July 20, 2021
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:40): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (18:22): Interview with Clint Pekrul, Chief Equity Strategist and Head of Research, Peak Capital Management
Brian Schreiner: Hello. Welcome to second quarter conference call for the CMG Mauldin Smart Core Investment Strategy. My name is Brian Schreiner. I am Vice President of the Private Wealth Group here at CMG.
The Mauldin Smart Core investment strategy is the culmination of over 30 years of economic thinking by one of the world’s leading economic writers.
John Mauldin is the Chief Economist and Co-Portfolio Manager of the CMG Mauldin Smart Core investment strategy. John believes that the end of the debt supercycle is one of the most profound trends that will impact your portfolio over the next several years – and he believes the period ahead will require you to think and invest differently to get through the “Great Reset.”
Instead of diversifying asset classes, Mauldin Smart Core diversifies among trading strategies. The strategies seek growth, have the ability to respond to the global economy on a daily basis and do so with a disciplined investment processes that seeks to minimize downside risk.
Think of Smart Core as four strategies in one managed account portfolio. The strategists utilize ETFs that enable them to trade across asset 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 economic landscape.
In the second segment, we will hear from one of the portfolio’s four asset managers: Clint Pekrul is a Certified Financial Analyst, Chief Equity Strategist and Head of Research at Peak Capital Management. Clint 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 email@example.com
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, Thanks for joining us today!…
John Mauldin: It’s always good to be with you Brian.
Brian Schreiner: Mauldin Smart Core is an opportunistic of multi-asset, multi-manager investment strategy that combines several investment strategies into one portfolio. The objective is to seek global growth opportunities while maintaining a level of protection in down markets.
The Morningstar category for US Fund Tactical Allocation was up 7.3% year to date through June 30th, while Mauldin Smart Core managed account strategy was up 5.7% over the same period. Over the last 12 months, the Morningstar category was up 23.9%, while Malden Smart Core was up 17.7%.
John, what are your thoughts on the performance of the strategy so far this year?
John Mauldin: Well, I’m very happy with it, especially over the last 12 months. What you have to realize is that comparing it to the Morningstar Category, I mean, they choose what the comparison is. And I think it’s an imperfect comparison because the rest of that category is taking far more risk in my opinion. Well, we all know what my opinions are worth, but in my opinion, they’re taking a lot more risk and volatility than we are. So in a bull market, which we’ve been in, they’re going to be out preforming us, because the volatility is to the upside, which everybody likes volatility to the upside. It’s the volatility to the downside that we don’t like. And frankly, with Smart Core, I am more focused on the volatility to the downside. We are at a place where evaluations are stretched. The breadth in the market is beginning to diminish significantly. We’re seeing rotations.
It is in my view, time to be a little bit more cautious. And it’s not that our managers today are all that cautious. I mean, we have a significant exposure to the markets. Obviously you don’t produce 17% without having that exposure, but are triggers to reduce that exposure probably happen a lot more quickly than it would be for some of the others in the tactical group that Morningstar has just randomly put us in. So I’m not certain that it’s a good comparison, but I guess you have to do comparisons, but I’m personally quite pleased with the performance, it’s doing what I wanted to do.
Brian Schreiner: Agreed. I think anytime you have a risk managed strategy, there are some opportunity costs and we’re going to generate and participate. We’re going to generate returns and participate as long as the markets are strong. But the fact is, we’re also going to have kind of one foot out the door, or at least look for the exit when market volatility comes back. And when we enter a bear market phase and so that’s just the nature of a risk managed strategy. John, I wanted to ask you about your recent thoughts from the frontline letter. You raised a great concept. I think a really important one. TINA and TINA is an acronym T I N A, for there is no alternative. How does the concept of TINA apply to investing? And why do you think it’s especially relevant for investors today?
John Mauldin: Well, TINA, in this context is talking that there’s no alternative, but to be in the stock market. And typically they’re talking about 60, 40 portfolios or 80 20 portfolios. They’re talking about what the average investment advisor out there sells. This is Wall Street talking, and they want to sell you stocks. They want it to sell you ETFs. They want to sell you market exposure risk because it’s the easy thing for them to do. It’s the easy button and my argument that there’s always an alternative.
There are literally scores and scores of alternative investments that don’t depend upon a rising market to make their returns. I guess the whole concept of there is no alternative is a lazy man’s way of saying, well, you have to be in the stock market because there’s nothing else you can do. And my argument is, there’s lots of other things you could do.
There’s lots of alternatives. And I think the risk that you have of saying, well, I’ve got to be all in on the stock market. And I’ve just got to be blinded and not worry about the volatility because they’re telling you no matter how much it drops, it’s going to come back and I will agree. But if it takes 10 years, 15 years, 20 years to come back, how much time do you have? I mean, we have, over the last hundred years, we have a 20 year time periods where the market did not recover for more than 20 years.
From 1966 to 1982, it took the market 16 years to get back. In real terms after inflation, it was 26 years. It was 1992. That’s what happens in full blown bear markets. If you look from 2000 to 2010, you were flat. Now since then we’ve had a roaring bull market it’s going up. But your average from 2000 to 2021, roughly at the end of the last quarter, last year, you were up 6.76%. You were up under 7% for the whole 20 years.
So what the TINA people are saying well, so you have always be in the market. You were flat for 10 years, you had a rowing bull market for 10 years under that strategy. And you took all of that risk, which was a lot of risk in 2001 and 2009, 2008, rather for 7% compound. And I can find you strategies and portfolio designs that will give you that same 7% for a significantly reduced amount of volatility compared to what we’ve seen in the past, in a market only strategy.
Brian Schreiner: There’s another concept that I think is related. Throughout the 70s, 80s and 90s and most of the 2000s, really, stocks and bonds were by far the most predominant way that investors allocated their capital. This is starting to change and has been in recent years. And so if you’re going to take a TINA approach, I think that’s ignoring the fact that other markets are emerging. You know, there are private markets now with technology, we’re going to be able to access and we are accessing and we continue to have easier access to private markets through new online platforms. We have digital signatures now that make investing easier in private markets. There’s cryptocurrencies, another way to invest. And I think these are some of the areas that you’re talking about. And as these types of investments in ways of investing become easier, I think regulation around these investments will start to become better too, for smaller investors.
And maybe a little bit more out there on the horizon: tokenization. Securities may become tokenized, which would allow them to be more easily traded in private markets. So we shouldn’t just make the assumption that stocks and bonds are the only way we’re going to invest for the next 10 or 20 years. I think that’s pretty short-sighted.
I think it’s very likely that stocks and bonds will continue to be an important part of a portfolio, but the point is there’s a growing number of ways to access different markets. And especially in this environment, we want to be creative in doing that. And that’s what we’re doing now with clients, is building portfolios more creatively.
Do you want to talk a little bit about what you’re doing with Team Mauldin?
John Mauldin: Well, we’ve put together a whole structure, especially around private credit, if you’re an accredited investor, but there’s other ways and funds that we can access if you’re not, that are different than bonds.
In my portfolio, I don’t have any bonds. I have cash flow investments that are private credit. I have funds that are trading funds. I talk about diversifying trading strategies. I have funds that are trading funds that the return streams look like the bond funds that we used to get back in the nineties and the two thousands, back when bonds actually gave you some interest.
Today, they’re giving you no interest or your bond fund is as much more of a risk to your portfolio, than the stock market fund. I mean, when you’re in a bond fund, you’re making the bet that inflation is not going to increase. And I think that at least in the short term, is probably not good bit.
Short term, I’m talking about 12 months. I mean, longer term. I would not be surprised to see the disinflationary world that we’ve been living in, come back for a while, but you’re also making the bet that the government’s not going to ram through, you know, another $4 or $5 trillion worth of excess spending, that we’re going to have to figure out how they’re going to pay for. They’re not going to be able to raise taxes significantly, which will create a true market issue.
There’s a lot of things you’re betting on when you say, well, I want to own bonds. I want to own stocks. I look out in the market and I’m going, there’s a lot of potential risk. Now as an investor and a hesitant American, I hope those potential risks don’t happen. I hope we don’t spend unfunded $5 trillion. And I hope we don’t see taxes go up by $3 or $4 trillion.
So honestly, looking at this Congress, and this market and the deep divide in this country, I don’t think we can say that’s a non-trivial risk. I think it’s a very real risk that those could happen, and those are going to be market moving events. That’s why it’s important to have trading strategies that can respond relatively quickly to any current events. And I would just say to individual investors that it’s a problem if you think you can do that. I mean, if you got a system that you check every day, what’s you’re moving average? I mean, whatever your system is, that’s fine. But most of us get emotionally tied up into it.
The managers in the Smart Core fund, they have their systems. They’re constantly refining in generally minor ways now, but they’re still refining their programs, but they stick to them religiously.
I don’t want an emotional involvement in the market because when you’re down 20% to 30% it’s probably not the best time to sell. I mean, you’ve already taken the bulk of the pain. And bonds aren’t going to be there to help you to balance your portfolio. Not at the low rates we’re having today. So the whole concept of a 60/40 portfolio or the traditional portfolio design is just flawed. There is an alternative and Mauldin Smart Core is part of it, but Team Mauldin has a whole menu. We called it the “Mauldin Kitchen.” They have a whole menu of alternative investments.
Brian Schreiner: And I invite any investors who are listening. If you’d like to learn more about the Mauldin Kitchen, contact us, we’ll have one of our advisors talk with you. And if you’d like, we can build a proposal for a portion of your investments and make some recommendations on how we might adjust your portfolio, given the market environment that we have today.
John, I think you’re headed to Washington DC for a working vacation, you might call it?
John Mauldin: It is a working vacation. I’ll be doing several meetings. And then on my way from DC, I go up to Maine for my annual fishing trip, with a bunch of economists. We try not to let the fish get in the way of conversation and enjoying ourselves with the good food and maybe a little wine.
And then from there, I’m be going to a private conference in Colorado, which will be a pleasant diversion. I’ll have to sing for my supper, but it’ll be a pleasant place to do it in. And then I’ll be back. I don’t know if my travel schedule will ever get back to what it was even three years ago. I think in the days of Zoom and until we’re ready to start having large conferences again, and people are willing to pay speakers to come back. I think that large travel schedule is over. I enjoyed it at one time, but I enjoy being here in paradise and it feels good to be able to sit and get up every day and get into a routine. And I’m quite happy being in Puerto Rico.
Brian Schreiner: Well, that sounds good. I know you’ll have no shortage of material, you know, at camp co-talk and the conference in Colorado. So we’ll be looking forward to reading your letters and also looking forward to talking with you in a few months again, and thank you for joining today. Appreciate it, John.
John Mauldin: You’re very welcome Brian, always good to talk with you.
Brian Schreiner: Have a great day.
John Mauldin: Okay. Thank you, sir.
Brian Schreiner: Ok, we’re back for the second segment of the Mauldin Smart Core Quarterly Conference call for the second quarter of 2021. As a reminder, if you have any questions or you would like to learn more about our investment management services, please contact us by phone at 800-891-9092 or by email at firstname.lastname@example.org.
I am very glad to be here with Clint Pekrul, Chief Equity Strategist and Head of Research at Peak Capital Management. Clint oversees the Peak Dynamic Risk Hedged U.S. Growth Portfolio which accounts for 25% of Mauldin Smart Core.
Clint Pekrul: Well, thank you. Glad to be here.
Brian Schreiner: First. I wanted to, if you would just give us an overview of your investment philosophy at Peak and then with regard to the dynamic risk hedge strategy.
Clint Pekrul: Sure. At a very high level, our investment philosophy is fairly straightforward. Our approach is that managing risk can help deliver attractive long-term compound return by staying engaged in the markets while mitigating some of the pitfalls along the way. Investors can be in better positioned to meet their long-term financial goals. And the way that we do that in terms of an investment process, is that we allocate portfolios based on perceived risks. Specifically, we utilize a process known as risk budgeting, so by estimating in return volatility for each holding in our portfolio, which includes various asset classes and equity factors, Treasury bonds, for example. As we look at those holdings and estimate return volatility for each as well as the return correlations across those holdings, we can quantify sources of portfolio risk and work to ensure that those sources of risk are evenly allocated across the portfolio.
So very high level, that’s just an industry term called risk budgeting. So when markets become dislocated, kind of like what you see periodically just last year during COVID, our portfolios are designed to become quite adapted. And you’ll see that in terms of our asset allocation, how we mix our portfolio in terms of equity exposure and fixed income exposure. We have the flexibility to change the mix between various asset classes in a very dynamic way. So moreover, if returns become highly correlated across asset classes, like we see typically during times of market stress, our portfolios can utilize various hedges, such as cash or inverse positions to broad market indexes.
So our goal is ultimately to provide a smoother ride for the investors over time. We want to know where volatility is coming from, what that return on certainly might look like going forward and how returns are correlated across asset classes. So we evaluate that on a daily basis and our algorithms dictate to us where the optimal asset allocation should be. So if we can mitigate portfolio risk during times of market stress, our clients over time are more likely to remain invested again over the long-term. And that’s where you get the clients meet their financial goals. It’s more about investor psychology, more than anything else, and keeping them calm during periods of stress and just reemphasizing that long-term, you know, compounding is your friend and that’s how you get to your ultimate goal.
Brian Schreiner: That makes sense. During the periods of market stress or maybe a bear market, are there any constraints on how much of the portfolio can be in cash or in defensive positions. I mean can it be fully cash?
Clint Pekrul: That’s a good question. We get that question quite often. Our portfolios are binary in the sense that we go all into cash are all out of cash. We’re always engaged to some degree in the equity markets. The exposure is really dictated by how volatile or uncertain those returns can be. So the restrictions in the portfolio are simply risk contribution to the total asset mix, and we have that budgeted. So there’s a certain amount of risks that equities can pose to the portfolio on a percentage basis. And if that exceeds the risk budget, we do a couple of things.
We either rotate into a non-correlated or a sub-correlated asset class such as Treasurys that typically works. It certainly worked in March of last year, February, March of last year. If there’s a negative correlation between stocks and bonds, that could be a risk mitigation strategy. In other words, we can trim some of that equity exposure and reallocate risk into a non-correlated security, such as Treasurys.
If that correlation is positive, which can happen as well. So in other words, equities are falling. Equity volatility is very high or both longer-term averages and Treasurys are falling off the cliff as well. So in other words, maybe interest rates are rising. So combining stocks and bonds doesn’t necessarily do anything for you.
During periods like that, we have additional mechanisms in the portfolio where we can feather in cash. We can step into cash to mitigate some of that excess risk, or we can allocate to a negatively correlated position such as an inverse exposure to a broad equity index. And those are very marginal trades kind of step in trades. I would describe him that way. We’re never going to be in a position where we’re completely disengaged from the equity market. You’ll always have volatility in your portfolio that is sourced by the volatility that you see in the US equity markets, such as the S&P 500. You can use that as a proxy.
So typically the higher the volatility, the higher the risk contribution that exceeds our budgeted allocation. And that’s when we start to rotate the portfolio. But more often than not, our portfolio is going to look approximately like a 75/25, you know, equity/fixed income allocation on average overtime. But again, we do have the ability to make those tactical shifts as needed.
Brian Schreiner: I want to try to get a little bit of insight into your day-to-day processes. You know, how you actually trade. How often does this strategy trade? If we’re looking over your shoulder and at your trading screens as you’re trading, what do we see? What are the factors you’re looking at? And maybe give us an example, or, you know, what a typical trade might look like for you. If you want to use a current one with regard to the positions you hold today, that’s fine. Give us some insight into, you know, what we might see if we’re looking over your shoulder at your trade screens. When you’re trading on a daily basis or is it less frequently than that? What does it look like in your day-to-day work?
Clint Pekrul: So from a trading standpoint, we don’t trade on a fixed schedule. In other words, we’re not going in at the end of every quarter or at the end of every month and automatically trade. Our systems are designed to measure return volatility and correlations every day. Now that’s just a signal that tells us, okay, here’s where we currently are. And here’s where our model says we should be. And if that deviates too much, in other words, if we start to drift away from our targets by a meaningful amount, that’s what pay us when we should trade.
So every morning we run an algorithm, it is completely quantitatively driven, algorithmic driven, and that gives us a guide so to speak, that says, okay, well here are your sources of risk in the portfolio. Here are the estimates of volatility for each holding. Here are the correlations as for returns.
What does that mean for total portfolio volatility, and how has that volatility broken out in terms of risk contribution across the portfolio?
We measure that risk contribution based on prevailing conditions, whether that’s, you know, a normal quote unquote “normal market”, or if it’s a market that’s going haywire like a year ago, we can see where the portfolio is currently positioned and how far away that is from the current target. So as conditions change over time the amount of call it dispersion between where we currently are and where we actually should be dictates when we actually go in and trade. So we definitely are an actively daily trading strategy.
We trade based off when markets kind of dictate that we need to trade, and that’s not necessarily a preset schedule. So you could have years like 2019, for example, where volatility was very contained, very subdued. You didn’t see much risk in the equity markets for the entire year. Our portfolio traded three times.
If you fast forward and go to 2020, you know, particularly February, March, April, during that timeframe, our algorithm starts to give us more signals, more buy and sell signals, as conditions for volatility and correlation standpoint, start to change materially.
So that might be a scenario where you go for months, maybe quarters, where we don’t have to move the portfolio at all. And the reason we don’t is because the risk contributions are in line with the risk budget, but then there are periods where that changes dramatically. And then that’s where we have to share the mix between stocks and bonds or, if correlations are sufficiently high across all asset classes, we can start to incorporate cash and various hedges at that point in time, but it’s not a preset schedule. It really is dictated on what the market’s telling us.
Brian Schreiner: How has the strategy performed so far this year?
Clink Pekrul: Our US Growth Portfolio, for our composite, net of fees, we’re up about 6%. That’s through June. You know, we’ve had a pretty solid July as well, but up about 6%, which is slightly above the benchmark. We’ve been pleased with recent performance, particularly over the last quarter. We did see some headwinds earlier in the year, particularly when Treasury, yield started to rise. We had used Treasurys as a hedge against volatility in 2020. We gradually rotated out of that as conditions change. We materially reduce that Treasury exposure, but we did have some duration risk heading into that pop in interest rates. So we did have some under-performance in January-February, but if you look at our composite versus a 50/70 equity peer group in Morningstar, we are above median for the most recent quarter.
So we’ve been pleased, not only in terms of absolute returns, but risk adjusted performance as well. What we try to do over time is deliver a sharp ratio, you know, as close to 1.0 as we can and above 1.0 even better, but we want to make sure the return we’re providing commensurate with the risks that you’re taking. So we have seen a pretty good quarter here recently in Q2, that was coming off a little bit of a headwind scenario in Q1. So overall up 6% for the year.
Brian Schreiner: What do you use for the benchmark for the strategy?
Clint Pekrul: Internally for our reporting purposes, we use the S&P Target Risk Growth Index. It’s one of the indexes calculated by Standard and Poor’s. It’s an industry standard benchmark for measuring portfolio performance against stock bond portfolios.
That index is typically about a 60/40ish allocation between stocks and bonds. So over time, that’s a reasonable proxy for the strategy. We also look at ourselves versus peer groups internally, whether it’s the Morningstar Tactical peer group or the 50/70 equity allocation peer group that I mentioned before. So that over time is a good benchmark proxy, you know, to compare our performance to.
Brian Schreiner: How is the strategy positioned today?
Clint Pekrul: So in the US Growth Model, we’re currently at a weight of about 75% equity and that’s split across the equity factors and the equity factors we use are: size, momentum, value, low-volatility and high-quality. So instead of being cap-weighted, we actually allocate risks across those five factors for equity exposure.
And currently we have about a 23% weight to long-term Treasurys and the remaining 2% is in cash. The recent move in interest rates has been an interesting one and somewhat counterintuitive, given the inflation data that we’ve seen. But nevertheless, the 10 year yield is now back to roughly the same level it was back in February. So if we indeed have become perhaps overextended on the reopening trade evaluations come in to more normal levels in terms of price earnings, multiples, for example. I would expect downward pressure on yields would continue and allow our U.S. Treasury position to effectively hedge any potential equity volatility that you might see.
Interestingly, the US Treasury position has been an effective hedge in the past, and that’s kind of why we use US Treasurys as a hedge. So for example, if you go back to 08, you go back to 2011 during the Eurozone crisis, or even during COVID, the onset of COVID, in each one of those scenarios, you know, you’ve had an explosion of equity volatility, but you’ve had Treasurys, give you that negatively correlated return on the opposite side.
So basically you get that diversification effect with Treasurys and it worked during the most recent drawdown last year. While it’s no guarantee that that’s going to work in the future, when the equity markets become dislocated, that US Treasury position, for what it’s worth historically has provided that hedge that we’ve always looked for.
Conversely, on the flip side if stocks gain momentum in the back half of the year, maybe we are overreacting to the Delta Variant of COVID, perhaps equities have much more room to go because yields are so low and there really are a lot of alternatives to equities. If that scenario plays out, we’ll have sufficient equity exposure in the portfolio, which I think could offset any potential losses that you see on the Treasury position, if you get an uptake and rates.
But again, it’s all about balancing your sources of risk across less-correlated asset classes, and then being able to modify your allocation as those volatility and correlations change over time. So we’re prepared to kind of go in whichever direction the markets are going to take us. So just know that over time you will always be engaged in the equity markets to varying degrees. We try to mitigate that volatility through our risk budgeting process. And at the end of the day, we’re trying to navigate uncertainty the best that we can.
Brian Schreiner: Well, I know many of our investors are concerned about risks in the market, so it’s good to hear your focus on risk management.
Clint thanks for being with us today and thanks to all of you for listening to our conference call. Please be sure to listen again next quarter, when we will, again, host John Mauldin and one of the asset managers from Mauldin Smart Core. Clint thanks for being here.
Clint Pekrul: I appreciate the time.
Brian Schreiner: Likewise. And thanks to everyone again for listening. Have a great day.
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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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