Dear clients, friends and family:
Following is the 2014 third 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 -0.44% for the third quarter, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned -0.75% for the third quarter, net of fees. The strategy began the quarter invested long in high yield bonds. High yield bonds declined in July causing the strategy to move to cash in mid-July. One month later, the strategy invested back into a long high yield position that was held until September. Market volatility in September caused a broad decline across most asset classes, including high yields. For the quarter, high yield declined -1.87% as measured by the Barclays US Corporate HY Bond Index.
After hitting historic lows in yield during the second quarter, high yield bonds sold off during the recent market correction, bringing bond prices back to more reasonable levels. While the intermediate trend may now be higher again for bond prices, given the recent correction, the longer-term picture is not as positive. In Steve Blumenthal’s recent Forbes article titled “Watch Junk Bonds for Early Warnings of a New Financial Crisis”, he discussed the systemic risk that could result from a wave of defaults in high yield bonds. Well-known high yield analyst, Martin Fridson, believes high yields could lose 40% of their value over the next five years if default rates surge. The financial system is currently more leveraged than during the 2007 financial crisis and quality of high yield credits has declined in aggregate, increasing the risk of default as less credit worthy borrowers won’t be able to roll over debt if interest rates move higher. Should a correction of this magnitude occur, CMG HY would move to cash to side step a decline based on our risk management process and wait for a re-entry point at lower bond prices and 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 -2.62% for the third quarter in the TCA (Trust Company of America) portfolio, -2.88% in the TDA portfolio and -0.75% in the ETF portfolio, net of fees. The Jefferson National Tax-Deferred Variable Annuity portfolio returned -2.01% for the third quarter, net of fees. The strategy began the third quarter with low allocations to fixed income and the majority of the portfolio invested in diversified equity positions including allocations to communications, mid and large-cap growth stocks and healthcare. Allocations to real estate, small-caps, international equities and communications were the primary detractors from performance. Although the portfolio is predominately an equity based portfolio, the strategy is designed to mitigate risk by rotating into fixed income, defensive equity sectors or cash at times. During the quarter the portfolio shifted to a defensive position with allocations to fixed income and cash increasing to 30-40%, depending on the portfolio, by the end of September. The portfolios remained in a defensive position at the start of the fourth quarter. 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 -1.84% for the third quarter, net of fees. As equity markets declined in July on geopolitical fears, the strategy’s allocation to electronics (semiconductors), transports and biotech detracted from performance. In August, the portfolio generated positive returns benefiting from allocations to precious metals and biotech, which rebounded from the difficult prior month. During September, US equity markets hit all time highs and then corrected on global growth concerns. Scotia Dynamic was allocated to biotech, small-caps and electronics during the month. The allocation to electronics detracted from performance accounting for most of the loss for the month as the sector was particularly volatile.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned -1.43% for the third quarter, net of fees. Tactical Rotation was positioned 50% to REITS (VNQ) and 50% to equities (SPY) for the entire quarter. In July, REITS were slightly positive while the allocation to equities detracted from performance. The strategy generated strong positive returns in August as it was a strong month for both REITS and equities. September proved to be a challenging month for most asset classes with both REITS and equities declining on global growth fears. REITS have been one of the best performing asset classes for the year and the strategy has had an allocation to REITS for most of the year. However, the correction in August, where REITS were down 6% for the month was the most significant detractor from performance for the quarter. For the year, the strategy has been very effective at avoiding the worst performing asset classes such as commodities and international equities. The strategy is positioned 50% to equities (SPY) and 50% to bonds (BND) for the month of October.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) returned +0.19% for the third quarter, net of fees. For the quarter, Scotia generated 15 total trades, 13 of which were profitable and 2 that were not. Furthermore, Scotia generated 13 long trades and 2 short trades (both 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 three occasions: in mid-July, at the end of July into August and at the end of September. When the strategy’s long- and intermediate-term trends are in disagreement, the strategy remains in cash. Although the strategy generated positive returns in July and August, two losing long trades in September during the equity pullback caused the strategy to finish modestly higher for the quarter.
Conclusion
Although equity markets were modestly positive in the second quarter, market volatility increased significantly at the end of September and into October. In the summer, equity markets were content to shrug off a swath of negative news including several wars in the Middle East, the simmering conflict with Russia and the expanding outbreak of Ebola in Western Africa. In October, concerns about global growth, rising debt and global monetary tightening were the catalysts for the equity market sell-off in October. The first cases of Ebola in the US only added to the selling pressure.
The Federal Reserve continues to wind down its bond buying program at the same time as China is attempting to let the air out of its property market bubble by tightening lending standards and cracking down on the shadow banking system. Both actions amount to monetary tightening and less liquidity globally. The expectation has been that the ECB would step into the breach with more liquidity operations prompting some observers to speculate about quantitative easing in Europe. Europe clearly needs a jump start but it is naïve to believe that QE can be implemented given the current political climate and staunch opposition by Germany. Although the prescription of austerity has been a disaster in Europe, the political will to stimulate the economy simply does not exist now. European governments are becoming more nationalistic, right wing and anti-Euro – making it more difficult to find the consensus needed to stimulate a European economy that is on the verge of outright deflation. German Bunds reflect that reality as yields reached record lows of 0.81% over the past quarter. The global economy has rebounded from the financial crisis unevenly and there is a significant risk that central bank activities have reached their limit at a time when several economies, like Europe, have yet to recover to pre-crisis levels of output. In fact, Europe, which accounts for about a fifth of global GDP, is precariously close to tipping into its third recession in six years. At the same time, the global economy is more leveraged than it was in 2007. Morgan Stanley calculates that gross global leverage has increased almost 50% from $105 trillion to $150 trillion since 2007. Debt to GDP ratios have risen in both emerging and developing markets with little growth to show in most places. Despite record levels of printing by central banks, 30 of the 46 central banks with inflation targets are below their targeted level. Money is being printed but the lack of velocity (how fast money passes from one holder to the next) has limited the impact of monetary policy to produce growth. With inflation below target in so many countries, there is room for more monetary stimulus before inflation takes off.
Expectations for Fed tightening have changed after the recent market decline, with most Fed watchers predicting a rate increase in late 2015 rather than early next year. If 2015 global growth is as tepid as forecasted, the Fed may have to hold off longer than expected. A negative shock might be cause for another round of QE. After this many rounds, it is not unreasonable to ask if a world with no QE can still exist. Alan Greenspan was recently interviewed on CNBC and acknowledged that the unwinding of the Fed’s liquidity operations is unprecedented in history – we are in uncharted waters. Mr. Greenspan added that “we really cannot tell how it will work out” and that the risk of the Fed losing control of rates is high.
With PE ratios at lofty levels and bond prices still near record highs, forward looking returns for both asset classes are mid-single digits – not enough to drive retirement portfolios and pension funds. More than ever, investors must think differently about equities and fixed income. To generate returns they will have to be more tactical with their portfolios and seek out different asset classes.
With kind regards,
PJ Grzywacz
President
CMG Capital Management Group, Inc.
1000 Continental Drive, Suite 570
King of Prussia, PA 19406
610-989-9090 (P) 610.989.9092 (F)
www.cmgwealth.com
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 the 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).