October 21, 2021
Hosted by:
Brian Schreiner
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:34): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (14:30): Interview with Brian Sanborn, Certified Financial Analyst and Chairman of the Index Committee, Ned Davis Research
Transcript
Brian Schreiner: Hello. Welcome to the quarterly conference call for the CMG Mauldin Smart Core Investment Strategy. My name is Brian Schreiner. I am Senior Vice President of the Private Wealth Group here at CMG.
The Mauldin Smart Core investment strategy is the culmination of over 30 years of economic thinking by one of the world’s leading economic writers.
John Mauldin is the Chief Economist and Co-Portfolio Manager of the CMG Mauldin Smart Core investment strategy. John believes that the end of the debt supercycle is one of the most profound trends that will impact your portfolio over the next several years – and he believes the period ahead will require you to think and invest differently to get through the “Great Reset.”
Instead of diversifying asset classes, Mauldin Smart Core diversifies among trading strategies. The strategies seek growth, have the ability to respond to the global economy on a daily basis and do so with a disciplined investment processes that seeks to manage downside risk.
Think of Smart Core as four strategies in one managed account portfolio. The strategists utilize ETFs that enable them to trade across asset classes, countries, sectors, commodities and cash-like securities for safety.
Today’s call will be split into two segments. First we will hear from Co-Portfolio Manager John Mauldin on what he sees in today’s investment environment and the economic landscape.
In the second segment, we will hear from one of the portfolio’s four asset managers: Brian Sanborn is a Certified Financial Analyst and Chairman of the Index Committee at Ned Davis Research where he oversees the NDR Dynamic Allocation Strategy. Brian will give us his take on the current market environment and provide insights into NDR Dynamic Allocation Strategy, one of the individual trading strategies within Mauldin Smart Core.
As you are listening to the call today, if you have any questions or if you’d like to learn more about our investment management services, please contact us by phone or email. Our phone number is 800-891-9092 and our email address is info@cmgwealth.com.
Federal securities laws require us to make the following disclosure: Investing involves risk. Past performance is no guarantee 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 CMG Mauldin Smart Core) will be profitable, be suitable for your portfolio or individual situation, or prove successful. No portion of this call should be construed as an offer or solicitation for the purchase or sale of any security. There are additional important disclosures in our Form ADV, which is available on our website.
It’s always an honor to introduce my friend and colleague, John Mauldin. In addition to serving as Chief Economist at CMG, John Mauldin is a noted financial expert, a New York Times best-selling author and market commentator. Together with Mauldin Economics, John hosts the Strategic Investment Conference every year. And he has written many books – several of which have appeared on the New York Times best-seller list.
Welcome to another quarterly update call John!
John Mauldin: Thanks for having me, Brian.
Schreiner: Mauldin Smart Core is an opportunistic, multi-asset, multi-manager investment strategy that combines several investment strategies into one portfolio. The objective is to seek global growth opportunities while maintaining a level of protection in down markets.
Mauldin Smart Core has underperformed the Morningstar Category for US Fund Tactical Allocation year-to-date through September 30th. Smart Core was up 4.4 percent year-to-date through September 30 while the US Fund Tactical Allocation group was up 7.9 percent over the same period. Over the last 12 months, Smart Core was up 12.5 percent while the US Fund Tactical Allocation group was up 18.7 percent.
Schreiner: John, how do you feel about the performance of the strategy?
Mauldin: Well I mean, it’s doing what I wanted it to do, which is we’re participating somewhat in the upside of the market; so 12% over the last 12 months is certainly not at the market, but we’ve done so with a lot less volatility and you know, we’re protected on the downside, which is really where I try to focus, with that being said, given the risk in the market today, I’m very happy. I’m not trying to be an index fund and keep up with the market; I want to make sure that I don’t follow the market down on a major correction.
Schreiner: Participate and protect. That’s the objective as best as s succinctly as I can say it. John, I was reading your recent letter, and as a student of Austrian economics, I got a little bit of a twinkle in my eye, when you mentioned Adam Smith and the division of labor. But you recognize that, as efficient as our economy is, it is also fragile and right now there are so many dislocations that are causing some pretty serious economic disruptions, some pain for businesses, governments, and citizens around the world. What do you see as the biggest problems right now and what are the impacts?
Mauldin: Well believe it or not, everybody’s worried about the supply chain and saying that the supply chain is broken down and the answer, and I’ll be actually talking about that in my letter next week. The answer is supply chain hasn’t really broken down. We’re bringing more containers into, for instance, the LA and Long Beach ports than we ever have. What’s broken down is the demand and where people are spending, US Congress dumped $6 trillion of what I call hot money, into the hands of individuals who couldn’t spend it on services because restaurants were closed, hotels were closed, and they ended up spending it on products. And what you see is that demand spike from the bottom of the COVID recession, 37% up, I mean, it’s never been, we’ve never seen that, like in months, we’ve never seen anything like that and it’s still 10% in terms of spending on goods, above where it was before.
And that’s a major shift, and so those hundred containerships that are sitting out there, are hundred container ships that ports weren’t designed to take. I mean, we’re handling more than we’ve ever handled, it’s like the roads in whatever major city are designed to handle traffic, but in morning rush hour and afternoon or evening rush hour, you could bottlenecks; because more people try to get on those roads than the roads are designed to handle that’s what’s happening with shipping and manufacturing right now. We did have lots of industry shut down for COVID, so they got behind on their inventories, they’re having to catch up. I mean, clearly that is happening, but we had a major shift by the government pouring a lot of money in it and what I’ve argued now for years is that QE isn’t printing money. It’s a distinction that only a handful of really nerdy economists could get, but the QE, the money goes into the banks and it goes into back into bank reserves, so it goes right back into the Federal Reserve.
It doesn’t create inflation and had not to create inflation before. What’s created the inflation now was the government stimulus. That has created the inflation because it created demand. Now what we’ve done is the first $2-3 trillion was probably necessary maybe the fourth, but we got on a roll and just said, we’re going to start doing more. So we went too far in the whole stimulus cycle, and now the Fed is behind the curve, they just have got to figure out what they can do to down the inflation cycle. I mean, easy money, low rates are not going fix the demand is created by too much stimulus from the government, low rates and QE is not going to create fix the supply side problems, supply chain problems.
I think they need to start normalizing rates faster; they are going to go after the balance sheet. Well, I would say, start with the mortgages because they have created an imbalance in the mortgage world where a fourth of the homes that are bought now are bought by hedge funds and so forth for investment purposes and because money’s so cheap and people are looking for yield and that’s not what we want to see happening I mean, they’re moving prices outside of the first time, home buyer, medium home prices in the US now, are somewhere in the area of a thousand dollars, but so short of $400,000. That’s not a first-time starter home price and that type of thing has to be reconciled. It’s going to take a year or more, I think the Fed needs to start raising rates that’s going to create pressures on the market and we don’t know how the market’s going to react.
Schreiner: You mentioned that you think the government stimulus has increased demand for goods. And I think you mentioned too, that that’s had an impact on inflation. To what degree is increased demand responsible for the inflation versus just the increase in the money supply?
Mauldin: I don’t think the increase in the money supply has that much effect. I think that increase in demand is clearly a part of a broader problem. We just overstimulated the economy. And in fairness, nobody had a crystal ball that says, this is what’s going to happen; they were just throwing stuff up because there was a problem and Congress as a tool called spending money and that’s the tool they elected to use. So we are where we are now, we’re at a problem where we’re going to need to spend less, or we’re going to see more inflation. So I don’t know how this gets resolved, but I don’t know that it gets resolved quickly and easily.
Schreiner: Do you expect additional stimulus next year as well?
Mauldin: Stimulus in terms of what, in terms of Congress spending more money?
Schreiner: Spending programs and maybe even direct payments to Americans.
Mauldin: Well, [Sen. Joe] Manchin [D-W.Va.] has come out and said he is willing to compromise at $1.7 or $1.5 (trillion), saying he doesn’t want to raise taxes. It’s a little bit of a mess, honestly, trying to predict what’s going to happen, but I would expect Congress at some point is going to spend more money and, you know, it’s kind of like, damn the torpedoes just full speed ahead.
Schreiner: Well it’s so important to us as investors to maintain an investment process that has the ability to play both offense and defense. That’s the message I keep communicating with clients because to be in a passive buy-and-hold strategy right now with no process to rotate to defensive funds, I think is pretty dangerous given the kind of uncertainties that we face, because we don’t know how markets will react. It may well be that they continue to go higher. When you look at how investors, what opportunities they have to allocate their money, they may choose the US stock market and they may continue to rally through next year. But there’s some probability that a correction will come, and we just can’t know. No one has a crystal ball. And I think anybody that is trying to predict is playing a dangerous game. We need to recognize and react to what’s happening in the market and be able to rotate to defensive when we need to.
Mauldin: Thank you and look forward to talking to you next quarter, we’ll see what happens.
Schreiner: I appreciate it have a great day.
Mauldin: Thank you.
Schreiner: Ok, we’re back for the second segment of the Mauldin Smart Core Quarterly Conference call for the third quarter of 2021. As a reminder, if you have any questions or you would like to learn more about our investment management services, please contact us by phone at 800-891-9092 or by email at info@cmgwealth.com.
I am very glad to be here with Brian Sanborn, Certified Financial Analyst and Chairman of the Index Committee at Ned Davis Research. Brian oversees the NDR Dynamic Allocation Strategy, which accounts for 25% of Mauldin Smart Core.
Founded in 1980, NDR is a global provider of independent investment research, insights, tools, and investment solutions. In addition to overseeing the NDR Dynamic Allocation Strategy, Brian writes NDR’s Stock Selection publications. Before joining NDR, Brian was an Analyst at Vardon Capital Management, where he performed statistical testing and constructed quantitative investment models. He received a Master’s degree in Statistics from Columbia University and a Bachelor of Science degree in Mathematics and Economics from Davidson College. Brian is a CFA charterholder and is a member of the CFA Institute. Brian, welcome to the call today!
Brian Sanborn: Thanks Brian it’s a pleasure to speak with you and I appreciate you having me on.
Schreiner: It’s our pleasure. Brian I wanted to get your thoughts on the investment environment and your investment strategy, but before I do, I know that NDR just sponsored the Excel 2021 Conference in Las Vegas and I saw on Twitter that the real highlight of the conference was your birthday! How was the conference?
Sanborn: It was fantastic to be back in person again; so we were a sponsor at Excel 2021. We had a booth there, to be able to speak live with advisors, talk about the environment, talk about what their needs are it just was a breath of fresh air. It’s been so long since we’ve been out, you know, live in an event setting. And as I just said it was also my birthday last week; it was a milestone birthday and the event happened to be in Las Vegas a great way to celebrate.
Schreiner: Wow! You turned 21 in Las Vegas that must have been fun!
Sanborn: Let’s go with that.
Schreiner: Alright the NDR Dynamic Allocation Strategy is the global stock and bond strategy, which does have the ability to go fully to cash. I know that’s rare, but it is unconstrained. Give our investors a high level perspective over the overall investment objectives of the strategy.
Sanborn: In fact, this is something that NDR is that we are constantly reminding ourselves about and challenging ourselves, which is to always hear the voice of our clients and what their needs are and to help address their pain points. With dynamic allocation we wanted to tackle a common frustration that we’ve heard from advisors with traditional asset allocation frameworks, which was that although they may outperform a benchmark over time, they are very much exposed to downside risk due to constraints, which typically force a minimum allocation to stocks. So when we develop dynamic allocation, we wanted to build a high conviction strategy with a primary focus on reducing drawdowns. This leverages NDR weight of the evidence approach, which combines indicators from various disciplines. We look at macroeconomic and fundamental indicators to help us determine their value of asset classes as well as sectors while using technical and behavioral data, to help us with the risk management and timing in the strategy. And so when the technical indicators and the macroeconomic indicators are lining up, we can take a large allocation to a particular asset class. So that means that the stock allocation ranges from 0% all the way up to a hundred percent, versus a traditional 60/40 global stock bond benchmark.
Schreiner: Well, I think it’s so important; I’ve been talking with clients. In fact, I just met with one in person, it is great to be meeting with people in person again yesterday in Delaware, and they had this traditional approach buy and hold a kind of a traditional diversified portfolio and just to stress to them, the importance of having a strategy for defense, I can think of times in hindsight where a defensive strategy is so important to have in place, but I don’t think ever before, have I been able to say with such foresight that a defensive strategy is so important and that’s just because valuations are so high and the environment is, you know, ripe for a large correction. That doesn’t mean it’s going to happen and doesn’t mean that we shouldn’t be long stocks and have allocations even significant allocations to stocks; because we don’t know when it’s going to happen, but we are looking at risk and the potential is there and that’s why I think it’s great what you guys do and what other managers do in the portfolio, because investors really do need that process in place that can help them manage risk when the next downturn comes.
Sanborn: It really plays to a couple of behavioral aspects with investors. So the common refrain I’ll get is, so if I just hold passively a 60/40 allocations at a time, listen stocks a continuum have been very close to all of time highs to continue, make all-time highs. So if any point in history, if I had invested in stocks, I came out ahead today, which is you know, very much true, but there were significant stretches over time where depending upon where your client was in their retirement process, that they were underwater with their equity allocation. There were long stretches, you know, around the great depression, as well as even into the sixties and seventies, where it took a long time to then actually break even, or come out ahead on a stock allocation or a stock investment. And so that’s why it’s important to manage risk along the way and be tactical.
The other thing too is even outside the mathematics of just your returns and compounding over time is the psychological aspect in investing, right? Whether it’s the traditional study of looking at gains versus losses are not equivalent, right? So if I lose a dollar, it’s not the same as gaining a dollar, they really, it’s more of a two to one ratio so for every dollar you lose, you really need to make $2 in terms of gain to feel like you’ve broken even it’s because of that emotional stress of loss; and so that’s also something to keep in mind that even though mathematically over time the stocks made all-time highs and it’s important, you can have a passive allocation to them that there is an emotional stress that your clients undergo. And so it is important to manage risk along the way.
Schreiner: Well said, I wanted to ask you to dig in a little bit on the strategy; you mentioned the technical and macro indicators, just give us a feel for those however you think is best. How do you explain those to advisors and to investors?
Sanborn: Absolutely, so when we develop the strategy, we wanted to make sure it was comprehensive and followed the NDR approach, but also it needed to be explainable, right? Especially for advisors who are sitting down with their clients and trying to then discuss why the allocation was a specific level at a point in time. And so we decided to construct this strategy using in two different levels. The first is a broad stock bond, global asset allocation decision; so think of it as the MSCI all country world indexes versus the Barclays global area. So to make that stock bond decision, we use six different composite indicators, and they’re very diverse measuring different aspects of the global economy, as well as the price action of stocks versus bonds. I will tell you just a briefly list [inaudible21:19] so when we talk about the global economy, we’re looking at measures like the composite leading indicator.
We’re looking at the purchasing manager index, which is a measure economic sentiment. We’re also looking at global shipping rates through the Baltic dry index and of course not surprisingly over the last 10 years have taught us a valuable lesson, not to fight the Fed, to the extent that to global central banks, we have an indicator that looks like global monetary policy. And then on the technical side, we don’t want to fight the trend that’s something that Ned is always stressed to us, and it’s a critical part from a risk management perspective. So we look at the stock bond, relative strength ratio versus longer term trend. And also we look at a measure of global equity market participation. And so what we want to see are a majority or a large majority of global equity markets in up trend, that support the trend versus a narrow set of global equity markets and uptrend, because that is more susceptible to a breakdown in trend.
And so we call that a measure of breadth so those are the six indicators we use to make that global stock bond decision, just as an aside, we also double weight that relative strength indicator again, because the trend is your friend over time, from there we then need to make a decision within each asset class, within stocks, as well as within bonds, where to allocate those assets. And so within the stock side, we look at six different areas. So we’re looking at US large caps, US small caps, US growth, US value, international developed as well as emerging markets and then on the fixed income side, we’re looking at six different fixed income ETFs. We’re looking at short term Treasurys in the US; US long term Treasurys, US investment grade, US high yields, international investment grade, and emerging market bonds. And then when there are no opportunities within that fixed income space, there’s also potential allocation just to cash; to make those decisions within each asset class, we’ve built technical composite models that look at trend, relative strength, and momentum to help make those decisions.
Schreiner: Performance of the strategy has been very good to make it easy on our compliance team we don’t need to talk about the exact numbers right now. Just invite investors who are interested in performance updates from CMG on Mauldin Smart Core, as a whole, of course, we can provide those to you upon request and each of the individual managers has performance histories as well. NDR is no exception, and just to say that you’ve been one of the strongest managers in the portfolio on a pretty consistent basis, so it it’s been good for our clients. I wanted to also just ask about the unconstrained nature of the strategy with as much risk as it is in the markets, you know, talked about the ability to go to cash and I know the strategy has become defensive several times over the last couple of years. Can you just talk about those periods over the last couple of years where the model became defensive?
Sanborn: Absolutely, so over the last three years, the largest cash allocation was 28% and that occurred in late 2018. At that same time, the stock allocation got as low as about 14%; I think this last two years have really been a fascinating case study for the dynamic allocation strategy. So of course we all think about the COVID lockdowns and how the market behaved in early 2020. But even if you look a few months before that the global economy had been under a little bit of pressure due to increasing global trade tensions. And so leading up into the fall of 2019, the equity was as high as about 72%, but then in the early fall, it started to drop pretty quickly and in fact, it actually dropped below 60% in the fall of 2019, you know basically between 55 and 60%. It remained below that 60% benchmark allocation until June of 2020.
The equity allocation got as low as about 30% in the spring of 2020. So you could see here within a six month span going from over a 70% allocation down to a 30% allocation and then within just a couple of months as the global economy reopened, and as the data reflected an improving environment the allocation got aggressive again, back to over 70%. The equity allocation has remained above 70% since June of 2020; however, one thing to note is that there is much less conviction and many of those top global indicators we previously discussed than there was one year ago. So the summer of 2020, think of the rubber band, it was basically stretched one way global economy being shut down and then opening back up it snapped back the other way. Many of those economic indicators that we look at the composite indicator the PMI, the Baltic dry, the way in which we incorporate them into our dynamic allocation strategy. Those indicator readings were highest levels in the history that we track going back to late 1990s and a lot of those are looking at growth rates on those various indicators. So since then it not surprisingly as the economy has rebounded and start to mature a little bit, those indicator readings are no longer as strong as they were a year ago. And so there’s a little bit less conviction in this greater than 70% equity allocation now that it was a year ago, but nonetheless, it is still above 70%.
Schreiner: How is the strategy allocated today?
Sanborn: So today it is still a very strong equity allocation; so in this case, it’s over 80% equity allocation with the remaining going into fixed income, the trend indicators, the breath indicators fill in a positive territory, big and less so than they were months ago. In fact, the stock bond, relative strength ratio, which has the strongest weight in our model it had an all-time high reading earlier this year and has since come down from that level, but still very positive. But one of the tiers that have been favoring more, a fixed income has been the PMI breadth indicator. So it looks at the percentage of economies globally that are moving above the 50 level on the PMI. So 50 indicates extension below 50 indicates contraction and so what happened basically was that all the global economies after the global economy opened reopened, had strong economic readings and so you actually had a hundred percent of global economies above that PMI, 50 reading that we track, some of those have started to fall off, so for example, earlier in the summer Turkeys PMI drop below 50, then we have India’s drop below 50 and more recently China’s PMI reading has dropped below 50, so that has helped the breath deteriorate and so that gave us fixed income, but to reiterate it overall we’re still well above 80% equity allocation in dynamic.
Schreiner: Thanks, Brian I’m looking now at your October, 2021 strategy update, and this has some really nice charts and graphs and explanation the model where it’s been over the couple of months and what your indicators are showing. So if any investors want a copy of that, please let us know.
Brian, thanks so much for me on the call today, appreciate your time very much and I know our investors do as well. Thank you for your work in Mauldin Smart Core we appreciate it and we look forward to having you back on another call soon.
Sanborn: Thanks again Brian, I appreciate you having me on.
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Investing involves risk. Past performance is no guarantee 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.
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