July 20, 2020
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:45): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (13:42): Interview with CMG Mauldin Smart Core ETF Strategist, Geoff Eliason, Peak Capital Management
[00:17] Brian: Hello welcome to the quarterly conference call for the CMG Mauldin Smart Core Investment Strategy. My name is Brian Schreiner I’m Vice President of the private wealth group here at CMG. The Mauldin Smart Core Strategy is the culmination of over 30 years of economic thinking by one of the world’s leading economic writers. John Mauldin is Chief Economist and Core Portfolio Manager of the CMG Mauldin Smart Core Investment Strategy.
John believes that the end of the debt super cycle is one of the most profound trends that will impact your portfolio over the next several years and he believes that the period ahead will require you to think and invest differently to get through what he calls ‘the great reset.’
Instead of diversifying asset classes, Mauldin Smart Core diversifies among trading strategies. The strategy seeks growth and the ability to respond to a global economy on a daily basis, and they do so with a discipline investment process that seeks to minimize downside risk.
Think of Smart Core as four strategies in one managed account portfolio. The strategies utilize ETFs then enable them to trade across classic classes, countries, sectors, commodities and cash-like securities for safety.
Today’s call will be split into two segments. First we will hear from Co-Portfolio Manager John Mauldin on what he sees in today’s investment environment and the economic landscape.
In the second segment, we will hear from one of the portfolio’s four asset managers: Geoff Eliason – a Certified Financial Planner and member of the Investment Team at Peak Capital Management. Geoff will give us his take on the current market environment and provide insights into Peak Dynamic Risk Hedged U.S. Growth Portfolio, one of the individual trading strategies within Mauldin Smart Core.
As you are listening to the call today, if you have any questions or if you’d like to learn more about our investment management services, please contact us by phone or email. Our phone number is 800-891-9092 and our email address is firstname.lastname@example.org
Federal securities laws require us to make the following disclosure: Investing involves risk. Past performance is no guarantee 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 CMG Mauldin Smart Core) will be profitable, be suitable for your portfolio or individual situation, or prove successful. No portion of this call should be construed as an offer or solicitation for the purchase or sale of any security. There are additional important disclosures in our Form ADV, which is available on our website.
It’s always an honor to introduce my friend and colleague, John Mauldin. In addition to serving as Chief Economist at CMG, John is a noted financial expert, a New York Times best-selling author, a pioneering online commentator and the publisher of the weekly letter, Thoughts from the Frontline. Together with Mauldin Economics, John hosts the Strategic Investment Conference every year, which brings together some of the world’s most respected economists, analysts and investment managers. John has written many books – several have appeared on the New York Times best-seller list, including Endgame, Code Red, Just One Thing, and Bull’s Eye Investing. Welcome John! Thanks for joining us today!
[03:48] John: Good to be here.
[03:49] Brian: Mauldin Smart Core outperformed the Morning Star category for US fund tactical allocation year to date, through June 30th. Smart Core was down just 5.5% year to date through June 30th. While the US fund tactical allocation group was down 5.7% over the same period. Over the last 12 months Smart Core is down 2.2%, while the US fund tactical allocation group was down 1.6%. John are you pleased with how the strategy has been performing this year.
[04:25] John: Well yes I am. It was nice we’re put performing our peer group but what I’m happiest about is during the steepest market decline in history, we just didn’t participate very much in the decline. We had positioned and positioned again, and one of the key things I’m trying to do with this strategy is to make sure that we don’t participate in the you know gut wrenching volatility. I want to participate on the upside when there is rational reasons to so, but today this market is a very difficult one.
That being said the active and constrained design of the strategy allowed us to preserve capital far better than the traditional investment strategies. We reduce our equity exposure from about 60% to less than 20%. We increase our bond exposure to almost 70%, mostly US government bonds and most of that was 1 to 3 month Treasury Bills and this was across all the four different strategies that were invested in so they were all increasing their exposure to Treasuries and interestingly enough.
We increased our gold exposure significantly which has been a big move for us. And then through May and June and we posted a positive return. So I’m pleased with that. Understand, we’re not trying to outperform the market in terms of return. We’re trying to outperform the market in terms of risk adjusted return.
[05:52] Brian: At the end of your most recent Thoughts from the Frontline letter, you recommended reading Ben Hoisington and Lacy Hunt’s quarterly commentary where they explain why we should expect lower inflation for an extended period of time along with high unemployment and sub-par economic growth. Do you agree with their assessment?
[06:15] John: I do and for reasons in addition to what they were saying. The current recession is unlike anything we’ve seen. It’s been caused not by an economic event, not by subprime blowing up, or by market’s running ahead of themselves so much as simply we had a pandemic and we shut down you know 25-40% of the economy. We’ve got 30 million people unemployed or getting government assistance. This was an unprecedented move and it’s going to take I think longer to come back. We’ll see a bounce in the third quarter and it will be a recovery from the second quarter.
But it’s not going to get us back to where we were in 2019 and it’s going to take quite some time [to recover] because really business that have been adjusting to the realities on the ground and the realities on the ground right now. And so it has required a lot of businesses to adjusted in ways that they don’t have any experience doing. Now, they will. I’m very confident of that because that’s what happens in a free society – especially a free market society. But this is not going to be a very normal recovery in that sense and because of the factors we’re talking about with Lacy. I think it’s going to be even slower. So, let’s listen to what they said.
We have a record 93% of our national economies are now in a recession globally. We’re in a global recession – that’s worse than it’s ever been. The average since 1871 for prior global recession was 54% so this is just unprecedented. World trade volume is on track to fall 15% and we’ve gone from globalization on steroids to a complete fall-off-the-cliff. I saw stat this morning where air trade within freight was down something like 15%. Car sales are clearly in a slump, airlines as well, and so forth. This is just unprecedented.
We have record debt levels, we’re already at 26 trillion approaching 27 trillion, we’re gonna see what congress does this week, spend another trillion or so. By the first or second quarter next year we will see 30 trillion dollars worth of US debt – plus our local debt, huge unfunded liabilities, pensions and health care.
Record debt levels will continue to depresses growth and unless offset by technology, demography can do natural resources and it’s gonna continue to depress growth and there’s nothing new on the horizon that’s going to suggest that technology or demographics is going to change.
Weaker debt productivity will put further downward pressure on the velocity of money and until you get the velocity of money coming back it’s hard to see inflation coming back. Record cooperate debt levels will prevent capital spending from growing as much as we would like for a recovery. And the problem that I try to highlight is that the federal reserve and other central bank programs around the world are mis-allocating credit. They’re sustaining failed business and keeping zombie companies alive and they have twisted in our tomb raiders of the creative destruction in a way we have, instead, un-creative protectionism.
So we keep protecting companies because those companies have jobs and we want them to have their jobs. But it prevents new companies, new ideas and new processes from coming up and replacing them. And that ends up looking more like; Europe. It’s a psoriasis in the blood supply in the innovation stream. The bottom line is there is a substantial deflationary gap I believe that has opened up between potential and real GDP. Closing it is going to be difficult and time consuming which means persistent downward pressure on inflation and declining bond yields in the future.
I totally agree with Lacy and Van, but you know Lacy and I talk regularly and that’s not understood by most micro economists. They look at the money supply. They come at it from a monetary stand point. They see the Fed is defending their balance sheet and they say the money supply going up, that’s going to create inflation and if you look at the actual equations you got to increase the velocity of money at the same time you’re increasing that money supply in order to get that inflation and that’s just not happening.
So that’s kind of where I see the world going right now and I think it makes it a very, very dangerous time to be a market participant. It’s clear that some areas are becoming over-extended and I’m happy with the way we’re positioned right now.
[11:20] Brian: All that makes sense to me and I think from an investor’s stand point. We can see the writing on the wall and we understand some of these large forces that are at play and I know so many investors who are frozen because they understand that the outlook for economies is not good, at least in the near term and, maybe longer term as well. I just know so many investors that are sitting on the side lines and I think what I’ve learned through this in a market period like others is that we can’t allow our macro-economic views to impact our investment strategy in a detrimental way. We have to look to markets, meaning stocks and bonds and other assets to tell us how to invest, because if we look at these broader economic factors, we end up frozen. And how I’ve been talking with clients. Let’s look at the markets themselves. What are the markets telling us? And right now especially in terms of equities, markets are trending higher and it’s ok to ride that wave. Now, I agree with you – that doesn’t mean we need to get fully invested, but it’s ok to have an allocation to stocks. I think the key is to be flexible and have the ability to move to cash, which all the strategies and Smart Core have. Do you agree?
[12:52] John: I do which is why I’m comfortable with where we’re going on and I thank you for this opportunity to talk with our clients and appreciate the work you do in keeping them informed.
[13:04] Brian: Well good, thanks for your time again today. I know our clients always enjoy hearing from you and if anybody has any question for John just send it to me. I’m happy to have a conference call. Or if you’re considering an investment in Mauldin Smart Core let us know. We’re always available and willing to talk. John thanks again for your time today and look forward to talking to you gain next quarter.
[13:28] John: Ok. Next quarter we’ll be together Brian. Thank you. Bye Bye.
[13:33] Brian: Thanks.
Mauldin Smart Core Quarterly Conference Call Second Segment.
[13:42] Brian: Ok we’re back for the second Segment of the Mauldin Smart Core quarterly conference call for the second quarter of 2020. As a reminder if you have any questions or you want to learn more about your investment services, please contact us by phone or email. The phone number is (800)-891-9092. The email address is email@example.com. I’m very glad to be here with Geoff Eliason; Geoff is a Certified, Financial Planner and a member of the team at Peak Capital Management. Geoff oversees the Peak Dynamic Risk Hedged US Growth Portfolio which accounts of 25% of Mauldin Smart Core.
Geoff has over sixteen years of experience in the investment industry and played a key role on Peaks Investment team. He’s also responsible for the firm‘s Compliance Program and prior to joining Peak, Geoff was with Investco PowerShares where he worked with registered Investment Advisors and family offices. Geoff has both an undergraduate degree and a graduate degree from Indiana University and lives in Highlands Ranch Colorado with his family. Geoff thanks for joining us today.
[14:53] Geoff: Thanks Brian I really appreciate it.
[14:55] Brian: Geoff I wanted to get your thoughts on the investment environment and also your strategy. But before I do I want to ask you about your business and your operations and how they’ve been impacted by Coronavirus. Your Offices are in Colorado. Is your firm still working remotely or you guys back at the office and how are your people coping with the change?
[15:16] Geoff: We’re still working remotely with a couple of exceptions that are client service oriented and operations oriented. They are back into the office with significant restrictions as far as distancing, wearing masks etc.
As a firm we kicked-in our business continuity program very, very early – at the end of February and beginning of March right when COVID was introduced in the United States. And we have a very robust business continuity program and so we have been working very effectively as a team remotely and also serving the advisor committee and our strategic partners through both web apps, zoom meetings and conference call. So certainly we miss the comradery and meeting face to face but we haven’t missed a beat as both the team and specific to our service model.
Brian: Your description is a lot like what’s going on here at CMG too. In fact, we try to hold, on a weekly or bi-weekly basis, a casual Zoom lunch just to connect on a social level, which happens naturally at the office but when you are working from home sometimes you forget to socialize – or it’s just not convenient.
I wanted to ask you about the strategy- the name first of all – Peak Dynamic Risk Hedge US Growth Portfolio. You guys in the office certainly don’t call it that. Do you have a nickname for it?
[17:01] Geoff: Yeah we simply call it DRH Dynamic Risk Hedged US.
[17:08] Brian: Ok DRH. Maybe I’ll call it DRH on the call today.
[17:11] Geoff: Yeah.
[17:12] Brian: So DRH is a domestic equity strategy. Can you give our listeners a high level perspective on the overall investment objectives and the risk level of the strategy?
[17:24] Geoff: The strategy itself is obviously US-based. We use exchange traded funds to express our philosophy and it’s a rules based disciplined approach that evaluates risk on a daily basis. In fact we’ve actually had computer scientists and engineers write computer code that’s sends an output to our investment committee at 5:30am Mountain Time and our investment committee evaluates that we have a combination of both man and machine working together and we are able to take action as necessary prior to the market open based on the investment committees interpretation of the output that the computer scientists created using code overnight. It’s great system that combines both man and machine to evaluate and contemplate the risk of the overall portfolio and the risk every single holding in the portfolio contributes and then adapts potentially on a daily basis. In reality though it’s a managed-risk approach that under normal circumstances ends up trading every four to six weeks.
[18:50] Brian: Do you actually execute trades in the morning then?
[18:52] Geoff: Well we’re very fortunate with the level of expertise on our team. Every member has in a number of cases decades of experience in exchange traded funds management and trading and so we’re very careful with our trade execution on the specific ETFs that are traded. So the trades typically don’t happen on the open. It also depends on the specific ETFs that we’re trading and so it’s case by case but certainly not at the open and not close.
[19:33] Brian: I guess one follow-up in terms of risk. What’s the risk relative to an index like the S&P500? I know it varies from time to time as you allocations change but maybe over a longer period of time, say a few years. What would the volatility of DRH look like to the broad stock index like the S&P?
[19:58] Geoff: Great question. Not surprisingly it’s part of the math behind what attracted CMG and Mauldin Smart Core to DRH and Peach Capital. Our volatility is certainly less than the broad market over three and five years because of that manages risk approach or able to bring in the bands of volatility if you will so that the investor experience is certainly smoother but also when you think about financial planning the financial advisor- because the standard deviation and the volatility on DRH is less than the broad market. They are able to provide a greater sense of probability towards reaching the objectives, the investments and financial objectives of the end client.
Brian: Talk about your investment process. What does that look like? I know in some of your literature you have series of steps. Break that down. What does the day to day process look like in terms of evaluating the markets and implementing your strategy?
[21:16] Geoff: We start out with conviction – a core belief in exchange trading funds and as I mentioned earlier we have a team that collectively has over 50 years of experience and ETF due diligence and implementation and we believe in ETFs by and large because of very low cost. Recently they trade at no cost. The ETFs that we use have incredible liquidity allowing us to with surgical precision move in and out. The tax efficiency and then perhaps most importantly the transparency, so for us as portfolio managers it’s critical that we have a very clear understanding of what we own and that what we own is impacting the performance and the risk mitigation as we would expect and therefore the advisors that we serve can have a high degree of certainty that what we say the DRH is going to do, is in fact, what it actually does.
So we evaluate ETFs and this is a part of the benefit of working with CMG and Mauldin Smart Core and Peak Capital that should not be over looked. There are thousands and thousands of exchange traded funds out there and the level of due diligence that our team and CMG go to an evaluating ETFs through a very rigorous process is simply something that financial advisors and investors do not have time nor the history, the background, the expertise to do that. So we take a certain level of pride in the background and our ability to evaluate ETFs.
Secondly, we then look at what types of ETFs that we use. Academically we’ve believe in what’s called the five factors of factor-based investing. There are decades of academic research that support investing in the factors or diversification, risk mitigation and potential out performance over the broad market and those factors are: momentum, low volatility, quality, size (which translates to smaller companies) and value. And so we identify five different ETFs that reflect those five factors and of course our team does a tremendous amount of due diligence to identify best in class, ETFs to reflect those five factors.
Once we have identified ETFs to reflect those five factors, the next belief that we have is that how you wait the holdings inside a portfolio matters, and so we apply what’s called a risk budget to those five factors or the holdings. When we talk about a risk budget, we’re waiting the holdings based on their risk contribution to the overall portfolio. Why does that matter?
Well intuitively the more risk the holding is going to contribute the lower the weight the holding is going to receive and vice versa. Now that’s extremely relevant if you’re simply waiting companies statically and then rebalancing on a calendar whether it’s quarterly, semi-annually or annually and if you have a portfolio that’s not adaptive. What happened in March as the global markets were coming absolutely unglued, losing 30+ percent of their value. Did you simply say, ‘well just rebalance semi-annually or quarterly and hope for the best?’
Well, hope is not a strategy we believe that risk budgeting is an adaptive approach and so DRH in the midst of the March losses was adapting to the risk profile that each holding have and re-balancing according based on risk. The final component is we believe all portfolio should include is hedging or protection if you will so a portfolio without a hedge is kinda like driving car with no brake. Can you slow down by taking your foot off the accelerator? Or turning the ignition off? How effective is that?
Not very effective. You’d have to see a hair pin turn or a cliff far enough away so you can take your foot off the accelerator. And so we like to say that basing a single hedge or basing single type of protection is not the most ideal. DRH actually has three different layers of hedging incorporating and you can look at that as foot break and an emergency break within the car using the same analogy.
So our hedging is all based on correlations to those five factors and the first line of defense are US treasuries. US treasuries are typically a flight to quality or a flight to safety they have done extremely well. 2020 is no exception and so in late February/early March we began to ramp up our treasury exposure. At some point treasuries become less effective and so we go to the second line of defense which is actually an inverse position to the S&P500. And so, again, in March we began to feather in, in addition to the treasuries, an inverse position. And we have a third line of defense, for when there is a total dislocation in the market – and that’s using cash as a hedge.
Currently we have allocations to all three lines of defense: treasuries, the inverse position and cash. About 40-50% of our US portfolio is protected using these lines of defense.
And so, Brian, you can see that this is a very robust, repeatable process that evaluates risks and then adapts every single day.
Now the question becomes; what is the path going forward? As you evaluate a surge in COVID and also an election coming and obviously our relationship in the US to China most pressing, No one has a crystal ball – we don’t know, but what we do know is that we have a process that evaluates risk and that process as needed will continue to apply the risk budget and also implement these three different layers of protection or as the story unfolds the hedging will come off and we’ll rotate that back into equities.
So, a long winded answer but it needs to be said, Brian, because we are in challenging times where the most common word that I hear from advisors and their clients is ‘uncertainty.’ Advisors need a disciplined rules-based approach that has proven to do exactly what it has said to do and will continue going forward as prescribed.
[30:00] Brian: Well I think that makes a ton of sense. I think it’s very important especially now. To have something that’s rules based because if we look at the strongest forces in the economy. I was just talking with John Mauldin in the first segment of the call and I mentioned that it’s very easy to become frozen, you know to sit on your hands, and say ‘gosh the outlook look so bleak, I just can’t imagine allocating my portfolio right now or having long positions [in stocks].’ But I said to John that it’s important that we let the processes, let the discipline that’s built into these processes handle the markets and we can handle as an investor and the allocation across strategies. Let the investments strategies – the managers like you and others – make the day-to-day investments decisions.
I wanted to ask you about the allocations. When you de-risk your portfolio and you remove some of the hedges. What’s under the hood in terms of the investments processes? Are they trend following-indicators? Or how would you describe (you know, without giving away your trade secrets) what kind of technical indicators are you using?
[31:17] Geoff: For Peak Capital we manage entirely based on the risk of the overall portfolio and the contribution that each holding contributes based on risk. To communicate risk we use standard deviation. Both standard deviation of the overall portfolio and then the standard deviation of each individual holding. And within standard deviation that is based on a 60-day look back of standard deviation that is actually exponentially weighted. So the risk most recently is going to have a heavier weight than the risk or standard deviation of the holding or the overall portfolio going back 60 days.
To contemplate standard deviation we simply need daily prices for each individual holding. So that gives you sense for that review portfolio management based on risk. We look at it as ‘control what you can’ and that is risk. And when you control risk, performance (both upside capture and downside capture) will be a product of that risk management. So we describe ourselves as managers of risk.
[32:38] Brian: Geoff, I just want to say on behalf of our client thanks for all your work we appreciate you looking after the portfolios – especially during the uncertain times we had in February, March. Is there anything else you want to add today?
[32:54] Geoff: I just want to emphasize some of what you said, Brian. It’s a challenging time for both investors and financial professionals alike and the solution, to your point, is not sitting on your hands. Financial professional are paid to have a process, a strategy and so I’m grateful that we can be a part of the CMG family and Mauldin Smart Core – giving financials professionals and the clients they serve a discipline process. Whether that was a process in 2019 that captured some of the market returns or a response that adapted to this environment, whether it was March of 2020 or the path going forward for the second half of the year.
So, I’m very grateful to Steve and yourself, Brian, and to John Mauldin to be a part of the team and for giving investors a thoughtful solution during a very, very difficult time. So, from the team at Peak, much gratitude to you, Brian, Steve and John.
[34:15] Brian: Thank you Geoff. I think it all goes back to our clients, at the end of the day. They are the ones that keep the light on! Thanks for listing to our conference call today and please be sure to listen again next quarter when we will again host John Mauldin and Michael Hee, Managing Director of Investment Research, here at CMG. Thanks again for listening today and have a great day and a great week.
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Investing involves risk. Past performance is no guarantee 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.
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