill Lynch U.S. High Yield index. That level is down from 8.30% at the end of 2011. Furthermore, low yields and easy monetary policy has allowed for record levels of new issuance globally as more than $133 billion in global high yields bonds were issued during the first quarter alone. In the U.S., new issuance fell just short of the record set in the third quarter of last year. All of that new issuance has been met with strong investor demand as reflected in current prices. However, the credit quality of new issues has dropped as less credit worthy companies have gained access to capital at lower rates. The result of the Fed policy and money flows into the high yield space looking to get invested is pushing high yield managers into lower quality credits at exactly the wrong time. While there is ample global liquidity, with yields at 5.70% and the quality of bonds weakening, there is good reason to keep an eye on the increased risk. We expect defaults to increase over the next several years. We remain focused on risk management as the strategy is designed to move defensively to cash in the event of a price decline. We view corrections favorably as prices decline yields rise giving us an opportunity to move back from cash into high yields at lower prices and higher yields. For now, we are fully invested in high yields as prices continue to move slowly higher.
CMG Tactical Equity Strategies
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned +7.47% for the quarter, net of fees. Scotia Dynamic generated strong returns during the quarter as equity markets continued their strong bullish move from 2012, reaching new record highs in early 2013. The strategy did particularly well considering its higher cash allocation during the quarter. As part of its risk management process, Scotia Dynamic will not allocate to overbought sectors and was frequently not fully allocated. The strategy was still able to generate strong returns due to its sector selection process. In January, the strategy allocated to electronics, energy services, small caps and transportation. Small caps and the transportation sector continued to drive returns in February along with healthcare and energy services. In March the strategy generated returns across almost all sectors with the exception of precious metals which detracted from performance.
The Heritage Capital Gold Equity Strategy (“Heritage”) returned -0.93% for the quarter, net of fees. Gold and silver miners continued their decline during the first quarter with the Philadelphia Gold and Silver Miners Index declining -18.02%. Heritage had very few trading opportunities during the quarter as mining stocks showed downward momentum with little sign of a reversal in the near future. The miners showed no sign of bottoming out and it appears that further declines are likely as the fundamentals for mining stocks continue to deteriorate, namely higher costs of mining and declining gold and silver prices. With respect to allocations we have to this strategy within our managed blends (conservative), we further reduced allocations to the strategy and continue to underweight Heritage as headwinds for gold and silver miners will limit the trading opportunities for the strategy.
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund allocation strategy, returned +3.87% for the quarter in the Multi-Platform portfolio (available at Schwab, TD Ameritrade, Pershing and NFS / Fidelity), +7.73% for the quarter in the TCA (Trust Company of America) portfolio and +8.00% in the TD Ameritrade (direct) portfolio, net of fees.
The CMG Opportunistic portfolios performed very well during the quarter, benefiting from the strong bullish trend in equities. The strategy began the quarter invested in higher beta equity funds and sector funds with allocations to Asian and Latin American stocks, US small cap stocks, energy and growth stocks. The portfolios had few defensive positions and were positioned for a bullish move up in equities. As equity markets moved to multi-year highs and momentum slowed, the strategy migrated to defensive equity positions in healthcare, value biased funds and government bonds by the end of March. 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.
Introducing Two New ETF Strategies:
In March, we announced the launch of the CMG Opportunistic All Asset ETF Strategy. The ETF portfolio utilizes the same quantitative process that drives the portfolio decision making process for the Opportunistic mutual fund portfolios but invests in exchange traded funds (ETFs). By utilizing ETFs in the portfolio, we are now able to offer the strategy at a lower minimum and have also included it as an allocation within the CMG Managed Blends. Please contact your CMG representative to learn more about the CMG Opportunistic ETF portfolio.
During the quarter, we added the CMG Tactical Rotation Strategy to our roster of tactical strategies. The CMG Tactical Rotation Strategy seeks to generate returns in all market conditions based on the concept that various asset classes and sectors experience bull and bear markets at different times.
The strategy utilizes a proprietary tactical investment model that analyzes various technical indicators to determine which asset classes are in a bullish environment and likely to achieve a positive return. The strategy employs an equally weighted strategic rotation model which allocates the portfolio to the top two asset classes from a universe of six asset classes / ETFs: Domestic Equities, International Equities, Bonds, Commodities, REITs & Cash. If none of the first five asset classes exhibit a positive uptrend, the strategy has the ability to allocate the portfolio entirely to cash. The strategy makes investment allocation decisions on a monthly basis. Once the portfolio is allocated, the positions are held and monitored for the entire month. The strategy returned +6.46%, net of fees, for the first quarter. In late March, we sat down with Mark Eicker of Sterling Global Strategies, the manager of the strategy, to learn more about how the strategy works and what role it plays in a portfolio. The webinar can be found here and serves as a great introduction to the strategy. As always, feel free to contact us to learn more about the strategy, what platforms it is available on and how to incorporate it into your portfolio.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) finished the quarter +7.07%, net of fees. Scotia began 2013 with a strong first quarter, generating profitable core model and mean reversion trades. Equity markets were primarily in a bullish trend all quarter and the strategy generated 12 long core model trades based on a bullish intermediate and long-term trend in the S&P 500. Scotia was down modestly during January due primarily to a short trade generated from an overbought signal. February was a good month for Scotia as the strategy generated strong performance from seven core model trades. Alternating up and down performance days for the S&P 500 provided great opportunities for the strategy to generate positive trades. The strategy continued to perform well in March as equity markets pushed higher and Scotia’s core model generated five long trades during the month.
The System Research Treasury Bond Program (“SR”) returned -3.76% for the quarter, net of fees. SR alternated between long and short positions during January, triggering the strategy’s risk management mechanism, leading to a reduced long bond position for part of the month. As equity markets rallied to start the year, interest rates moved higher and bonds sold off. The strategy continued to trade long and short as several of the strategy’s indicators oscillated between long and short bond readings. After a challenging February, the strategy settled into a long bond position in March as several of the strategy indicators now point to lower interest rates and higher bond prices. April is turning out to be an excellent month for the strategy as the strategy remains positioned 100% long Treasury bond exposure. The commodity indicators signal lower inflation expectations and the short-term momentum for bonds (declining yields and rising prices) is bullish.
Conclusion
Equity markets rallied to new highs to start the year continuing the strong move higher from last year. The commitment of the Fed and now the Bank of Japan to stimulate their respective economies through massive quantitative easing programs has kept the bullish run intact (for now) but we believe the global central banks and the Fed are creating another massive bubble – this time in the bond market. While stocks and bonds have rallied to record highs, the underlying economic fundamentals paint a more restrained picture for growth and employment.
The challenges facing the developed world look daunting: stimulate growth and increase employment all while cutting spending and balancing the budget. The Europeans have been the first to dive headlong into austerity and it is ripping the fabric of the EU apart. Rather than stabilize the economies of Greece, Ireland, Italy, Spain and Portugal, the austerity prescribed by the EU has made things worse, lowering growth and increasing debt. Governments have fallen, unemployment has risen, protests continue to erupt and the EU bureaucracy has proven to be behind the curve every step of the way.
The most recent debacle was the ill conceived Cyprus “bail-in” that proposed balancing the books through an assessment against bank deposits in violation of the deposit insurance commitment (i.e. FDIC insurance) by the EU for sums up to € 100,000. That a bank run in the rest of Europe was averted was a miracle. That the EU even contemplated such a remedy is a tragedy. As a result, the likelihood of a banking union is practically nil and Cyprus will spiral into a depression in the next couple years, thereby increasing the probability of it leaving the EU.
Finally, recent economic data indicates problems in the northern flank of the EU as Germany and France continue to slow. The prospects for Europe remain poor, to say the least.
In Japan and the U.S., governments have taken a different approach: print, print and print some more. In Japan, Prime Minister Shinzo Abe is throwing the kitchen sink at deflation, driving the Yen dramatically lower in hopes of stimulating Japan’s exports and creating inflation. The Japanese stock market has lifted off with the Nikkei 225 up over 20% this year. While the short-term results have been impressive, the increased cost of imports, namely energy, has not been fully absorbed and the tentative approval of the G20 could quickly turn to accusations of currency manipulation if Japan’s export gains come at the expense of another country’s loss. The debt induced hangover remains.
The U.S. economy, on a relative basis, looks ok. Housing has steadied, bank balance sheets are in better shape (thanks to Uncle Ben), corporations are on sounder financial footing and have learned to do more with less and consumers continue to work through a massive deleveraging. The caveat to that assessment is the commitment of the Federal Reserve to its asset purchase programs and keeping interest rates at zero.
The markets remain glued to the Fed. When they sense the Fed’s commitment to easy monetary policy might wane, stocks retreat (as do other risk assets). The economy has yet to prove it can reach escape velocity without the Fed’s support and it will need it more than ever as Congress and the President negotiate the appropriate level of austerity over the next decade (spending cuts and tax hikes – neither of which provide a tailwind to growth).
Recent economic indicators point to a deceleration of the U.S. economy and the next several months of unemployment figures and retail sales data will provide color on whether the U.S. is at risk of a mild recession this year. Today, equities look overbought and slightly overvalued based on trailing 12-month earnings, but remain in an aged cyclical bull market uptrend. Despite the short-term challenges, the longer-term outlook for the U.S. remains bright, especially compared to other developed economies.
With kind regards,
PJ Grzywacz
President & CCO
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).