Dear clients, friends and family:
Following is the 2013 fourth quarter and year end 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 +2.59% for the fourth quarter and finished the year +3.80%, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned +2.34% for the fourth quarter and +3.95% for the year, net of fees. CMG HY was invested long high yield bonds for the entire quarter and remains in a long position to start 2014. High yield bonds performed well in 2013 with strong demand from institutional and retail investors driving prices higher. We believe 2014 should continue to be a solid year for high yield bond prices as growth and corporate profitability remain strong and defaults are expected to be limited. Supply will also be strong but will likely be dominated by refinancing activity. M&A activity will provide an additional tailwind. The most likely risk to high yields remains a change in the risk premium, the return of high yields in excess of U.S. Treasuries. As investor risk appetites adjust to reflect changing market conditions, changing macroeconomic data and Fed communiques, this risk premium will change for all credits, including high yields. Although high yield spreads have widened over the past year we would welcome a short-term correction. As the strategy is designed to move defensively to cash in the event of a price decline, we view a correction as an opportunity to move into high yields at lower prices and higher yields. However, if interest rates rise too quickly (i.e. the Fed loses control of policy or investors react too quickly to talk of a taper like in the summer of 2013), a gradual adjustment in risk premium could translate into a deeper correction.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +2.40% for the fourth quarter in the TCA (Trust Company of America) portfolio, +4.08% in the TDA portfolio and +3.69% in the ETF portfolio, net of fees. The Jefferson National Tax-Deferred Variable Annuity portfolio returned +3.96% for the fourth quarter, net of fees. The TCA, TDA, ETF and Jefferson National Variable Annuity portfolios returned +16.10%, +20.54%, +6.90% and +12.17% in 2013, net of fees, respectively.
The strategy began the quarter in diversified equity positions across all of the portfolios including allocations to emerging markets, energy and large cap growth stocks. The portfolios remained allocated to equities for most of the quarter as equity markets rallied into year end. However, in December several of the portfolios shifted to more defensive allocations, rotating from higher beta equity funds into fixed income positions, including municipal bond, intermediate-term bond and world bond allocations. 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 +7.67% for the fourth quarter and finished the year +22.43%, net of fees. Scotia Dynamic’s model remained in a bullish trend all quarter long and the strategy generated positive returns by overweighting allocations to electronics, transportation and small caps during October. Equity markets continued to trend higher in November and the strategy profited from allocations to transportation, basic materials and healthcare. Equity markets paused their rally in early December awaiting the Fed’s taper decision before vaulting higher into year end with strong momentum. The strategy capitalized on the strong trend higher to close out the year with allocations to biotechnology, electronics and basic materials in December.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned +7.04% for the fourth quarter and finished the year +16.14%, net of fees. Tactical Rotation was 100% invested for the month of October with a 50% allocation to the S&P 500 (SPY) and 50% allocation to the MSCI EAFE ETF (EFA). The strategy maintained this allocation through the end of the year, generating strong returns from the move higher in equities. The strategy was fully invested throughout the year with the exception of July (50% in cash) and maintained an equity bias throughout 2013, not once allocating to bonds. Tactical Rotation commenced 2014 with the same portfolio allocations as it ended with in 2013: 50% SPY and 50% EFA.
We are pleased with the strategy’s performance for the year since we added it to our platform of managed account strategies. After initially identifying the strategy in early 2013, we are pleased to see the research provider for the CMG Tactical Rotation Strategy, Sterling Global Strategies, earn a five star Morningstar rating.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) returned +6.39% for the fourth quarter and finished the year +5.32%, net of fees. Scotia had a strong quarter benefiting from a continued bullish trend in equities into year end. The long-term indicator for the strategy was bullish for the entire quarter and there were only two periods where the intermediate-term trend turned bearish (early October and mid-December). As a result, the strategy generated 16 long trades and only 3 short trades during the quarter, all 3 of which were overbought, mean reversion trades. Historically, mean reversion (i.e. overbought / oversold) trades have had a very high hit rate, and in contrast to the prior quarter where these trade set-ups were not effective, Scotia was profitable on all three overbought trades. Overall, the strategy hit rate (% of trades that are profitable) for the quarter was in line with the historical average for the strategy.
The System Research Treasury Bond Program (“SR”) returned -3.68% for the fourth quarter and finished the year -17.32%, net of fees. SR moved from long to short positions in Treasuries during the quarter as continued rumors of a Fed taper (ultimately resolved in mid-December) created volatility for 30 year interest rates. Interest rates started the quarter at 3.72% and finished the year at 3.91% despite hitting a low level of 3.60% in October. This volatility proved challenging for the strategy as a number of underlying indicator were in conflict. During periods when the model has conflicting indicators, the strategy can experience some whipsaw trading. At the start of the quarter, SR was long bonds, anticipating a decline in interest rates, and remained in that position for most of October with the exception of three days when the strategy moved to a short position. During November, SR traded actively in the first few weeks as the trend in interest rates reversed from October and rates headed higher once again. November proved to be a challenging month, with November 8 accounting for approximately half of the loss of the month. The strategy was long on that day while 30 year interest rates rose from 3.72% to 3.84% in a single day. By the end of the month, SR’s indicators were firmly pointing in the direction of rising rates and the strategy remained in a short position through the balance of the year.
Conclusion
Equity markets finished the year higher with U.S. equity markets outpacing global equities in aggregate. Fixed income markets were a rollercoaster for most of the year as talk of the taper changed from rumor in the summer to reality by the end of the year. Additionally, the year was clouded in uncertainty of who would succeed Chairman Bernanke and concluded with the appointment of Janet Yellen and a feeling of policy continuity amongst market observers. There are good reasons to be optimistic about the economy but we can’t help but sense a feeling of doubt amongst most Americans and investors. Indeed, after a strong Fed fueled market in 2013, where do we go from here?
The start of any new year brings new resolutions, new goals and planning. January, named by the Romans after the god Janus, is a new beginning and for investors it brings portfolio rebalancing (and the crosscurrents that come from those changes) as well as a feeling of optimism that this year will be better. Janus was the god of transitions and changes, a god that presided over not just a beginning but also an end and in visual form he is represented with two faces. Over the past year, the economy appeared to have two faces on many fronts. The housing market had a strong year, new construction reached its highest level since 2008, but if interest rates rise too quickly, the recovery may be extinguished before it really gets going. The unemployment rate has ticked down as non-farm payrolls have been steadily adding each month but the quality of jobs is not at a level to support most middle class families in today’s economy. While the Federal Reserve reports inflation is below their target, most consumers that buy food, energy, healthcare and education would tell you otherwise. The U.S. economy absorbed a large fiscal tightening (the Sequester) but grew at an annualized rate of 4.1% through the third quarter, yet still needs central bank stimulus. Two faces indeed.
In the recent Blumenthal Viewpoint (link to Steve’s outlook piece) we tried to help sort through the data and believe that while equity market momentum is strong, some warning signs are flashing that a transition may be coming. Historically, bull markets experience a correction (-10% decline) every 1.5 years on average and it has been over two years since the last correction in the summer of 2011 (one that almost turned into a bear market). Valuations, based on actual earnings (not a guess of what they may be), are high and historically, buying at these valuation levels does not portend bountiful returns. Furthermore, corporate profits are near record high levels and are unlikely to persist forever – there is only so much cost cutting they can do and wage inflation has been nonexistent over the past decade. Finally, there is the challenge of handicapping central bank policy, particularly if the U.S. Fed Chair Janet Yellen faces a real challenge. The U.S. economy is growing at a rate that would indicate we no longer need accommodation and unconventional stimulative policy. However, if those policies ended, can the economy stand on its own two legs? A bit of a catch 22 to say the least.
Although equity markets had a strong 2013, especially compared to fixed income, many investors remain dubious about the ability for markets to climb to even loftier levels. Indeed, bear markets, especially ones like 2007 and 2008, that combine massive deleveraging and a real estate crash into one cocktail, leave a nasty hangover and deep scars for investors. Unfortunately, by the time those feelings subside, it is often past the time to invest, in equities specifically. We believe 2014 will prove to be a more challenging year than 2013 as these economic contradictions sort themselves out. While we will do our best to provide clarity through our ongoing market commentary, from a portfolio construction perspective, we believe a balanced strategic asset allocation, one that includes traditional equity and fixed income investments combined with tactical strategies, is the best way to keep investors on plan. A prudent plan can help navigate markets as two faced as these.
Wishing you a healthy and prosperous 2014,
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).