Dear clients, friends and family:
Following is the 2014 second quarter 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 +1.42% for the second quarter, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned +1.71% for the second quarter, net of fees. The strategy was invested long in high yields for the entire quarter. Investors’ continued search for yield pushed the Barclays High Yield Bond Index to 5.54% – the lowest level in history. With yields this low, the risk to the downside is significant, especially given how the fundamentals are changing for high yields.
In a recent Forbes article titled “Code Red In High Yield” by Steve Blumenthal, he highlighted the warning signs he is seeing for high yield bonds. Yields are near all time lows, a greater number of less credit worthy companies are finding funding and investors are getting unfavorable terms (light on covenants that are supposed to protect bondholders). If the Fed moves to tighten interest rates more quickly than anticipated, the pullback in high yields could lead to something much more serious. Indeed, Martin Friedson, one of the smartest investors in high yield, predicts $1.6 trillion worth of high yield bonds will default globally between 2016 and 2020. While painful, such a correction would create opportunity for CMG HY, much like in 1999 and 2007, where the strategy was able to side step the major declines and re-enter positions at lower prices and much more attractive yields. For the full Forbes story, please click on the link above.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +2.95% for the second quarter in the TCA (Trust Company of America) portfolio, +3.99% in the TDA portfolio and +3.97% in the ETF portfolio, net of fees. The Jefferson National Tax-Deferred Variable Annuity portfolio returned +6.48% for the second quarter, net of fees. The strategy began the second quarter allocated approximately one third to fixed income and two thirds to diversified equity positions including utilities, growth stocks and natural resources. At the beginning of the quarter, allocations to fixed income and utilities helped offset declines in small caps and international stocks. The portfolios shifted to a more equity dominated allocation over the quarter driving strong performance in May and June. By the end of the quarter, the equity positions in the portfolio included allocations to Latin American equities, real estate, communications and US growth stocks, primarily large and mid caps. The fixed income allocations in the portfolios was reduced, while the allocation to utilities, a very interest rate sensitive sector, was shifted to higher beta equity positions. For a snapshot of current allocations and changes to each portfolio over the past month, please visit our website at the following links to view the monthly update for each portfolio: TCA, TDA, ETF, and Jefferson National.
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned -1.46% for the second quarter, net of fees. Scotia Dynamic’s model remained in a bullish trend for the entire second quarter while maintaining larger than average cash balances due to the continued overbought condition of the market. In April, the strategy generated losses from positions in energy services and precious metals as broad equity markets pulled back modestly. The strategy generated positive returns in May and June with allocations to transportation, technology, healthcare and precious metals.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned +3.70% for the second quarter, net of fees. To start April, Tactical Rotation was 50% invested in REITs (VNQ) and 50% to bonds (BND) start the quarter, generating positive returns and outperforming the broader equity markets. For May, Tactical Rotation maintained its allocation to REITs but reallocated the other 50% of the portfolio from bonds to commodities (DBC). For June, the strategy reallocated out of commodities into equities with a 50% allocation to the S&P 500 (SPY). The remaining 50% remained in REITs for the month. The strategy finished the quarter with a positive return and remains positioned 50% to REITS (VNQ) and 50% to equities (SPY). REITs continued to perform well, rebounding from a poor year in 2013. The strategy has been able to capitalize on this strong momentum by allocating to REITS five times this year in seven months, through July.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) returned -6.20% for the second quarter, net of fees. For the quarter, Scotia generated 16 total trades, 9 of which were profitable and 7 that were not. Furthermore, Scotia generated 11 long trades and 5 short trades (all of which were overbought mean reversion trades). The long-term indicator for the strategy was bullish for the entire quarter while the intermediate-term indicator turned bearish on two occasions, in mid-April and mid-May. When the strategy’s long- and intermediate-term trends are in disagreement, the strategy remains in cash. Although there have been a handful of short-term corrections in equities, the trend for the past year has been in one direction with little volatility to provide for mean reversion trades or a healthy market correction that would allow for the continuation of the long-term bullish trend.
Conclusion
Equity markets continued to trend higher, immune to rising geopolitical tensions in the Ukraine and the Middle East and the indications of slower growth in the US during the first quarter. The conflict in the Ukraine continues to escalate as Russian backed separatists stand off against the Ukrainian government. The conflict has taken on a new dimension with the shooting down of Malaysia Airlines flight MH17. Investigations point to the separatists in eastern Ukraine using Russian military equipment as the culprits. The response of Russia to the conflict stirs memories of the alternate realities of the Cold War propaganda machine and is leading to sanctions by the US and increased unity amongst European countries to support tightening the financial vice. In the short-term, the risk of the Russian economy going into recession or worse has increased significantly as the capital flight continues and Russian companies are cut off from the global financial system. Europe continues to fight off deflation but risks disrupting recoveries in several countries if Russian natural gas stops flowing west. Energy supplies are also threatened in the Middle East as conflicts in Iraq and Libya threaten oil exports. Although global oil output continues to produce ample supply, the risk premium stemming from Iraq, Libya, Gaza, Egypt and Nigeria continues to provide support for prices. Further escalation could drive prices higher during a time when many countries can ill afford an inflationary shock.
Global growth projections continue to be revised lower and the U.S. posted a -2.1% decline in GDP in the first quarter. The final estimate was a significant revision from the first estimate of +0.10%. Economists blamed weather as it impacted transportation and construction while also deterring home and auto sales. Growth for the second quarter showed a sharp rebound although the first quarter surprise suggests a more skeptical view of consensus prognostications for the year. The Fed has continued to unwind its bond buying programs under new Chair Janet Yellen as unemployment continues to decline and inflation remains at acceptable levels. So far, bonds have taken this retreat in stride, posting strong gains year-to-date. However, equity market valuations have not priced in the impact of additional tightening (actually raising rates rather than unwinding quantitative easing) and there remains a significant risk that as liquidity is drained from the international financial system, the rising cost of capital negatively impacts emerging markets and highly levered companies.
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 and CMG Tactical Futures 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 and the CMG Tactical Futures 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 and the CMG Tactical Futures 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).