Dear clients, friends and family:
Following is the 2013 second 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 -0.86% for the second quarter, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned -0.19% for the second quarter, net of fees. CMG HY was primarily long during the quarter as investors continued to allocate to high yield bonds at record rates. The strategy briefly moved to cash in June averting a pullback in high yields. The strategy moved back to a long position and remains invested as of this writing. Investors continue to search for yield and are prepared to sacrifice credit quality, reallocating from investment grade to high yield bonds via both mutual funds and ETFs. After a sell off in June, July has seen record inflows into lower quality bonds. The tailwind for high yields has pushed bond prices up and yields down. The trend continues higher for now, but we remain focused on risk management as we expect defaults to increase over the next several years. As the strategy is designed to move defensively to cash in the event of a price decline, we view corrections favorably as prices decline and yields rise giving us an opportunity to move back from cash into high yields at lower prices and higher yields. As long as the Federal Reserve remains committed to its current policies, high yield bonds should continue to perform well. However, should the Fed indeed “taper” its quantitative easing programs in 2014, interest rates will rise and high yield bonds would decline in price to more attractive levels.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned -1.33% for the second quarter in the TCA (Trust Company of America) portfolio and+0.05% in the TD Ameritrade (direct) portfolio, net of fees. The CMG Opportunistic All Asset ETF Strategy (available at Schwab, TD Ameritrade, Pershing and NFS / Fidelity) returned -3.58%, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned -3.55%% for the second quarter, net of fees.
The strategy began the quarter in defensive equity positions in healthcare and value based funds and allocations to government bonds after spending the balance of the first quarter in higher beta equity funds and sector funds with allocations to industrials, small cap, large cap, consumer staples and foreign equities. As of the end of June, the portfolio was moving from a defensive allocation in health care, government bonds and cash to more bullish positions in higher beta large caps, energy, real estate and communications funds. As we begin the second half, the portfolios have captured the bulk of the move up in the U.S. equity markets in July. For a snapshot of current allocations in the CMG Opportunistic portfolios, please visit our website at the following links: ETF, Jefferson National, TCA and TD Ameritrade.
The Heritage Capital Gold Equity Strategy (“Heritage”) was removed from the managed account platform during the quarter. Although the strategy has shown an ability to manage risk during declines in gold equities, the strategy struggled to meet our performance expectations.
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned +1.15% for the second quarter, net of fees. Scotia Dynamic generated strong positive returns in April attributed to positions in biotechnology, healthcare, technology and small cap equities. The strategy continued to perform well in May with the portfolio primarily allocated to biotechnology, basic materials, energy services and technology. As equity markets became overbought in May, the strategy’s risk management process prevented it from allocating to overbought sectors and the portfolio maintained a larger cash balance than normal. In June, equity markets pulled back and the strategy increased its allocation to several sectors that were no longer overbought. The strategy was allocated to electronics, transportation, precious metals equities and small cap stocks during the month. As equity markets declined in response to the Federal Reserve announcement on bond purchases, Scotia Dynamic generated a loss for the month of June.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned -0.52% for the second quarter, net of fees. In the first quarter, we added Tactical Rotation to our roster of tactical strategies. Tactical Rotation 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. Tactical Rotation was 50% allocated to the S&P 500 and 50% allocated to REITs (Real Estate Investment Trusts) throughout the entire quarter. Although the allocation to U.S. equities was positive for the quarter, REITs declined significantly from late May through June (the strategy has since exited its REIT position and is only 50% invested in the S&P 500 as of this writing). REITs sold off after the Federal Reserve comments on “tapering” bond purchases sent interest rates higher and investors sought to reduce exposure to fixed income assets and interest rates sensitive assets like REITs.
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.
In July, we sat down again with Mark Eicker of Sterling Global Strategies, the manager of the strategy, to discuss how the strategy has the ability to increase or decrease correlation depending on market climate. The webinar can be found here and provides greater insight on the strategy.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) finished the second quarter +6.34%, net of fees. Scotia traded actively during the quarter as the markets remained in a bullish trending environment. The strategy has been almost exclusively in a bullish position this year and short trades have been primarily generated as equities became overbought in the short-term on several occasions. The strategy generated 16 total trades during the quarter, with 12 long trades and 4 short trades. The long core model trades in particular have been very profitable this year and the strategy is generating a higher percentage of profitable trades than its historical average.
The System Research Treasury Bond Program (“SR”) returned -6.43% for the second quarter, net of fees. SR was in a long position for all of April generating strong returns as Treasury Bonds rallied and 30-year interest rates dropped from 3.08% to 2.82%. In May, the strategy moved to a short bond position, traded long briefly at mid-month and returned to a short position for the balance of the month. Although, the commodity indicator continued to signal a long position due to deflationary pressure on materials and commodities, the balance of the model’s indicators indicated a move higher in interest rates. The strategy was down modestly in May and struggled in June. Interest rates were extremely volatile during the month after Federal Reserve Chairman Ben Bernanke indicated that the Fed may “taper” bond purchases in 2014, sooner than markets had expected. As a result, interest rates moved sharply higher, reaching 3.60% during the month. Several of the strategy’s indicators alternated from long to short signals and the strategy had difficulty adapting to such volatile short-term movements. The sell off in bonds gained further momentum as investors reacted to the sharp move higher in interest rates causing the largest fixed income mutual fund redemptions in years. The strategy finished the quarter in a long position and remains long as of this writing.
Conclusion
Equity markets continued their trend higher during the quarter despite signals from the Federal Reserve that quantitative easing may be coming to an end. Markets retreated briefly in June after Fed Chairman Ben Bernanke suggested that the Fed would “taper” its bond purchases in 2014. Equity markets sold off, bonds sold off causing interest rates and mortgage rates moved sharply higher. The Chairman and other members of the FOMC quickly backpedaled to clarify their comments and placate markets. In particular, the spike in mortgage rates was cause for concern; threatening the nascent housing market recovery this year. Markets have since rebounded and look set to move higher as the Fed has reaffirmed its asset purchase program in the wake of a weak first quarter GDP growth (+1.8%).
Global markets remain uneasy in the wake of the Fed’s announcement and the ripple effect that tighter monetary policy will have for the rest of the world. In Europe, bond yield spreads blew out immediately and reignited the crisis of the past few years. The IMF, already struggling to contain the crisis on the EU periphery, warned that if the tightening cycle of the Fed is not offset by the ECB, then the borrowing costs of Spain, Italy and Portugal are likely to move sharply higher (they are already 200 to 300 basis points higher than Germany). Private sector loan growth continues to contract in these countries and businesses in Spain and Italy that seek to compete with northern Europe must pay a higher price, assuming they can get access to capital at all. Emerging market economies were already slowing prior to the announcement by the Fed and are likely to struggle further as monetary policy is tightened and capital costs rise. Emerging market equities have floundered this year, trailing US equity markets by over 20% through the first half of the year. Although emerging markets are much more resilient than in the past, primarily due to strong structural reforms that accompanied the growth of the past ten years, countries like Brazil, India and Turkey will find it difficult to stay on track with reforms in the face of social unrest and volatile currency movements.
Accommodative central bank policy continues to provide a tailwind for equities and a floor for fixed income assets, but for how long? The first signal from the Fed has been received and although the market shuddered, most investors believe the Fed will continue its easy money policy. To add to the uncertainty, the transition to Chairman Bernanke’s successor has already become a focus as Fed watchers handicap whether the two leading candidates, Janet Yellen and Larry Summers, will continue with the easy money policy or pull back and end quantitative easing programs. Janet Yellen, the current Vice Chairman, is likely to maintain many of the current policies while Larry Summers, most recently Director of the National Economic Council and a former Secretary of the Treasury under President Clinton, has questioned the effectiveness of quantitative easing. In either case, the market will have to adapt to a new voice at the Fed at a critical time for the economy. The US economy continues to grow, albeit at a tepid pace with modest employment gains. The recovery feels fragile and the Fed will stay involved for some time to come, whether QE is wound down or not. The rest of the world will continue to watch the Fed’s next move and as much as global markets have developed over the past decade, the US remains at the center of the economic universe.
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.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Performance Disclosure: Performance results from inception to the present are net of the current advisor fee for the program, 2.50%, paid quarterly in arrears. Performance is not net of custodial fees. The performance results shown include the reinvestment of dividends and other earnings.
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.
CMG Global Equity Fund, CMG SR Tactical Bond 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 Global Equity FundTM, CMG SR Tactical Bond FundTM and the CMG Tactical Equity Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456 (1-866-264-9456). Please read the prospectus carefully before investing. The CMG Global Equity FundTM, CMG SR Tactical Bond FundTM and the CMG Tactical Equity Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA.
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. 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).