Dear clients, friends and family:
Following is the 2014 fourth quarter and year end net performance 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 -1.69% for the fourth quarter and finished the year -0.23%, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned -2.17% for the fourth quarter and -0.43% for the year, net of fees. The strategy began the quarter in cash before investing long in high yield bonds in early October. The quarter was particularly volatile for high yields and the strategy was whipsawed several times, moving from a long position to cash position and back to long again. This was one of the highest frequencies of trades in a quarter we have ever seen for the strategy.
Equity market declines in October and the continued slide in oil prices increased volatility in high yields during the quarter causing the strategy to trade more frequently than normal. As oil prices dropped in December, the Barclays US Corporate High Yield Bond Index declined more than 2% as a large percentage of new issuance in high yield has been in the energy sector as a result of the shale oil and gas boom. Energy companies account for approximately 15% of US high yield issuance, many of them leveraged and therefore at greater risk to default if energy prices stay at the recently low levels or decline further. The next couple of quarters in particular could prove to be challenging for long only investors in high yield, especially those reaching for returns in a low yield environment. There is debate as to the extent of contagion that would result if a wave of energy related defaults were to occur. What is clear is that the growth of the high yield market over the past four years has been parabolic, having increased by $1 trillion. It took almost forty years to grow the market to $1 trillion and in four years it has doubled. Not all of those companies are prepared for tighter liquidity or a shock to their operating budget from oil or other macroeconomic factors. As tactical managers, we are prepared to actively manage that risk and await an opportunity to re-enter the market at lower bond prices and higher yields.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +3.32% for the fourth quarter in the TCA (Trust Company of America) portfolio, +3.06% in the TDA portfolio and +2.66% in the ETF portfolio, net of fees. The Jefferson National Tax-Deferred Variable Annuity portfolio returned +2.64% for the fourth quarter, net of fees. The TCA, TDA, ETF and Jefferson National Variable Annuity portfolios returned +4.04%, +6.44%, +5.81% and +9.09% in 2014, net of fees, respectively. The strategy began the fourth quarter with a large allocation to defensive positions including fixed income, utilities and healthcare. Those allocations sustained performance during the equity market decline in October. The strategy reallocated out of defensive positions and into more diversified equity positions in November and December helping the strategy capture upside as markets rallied to new highs. The strategy was well diversified across US equities (small, mid and large cap exposure), real estate and modest allocations to international equities. The strategy has remained in a moderate exposure position to start 2015. For a more detailed summary of current allocations for each specific portfolio and allocation changes 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 -2.96% for the fourth quarter and finished the year -4.82%, net of fees. The strategy struggled in October as equity markets sold off before staging a dramatic rally to new highs by month end. The majority of the loss for the quarter came during the month of October when the strategy lost -2.29%. The equity trend model for the strategy shifted from bullish to bearish mid-month forcing the strategy’s risk controls to activate, namely a 25% cap on allocations to any one sector. As a result, the strategy was not able to capitalize on the market rally and recover the loss that was incurred during the first half of the month from allocations to healthcare, electronics and biotechnology. In November, the strategy declined modestly with losses attributed to allocations in electronics and biotechnology. The strategy was allocated to transportation, healthcare, electronics and biotechnology in December, finishing the year with flat performance for the month.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned +4.12% for the fourth quarter and finished the year +4.68%, net of fees. Tactical Rotation began the quarter positioned 50% to equities (SPY) and 50% to bonds (BND). Equity markets corrected sharply in October before v-bottoming and rallying to new highs at year end. The strategy rotated out of bonds and into REITS and was allocated 50% to REITS (VNQ) and 50% to equities (SPY) for both November and December. The strategy continues to be allocated to assets with strong momentum and avoid poor performing asset classes. REITS and domestic equities were the top performing asset classes during the year, gaining +30.29% (VNQ) and +13.54% (SPY). The strategy was allocated to both for the vast majority of the year while avoiding the two worst performing asset classes, international equities and commodities, for most of the year (the strategy allocated 50% to international equities in January and 50% to commodities in May). International equities declined -5.04% (EFA) and commodities fell precipitously in the fourth quarter leading to a 2014 loss of -28.18% (DBC). The strategy is again positioned 50% to equities (SPY) and 50% to REITS (VNQ) for the month of January.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) returned -5.21% for the fourth quarter and finished the year -9.69%, net of fees. For the quarter, Scotia generated 17 total trades, 9 of which were profitable and 8 that were not. Furthermore, Scotia generated 11 long trades and 6 short trades (the majority of which were overbought mean reversion trades). The long-term indicator for the strategy was bullish for the entire quarter with the exception of mid-October, when the long-term indicator switched to bearish for the first time in two years. Scotia began October in a long-term bullish / intermediate-term bearish trend environment. When the strategy’s long- and intermediate-term trends are in disagreement, the strategy typically remains in cash (the strategy’s mean reversion overlay may still trigger a trade independent of the core trend-following model). As the long-term indicator switched to a bearish reading, the strategy took a core model short trade. As equity markets bottomed and rallied into the end of October, this short trade during that time was the primary driver of the negative return for the quarter.
Conclusion
Although equity markets reached all-time highs by the end of 2014, the volatility and rapid decline in early October signaled that the period of smooth sailing for equities may be coming to an end. We are heading into a more difficult period for global markets. While equities moved higher to finish the year, commodities and bonds were flashing warning signs on slower growth and the higher risk of deflation. While collapsing oil prices garnered most of the headlines, the entire commodity complex is warning that we are at the end of the commodity super cycle. Some of the returns for 2014 are remarkable, especially when taking into consideration that most of the decline occurred in the second half of the year. Crude oil prices declined 45%, gasoline prices fell 48%, natural gas dropped 31% and copper fell 17%. While positive for consumers in the short term, the rapid decline will ultimately fuel the future spike in prices as companies cut investment, shut down rigs and adapt to a world of slower growth and oversupply. The catch is that when demand returns, investment and production will likely lag, thereby causing the next price spike. That is the paradox, the blessing and curse of lower commodity prices.
While the media chalked up oil’s collapse to supply/demand and/or the Saudi’s desire to break U.S. shale producers (or to help us break the Russians – it all depends on who you read), additional economic data points to slower growth and deflationary risks. While Europe’s deflationary woes are well known, Asia’s economic indicators continue to flash red. Chinese growth has slowed to its lowest rate in decades against the backdrop of a massive property bubble. Japan continues to fight its decade long battle against deflation with mixed results, on the one hand buying stocks to inflate asset prices and awaken “animal spirits” while on the other hand raising its consumption tax in what can only be described as a bad case of déjà vu (they did it in 1997 with the same poor result for the economy). South Korean growth has slowed amid a 9% drop in construction investment in the fourth quarter. All of these countries are enacting some form of stimulative policy from cutting interest rates to full blown QE in an effort to bolster growth.
As the Federal Reserve ponders whether to increase interest rates, it must consider whether it has lost its best opportunity. Trends in US economic data (growth, employment) support a rate hike, but global data, including growth estimates continue to be revised down. A stronger dollar is already negatively impacting global liquidity. A rate hike will add fuel to the dollar rally and cause more pain for emerging markets many of which are already suffering from the collapse in commodity prices. Fed Chair Yellen must be weighing this risk against the risk of not having the policy tools (you can’t cut rates if they are already at zero) to face the next recession or worse yet, the next global crisis. The drop in bond yields indicates that the market believes a rate hike is less likely than just a couple months ago and that we are likely to see slower growth. The Fed is now charged with making a decision on rates in the face of those changing expectations.
We are now almost six years removed from the depths of the financial crisis and despite U.S. equities near all-time highs, there is a continued sense of fragility across the global economy, an uneasy feeling that we are one or two shocks away from a recession or something worse. It has taken extraordinary measures (interest rates at record lows, QE, lower commodity prices) globally to achieve the current level of growth. What happens when conditions are not so accommodating? It is the question Fed Chair Yellen must be asking as she approaches the first major decision of her term. As we turn the clock on 2014 into 2015, we must prepare for a different equity market: a bull market that while likely to move higher this year will nonetheless be more volatile and challenging to navigate than last several years.
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).