Dear clients, friends and family:
Following is the 2013 third 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 +1.20% for the third quarter, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned +0.88% for the third quarter, net of fees. CMG HY started the quarter long high yield bonds and remained in a long position until mid August. The model generated a sell signal that moved the strategy to cash until mid September. The strategy remained long for the balance of the quarter and is long as of this writing. Despite a brief sell off in August, investors, particularly retail investors, continue to allocate to high yields, absorbing record levels of new issuance. U.S. high yield bond issuance set a monthly record in September with $47.65 billion, beating the prior peak from a year ago. In addition to strong retail demand, hedge fund managers have amassed the largest share of the high yield market ever. According to Bloomberg, hedge funds hold 23% of the $1.2 trillion market compared to 18% last year. Conversely, over the past year, U.S. mutual funds and ETFs decreased their holdings of high yields by 9%. The increased allocation by hedge funds managers is keeping prices higher for now but could lead to additional volatility if interest rates start to move higher. While retail investors and hedge funds have been increasing allocations, mutual funds have seen redemptions and banks have reduced holdings of riskier debt for regulatory reasons. As a result the market has seen an equilibrium that has buoyed prices and kept yields near record lows. However, if rates rise as they did in June, an orderly exit from high yields could turn into a panic as leveraged hedge funds will be the first to exit and rotate into other credits.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +6.66% for the third quarter in the TCA (Trust Company of America) portfolio and +7.18% 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 +2.93%, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned +5.85% for the third quarter, net of fees.
The strategy began the quarter in diversified equity positions including allocations to emerging markets, energy and large cap growth stocks. The portfolios remained allocated to equities as the bullish trend for the year has continued after a pull-back in August. Due to the short nature of the sell-off, the CMG Opportunistic portfolios did not reallocate to a more defensive posture over the past several months. Although the portfolios did move some allocations to bonds, precious metals or healthcare, CMG Opportunistic remains positioned for a bullish equity market. For a snapshot of current allocations in the CMG Opportunistic portfolios, please visit our website at the following links: ETF, Jefferson National and TCA.
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned +4.60% for the third quarter, net of fees. The strategy generated positive returns by overweighting allocations to energy services and biotechnology during July. Equity markets declined in August as the prospect of a war in Syria unnerved markets. As markets declined, a number of sectors stopped exhibiting positive momentum and the strategy was primarily allocated to precious metals during the month. The allocation to precious metals initially generated positive returns at the start of the month as the risk of war was elevated but, by the end of the month, risk had dissipated and precious metals sold off, leading to a loss for the strategy for August. The strategy rebounded in September, recovering almost all of August’s loss as a rising equity market pushed most sectors higher. The strategy was broadly allocated during the month with positions in small caps, transports and precious metals.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned +2.02% for the third quarter, net of fees. Tactical Rotation was 50% invested for the month of July with an allocation to the S&P 500 and 50% in cash. The strategy maintained its allocation to the S&P 500 in August and allocated the remaining cash balance to international equities. August proved to be a difficult month as most asset classes declined in the face of rising interest rates and a re-pricing of risk ahead of the Fed taper. In September, the Tactical Rotation reallocated to a 50/50 allocation between commodities and international equities and benefited from the risk-on environment after the Fed chose not to taper. The strategy has since reallocated back to U.S. equities and is currently invested 50% in SPY (the SPDR S&P 500 ETF) and 50% in EFA (the iShares MSCI EAFE ETF).
We are pleased with the strategy’s performance since its addition to the managed account platform earlier this year. The research provider for the CMG Tactical Rotation Strategy, Sterling Global Strategies, has a five star Morningstar rating and the track record is GIPS (Global Investment Performance Standards) Verified. We are also pleased to announce that the strategy is now available at Envestnet in addition to TCA, Folio FN, Placemark, TD Ameritrade, Fidelity, Schwab and Pershing. We continue to work hard to make the strategy as easy to access across multiple platforms and believe an allocation adds value to any portfolio as a core holding that diversifies risk and enhances returns.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) finished the third quarter -13.06%, net of fees. The third quarter proved challenging for Scotia as equity markets rose in July, fell in August, before rising again in September. The long-term trend indicator for the strategy was bullish for the entire quarter; however, the intermediate-term indicators turned bearish twice: in early July and again in mid-August through early September. The strategy generated 17 total trades during the quarter, with 12 long trades and 5 short trades. The majority of the loss for the quarter came from two short trades in July and September that were triggered by overbought market conditions and a core model long trade in mid-August. While historically, mean reversion (i.e. overbought / oversold) trades have had a very high hit rate, this quarter proved challenging as markets traded more on rumors (Syria and the Fed taper) than on the natural ebbs and flows of markets.
The System Research Treasury Bond Program (“SR”) returned -4.68% for the third quarter, net of fees. SR was primarily in a long bond position for the quarter punctuated by several short trades in August and September. The quarter proved challenging as the prospect of war in Syria and the Fed’s mixed signals on tapering caused significant movements in interest rates. The strategy was long in July with the model’s indicators pointing to low inflation and risk aversion. Interest rates rose from 3.47% to 3.77% on the 30 year U.S. Treasury during the month, fueled by positive economic indicators and the market’s expectation of Fed tapering. August proved very challenging as interest rates dropped as low as 3.63% and rose as high as 3.90% during the month before finishing in the same place as the start of the month at 3.79%. Markets had priced in Fed tapering in September and after the Fed reversed course, interest rates dropped to 3.69% at the end of September. The strategy was long for most of the month and remains in a long position as of this writing and the model’s indicators point to higher bond prices and lower rates for the time being.
Conclusion
It was quite a roller coaster for global markets over the summer. The past quarter was marked by two major catalysts: the chemical weapon attack in Syria and the subsequent standoff where war was averted (for now) and the expectation of a taper in asset purchases by the Fed. While the crisis in Syria has dissipated after a deal with the Russians, the Fed’s actions remain the subject of great debate. Markets had priced in a decrease in asset purchases in September pushing interest rates higher over the summer in anticipation of the Fed’s actions. The result was a re-pricing of risk over the summer as higher interest rates forced investors to reconsider elevated prices across all asset classes. Indeed, the only safe harbor during the August tempest was cash.
The Fed surprised markets by not tapering in September, and in hindsight, the decision looks sensible. In addition to a slowdown in growth, consumer spending and sentiment have declined while the real estate market has ground to a halt as higher mortgage rates have sidelined buyers. The Fed continues to revise down its growth projections (see On My Radar: No Haircut) and is unwilling to tighten policy in light of the partisan backdrop on Capital Hill. The decision to not taper seems prescient considering the drama of the recent shutdown and debt ceiling standoff. Rightfully so, the recent standoff left all noses bloodied in Washington as no politician emerged unscathed from the recent battle. The result has been another kick of the proverbial can as we anxiously await another battle in early 2014. Given the additional political risk, we don’t anticipate the Fed tapering anytime soon.
At the end of the quarter, President Obama nominated Janet Yellen to become the next chairman of the Federal Reserve Board, succeeding Ben Bernanke. Her term will begin in February 2014, will last for four years and will likely be a seamless transition from her predecessor with respect to policy. However, history paints a different picture. Historically, Fed Chairmen have been tested with a crisis shortly after taking office. In 1979, after Paul Volcker was appointed by President Carter, the Iranian Revolution sent energy prices and inflation skyrocketing. The U.S. fell into recession before Volcker won the battle with inflation. After Alan Greenspan was appointed chairman by President Reagan in 1987, it took only two months for the chairman to be tested by Black Monday, the stock market crash on October 19, 1987 that wiped out 23% of the Dow Jones Industrial Average. Greenspan’s reassurances during that crisis led to the “Greenspan Put”: the assurance that the Fed was always prepared to provide ample liquidity and low interest rates in the face of any crisis. Our current policies have their roots in this crisis. In 2006, President Bush selected Ben Bernanke to succeed Chairman Greenspan and within 18 months he was facing a real estate crash and the unraveling of the global financial system. Although he was able to pull the country back from the worst financial crisis since the Great Depression, Bernanke was forced to use unconventional monetary policies that have been the subject of great debate.
Which leads us to today. Given the history of the past three chairmen, it is no great surprise that the other frontrunner for the role, Larry Summers, withdrew. Who can blame him? Chairman Yellen inherits the ongoing quantitative easing policies, a stubborn rate of unemployment and a historically dysfunctional government that will only serve to complicate her task of steering the economy through the current recovery. Yellen is perceived to be a strong dove (in favor of easy monetary policy) and her background suggests a continuation of policy until unemployment is reduced further, her convictions and abilities are likely to be tested sooner rather than later. She is on record as saying that current interest rates should be held at zero for the time being, even if inflation rises above the current 2% target. In addition, she is dedicated to providing transparency through the Fed’s communication and although a fine idea in theory, in practice this will only complicate her job further. Clearly, anyone nominated for the role of the Fed Chairman over the past 40 years has had the academic and professional credentials for the job, and Janet Yellen is no exception. However, what has changed since Paul Volcker’s tenure is the level of political acumen that is necessary to manage the expectations of politicians, bankers and investors across the globe.
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).