October 18, 2019
Senior Vice President, Private Wealth Group, CMG
- Segment 1 (03:50): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG
- Segment 2 (11:43, audio improves at 13:20): Interview with CMG Mauldin Smart Core ETF Strategist, Brian Lockhart, CFP, Founder & CIO, Peak Capital Management
Hello, welcome to the quarterly conference call for the 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 investment strategy is the culmination of 30 years of economic thinking by one of the world’s leading economic writers.
John is a chief economist and co-portfolio manager of the CMG Mauldin Smart Core 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. He believes the period ahead is going to 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 strategy see growth and have the ability to respond to the global economy on a daily basis and do so with a disciplined investment process that seeks to minimize downside risk.
Think of Smart Core as four strategist in one managed account portfolio. The strategist utilize ETFs that enable them to trade across asset classes, countries, sectors, commodities and cash like securities for safety.
Today’s call is going to be split into two segments. First, we’ll hear from co-portfolio Manager John Mauldin, on what he sees in today’s investment environment and the economic landscape. And then in the second segment, we’ll hear from one of the portfolios for asset managers.
Brian Lockhart, founder and chief investment officer at Peak Capital Management. Brian will give us an in depth view of one of the individual trading strategies within smart core.
As you’re listening on the call today, if you have any questions or you’d like to learn more about our investment management services, 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. Investment 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 any future performance of any specific investment or investment strategy, including Mauldin Smart Core will be profitable, be suitable for your portfolio, or any 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.
Now, it’s always an honor for me to introduce my friend and colleague John Mauldin, in addition to serving as our chief economist here at CMG, John is a noted financial expert, New York Times bestselling author, a pioneering online commentator and publisher of The Week letter Thoughts From the Frontline. Welcome, John. Thanks for joining us.
It’s always good to be with you, Brian.
Thank you, sir. Now Mauldin Smart Core is an opportunistic multi asset, multi manager strategy that combines several strategies in one portfolio. The objective is to seek global growth opportunities while maintaining a level of protection in down markets.
Our benchmark is the Morningstar Moderate target risk index, which tracks a globally diversified portfolio. Now in 2017 and 2018, performance of smart core was inline with the benchmark and through September this year, the strategy is up 6.8% while the benchmark is up 13.1%.
John each quarter, you and your co-portfolio Manager Steve Blumenthal put together the quarterly update on Mauldin Smart Core. And by the way, we do provide this update to investors by email. If you want to be added to the distribution list, just email us at firstname.lastname@example.org.
This email is going to go out soon. I was able to get an advance copy and just wanted you to address a couple of things I saw in the update John. First, I wanted you to address recent performance. The portfolio did a nice job, and its first two years 2017 and 2018, keeping pace with the benchmark. So far this year, smart core has posted an attractive return, but it’s underperformed the benchmarks. Can you explain why?
Well, I know we have benchmarks, and I know that there’s reasons for them. But my benchmark is zero. I mean, just be personal and my goal is to try to give people positive returns with much reduced volatility. And I think you can do that by diversifying trading strategies. It’s one of several ways to do it. But this is the focus of Mauldin Smart Core and you know, you’re talking about underperformed in the first quarter. Well, we over performed in November, December when the market was going down and we were down just a few points.
I think you have to look at our performance over the entire cycle and we haven’t seen an entire cycle yet. And until we do, I don’t think the opportunity for Mauldin Smart quarter really shine will be there. Will it do well? Yes. Do we know when we’re going to have that next big downturn? No. But you can’t invest in the Smart Core after the fact. And that’s why is a reasonable portion of your risk capital, you know, you’re trying to make sure that that’s going to get there should be in strategies like Mauldin Smart Core.
Makes sense. I think I would just reiterate the point you make about a complete market cycle and the idea of participating and protecting, you know, the goal and strategy is not always in everywhere to beat the benchmark. If that was the case, we would just invest in the benchmark. The goal is to provide consistent positive returns and to protect the portfolio when markets are weak.
How about portfolio positioning? How is the portfolio positioned today?
It’s actually fairly conservative today. 54% almost 55% is in bonds and cash equivalent, 41% is in stocks but most of those are more conservative.
It has got a rising amount of gold in it, you know, similar significant but it is a much more conservative portfolio than it was, you know, two years ago when it was 95% equities, which was the correct thing to be.
So I’m comfortable with where we are. And given the fact that we have no idea since the Fed is beginning of QE, they can call it if they want to but it’s having the same effect.
And there you know, it’s not unreasonable think that will get one more way cut this year. You’re not this year early next year because they’re watching the economy slow down globally. So watching, I mean consumer spending this month we just got the data was down. The Cass Freight Index, Cass Freight Index has been down for nine months in a row now.
It’s not falling off a cliff. It’s not 2008 but it is slowing down and the Fed is leaning into it some and appropriately so I think.
Well, I was going to ask you, you know, your last two letters and thoughts from the frontline I really enjoyed on pensions and Social Security.
Especially being a young guy 44 years old. Sounds like I may not be getting all of the social security benefits that I expect but I always look forward to your economic analysis. And I imagine you have some of that coming out in the coming weeks. What’s on your mind as you look around the world today? At the economies in the world, clearly some slowing down in Europe and Asia. What does that mean for those countries and what does it mean for the US?
We’re going to be affected by Asia and Europe slowing down. There’s no question about that. Global trade is under pressure because of the rising tariffs everywhere. I am not and I’ve never been a fan of tariffs. I was writing 20 years ago that my biggest concern was an increase in protectionism and tariffs. And sure enough, now we’re beginning to see that and I shouldn’t say unless it…
I wrote 20 years ago when people ask me, what’s my biggest concern? I said, it’s protectionism and global trade. That’s the one thing that could really put a wrench in the entire global economy and slow everything down. That now combined with massive sovereign debt that’s continuing to grow. I mean, there are no deficit hawks in the Congress anymore it seems. I think we’re looking at a slower growth 2020. And lots of unpleasant things can come from that, but it means you’re closer to stall speed. So if you get a shock somewhere in the world, it’s easier to slip into a recession.
Well, John, I know you’re thinking about one of your upcoming letters, either this this week or maybe next week on discussing China. What are you thinking about and what kind of topics you’re going to cover in that letter?
Well, I’m known for a while that my next week schedule, when I’m in New York and in traveling is going to be tight. So we’ve scheduled a letter on China because we’re going to be reviewing a book by Jonathan Ward, and bringing in some of our other China experts. And some of my own thoughts.
One of the things that I think Trump is done correctly, is to focus on China and it’s growing real threat. Up until recently, presidents and most people, including myself, kept thinking China will become more capitalist, they’ll become more like us. And the answer is no, they won’t. It’s not happening. And in fact, they are becoming more aggressive in wanting to demonstrate that they are the world power, and they’re Stealing an intellectual property, they’re just pushing this in their local neighborhood is making all of their neighbors uncomfortable.
And I think it’s time that we begin to realize that China may not be our friend we see them the rise of another superpower. I know that some people still think of Russia as a superpower. I think of them as a third world country with nukes.
That’s with a struggling population and a very dicey economy. China the other hand is truly a phenomenal economic miracle. They are inventing at their own right now they’re creating their own technology that is going to press the west to keep up with it. So it’s a different world than what we would have thought in the 2000 and 10s. And I think we just need to recognize that as investors and as citizens in the US.
Well John, thanks so much for your insights. This concludes the first segment of our conference call today. And appreciate your time John, and look forward to talking with you again next quarter.
Okay, we’re back for the second segment of the Mauldin Smart Core quarterly conference call for the third quarter of 2019. As a reminder, if you have any questions, we’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.
I’m very glad to be here with Brian Lockhart, the founder and chief investment officer of Peak Capital Management.
Brian is the co-portfolio Manager of Peak Dynamic Risk Hedged US Growth Strategy, which accounts for 25% of Mauldin Smart Core.
Brian has been managing investor portfolios for over 20 years. He’s been featured in Barron’s, Forbes, Fortune, Business Week and he’s a frequent speaker at industry conferences.
Brian graduated from Polytechnic State University in California. And he’s an alumni of Harvard’s John F. Kennedy School of Government.
Brian, you and I spent some time together this past spring at the Mauldin Economics Strategic Investment Conference. I certainly enjoyed that. I don’t want to put any pressure on you today. But I do have to tell the listeners I was thoroughly impressed with the depth and range of your knowledge and not just on topics of investing and asset management. So that was a pleasure for sure. And looking forward to this call, and I’m excited for our investors to have the opportunity to hear from me today.
I’m glad to be on with you.
So Brian, how was Peak Capital Management founded? What’s your overall investment philosophy?
I founded Peak Capital as an entity in 2006. After almost 15 years of being in the industry, I’ve started like most people do in our industry, more on a planning emphasis side and working for one of the large financial services company in the US and early on in my financial services career, I decided to adopt a fee only stance and how I worked with clients.
And it was about 2006 when I realized that it really didn’t help me to be affiliated with any other companies and so started Peak Capital as our own RIA at that point in time, and it really allowed us just to serve our clients as fiduciaries with our focus on that moment. And I’ve just been extremely grateful and fortunate to have added some really, really smart people and committed people to our industry. We’ve built a nice team at Peak Capital both on the portfolio management side as well as on the client service side serving the RIA that we serve.
For good, we’ve had a great experience with you guys and getting to know you over the years. Tell us a little bit about your investment philosophy, you know, generally and then we’ll get to the portfolio in a moment.
Our philosophy really centers around delivering exceptional risk adjusted returns. I know that’s a focus of not only CMG, but each of the participants, each of the managers within Mauldin Smart Core.
And so we believe that if you can mitigate volatility and in particular, downside risk that the maximum drawdown that a portfolio might experience, the need to catch all the upside with the market becomes much less so instead of trying to keep up with the broad market which also means potentially losing 40% or more in a year during a recessionary time or a bear market, we find that if we can mitigate that max drawdown, that delivering steady consistent returns will actually end up outperforming in the long run. So our focus is definitely on risk adjusted returns and mitigating volatility or risk in the portfolio.
Good the idea of losing lesson down markets experienced investors I think, recognize that asset preservation almost more so than participating in market upside. It’s just critical in growing a portfolio over the long term.
Now, take a moment to tell us about the strategy that you employ in the Mauldin Smart Core Strategy. The Dynamic Risk Hedged US Growth Strategy. How’s that strategy work? And what’s its objective?
They need risk hedging, which is something that Peak Capital Management created, it’s our own intellectual property, you might say, is a way of allocating the portfolio so that we ensure that risk is being equally spread from each of the constituents in the portfolio.
And so instead of waiting by capital, we’d say 20% to large cap growth, we would turn that around and say we want 20% of the risk to come from a specific holding inside the portfolio. That risk is equally spread across the five most followed pharma fringe factors, value, quality, low volatility, momentum and size.
And so by allocating based on a risk contribution, what we’re able to do is really manage the level of volatility so Instead of an equity portfolio that moves up and down volatility wise with the market, we’re able to control exactly how much volatility is being experienced by the investors in the strategy.
Can you give us any insight, you know, without giving away your secret recipe, but can you give us insight as to how you measure volatility in each of those areas?
Yeah, that’s a critical component because if you’re managing risk in a portfolio, the first thing you have to do is to define what is risk. And so we have looked at historical information going back really pre World War 2, to really determine what are the indicators of risk that investors should be concerned with?
And our research leads us to a calculation called covariance, which is simply the relationship between volatility and correlations. So we believe that there is a strong historical precedent that shows that when volatility in the markets rises, that future returns are diminished and oftentimes negative.
The same we found out for instance, in 2008 in 2009, when the correlation of all of the holdings in a portfolio move towards one, you have much more risk because you have a non diversified portfolio. So, risk for us is the relationship of volatility and correlations and when correlations are moving together, meaning there’s a lack of diversification or when volatility is rising above historically average numbers, that’s when the hedging and our portfolio will increase.
So I always look forward to your monthly letter, Brian, which, by the way it’s available to anyone on your website. It’s really a great resource. I love the format. It always includes a lead story and then a breakdown of what’s moving the markets. There’s an analysis of several asset classes and industry sectors in the letter, and then one of your analysts will usually focus on something a bit more technical or sophisticated, which really gives us another level of insight into how you guys are thinking.
I find it really incredibly valuable and just urge anybody go to Peak’s website and take a look. It’s a good letter and published monthly.
In September, the letter was titled “Last Country Standing.” And you wrote about the fact that the US economy continues to perform well, while many or even maybe most economies around the world are seeing a downturn. I guess my question for you is, does this trend seem to be continuing? And how do you see it playing out, both internationally and then here in the US?
I think it’s really interesting because given how fast the new cycle has become, it seems like that was written a long time ago, but it really wasn’t that long ago. There’s just a lot that’s happened since then. But I do believe that what I wrote in September is still true today. When I look at even the economic data out this morning, there continues to be massive weakness in Europe.
I honestly expect a formal recession to be declared in Europe before the end of this year. In Asia, China’s really being heard by the trade conflict. I mean, it’s been posting the worst growth figures in over a decade.
In fact, Bloomberg just this morning, had an analyst that said they believe that Asia was in a recession already. And while GDP is certainly slowed in the US, I do believe it’s going to remain positive and the two to two and a half percent range, at least for the foreseeable future.
Driving growth here at home is a very strong labor market and rising wages. And so if you ignore a lot of the political rhetoric that will probably hear again, during the debates this evening in Ohio, you’ll see that the middle and even lower middle class wages have experienced really strong growth and that’s positive for consumption, and consumptions about 70% of GDP. So I believe that strong wages rising wages will be enough to stave off recession, at least for the next couple of quarters.
In this month letter, you look at the ever important commodity of oil. You talked about the recent attacks on Saudi Arabia’s oil production facilities, which cut their output by 50%. And was a major factor in the recent 15% spike we saw in the price of oil.
In that letter you wrote, “Oil is like oxygen for the world economy, causing some analysts to suggest that 15% spike in crude oil prices could tip economies into recession.”
I’m not going to ask you to speculate on the price of oil, but I would like to know what you think about the probability of a recession within the US over the next 12 months?
Well, I really do believe that energy and oil in particular, is like oxygen to the economy and very important to global growth. In fact, there’s a very strong correlation between spikes in oil prices, and recessions. And that’s really what prompted what I wrote that the Saudi attacks had resulted in oil remaining above $80 a barrel for any period of time, I think it would have portrayed the likelihood of a recession being imminent, because consumers have to increase the amount of their paycheck that’s used for gas for their cars for heating, cooling for their houses.
What happened instead, which we didn’t know at that time is that oil quickly reverted back to the range. It’s really mostly traded in for the last five years, which is between $50 and $60 a barrel and that’s really supportive of economic growth.
I will say that the world looks much different. Now the energy world looks much different now, especially in the US because we’re now one of the largest producers of oil, but also a top three global exporter of oil. So well oil nature has changed in the US the underlying fundamentals of economic growth habit. And I think it’s still supportive for growth here.
As for the probability of a recession, I would put those odds at only 10% over the next six months, I think it really would take some type of exogenous shock for us to experience a recession within the next six months. But I would increase that to 40% going out to 12 months.
You look at some of the shipping data that’s coming out right now, that shows a slow down. It’s very hard to pinpoint how much of that is just based on the trade conflict and how much of it we can look at historically and say, Boy, this is a precursor to a recession.
So interpreting the data, I think in today’s world is more difficult than ever before. So you get less clarity looking out 12 months than you might six months. But I still think the likelihood of a recession is less than 50% in the next 12 months.
Just talking with a client yesterday, we had a similar conversation about things being especially uncertain right now and it does feel that way. But I also mentioned to him that investing is never certain and for some reason, we have this kind of lingering idea that well, things will be clearer tomorrow or next month or next year and they hardly ever are, but I do agree that things do seem particularly hard to read these days.
Another topic that you raised in this month letter is the Federal Reserve. And they’re going to meet at the end of this month again and there’s some talk about them announcing another round of quantitative easing, they may or may not use those terms. Any thoughts as to what you expect from the Fed in their meeting at the end of October?
I think the Fed is very likely to cut another quarter point when they make. The Fed is very cognizant of how the markets interpret virtually every word and their policy statements that they make after their meetings.
Given that I don’t think that the Fed will actually say quantitative easing or QE4, but to some degree, I believe that they began to wait for when they intervened in the overnight repo markets when the spike in volatility and the rate spike in overnight repose, which is essentially banks lending to each other, the Fed interjected a massive amount of liquidity to bring that rate back down to a normalized rate. And essentially, that’s what quantitative easing is.
So I believe that while the Fed is unlikely to announce a specific policy of QE4, they are committed to supporting the growth in the economy and as much of a non political way as possible, and that you can really find QE4 today, if you know where to look.
So we’ve talked about the global economy slow down in Europe and Asia. The importance of commodities and specifically Oil and the Fed. How did these impact your trading strategy? Or do they impact your trading strategy? I guess, maybe a more general question would be, is your strategy entirely quantitative? Will you only look at quantitative factors? I understand those… the factors that we discussed will ultimately impact the underlying statistics and data that your strategy reads but, but talk about how the events may impact your trading
That will be completely rules based quantitative strategy. So we don’t override that strategy based on fundamental factors or forecasting what we may think is going to happen. We make sure that the portfolio allocation is such that the risk contribution from each of the those factors is consistent at all times.
The biggest impact I think of where the Fed is and what the Fed is doing and where the economy is headed, where the global economy is headed. I think that fortunately, it should provide a nice tailwind for our strategy. And it’s because I believe that the economy should result in stock and bond correlations remaining really favorable for us.
One of the more controversial arguments that I make these days, is that I believe interest rates in the US are high. Now most people look at it and they look at history in the US and say, we’re at historical lows in terms of interest rates, but it’s all and how you do that analysis.
There’s typically a relationship, for example, between the US 10 year Treasury and the German bond 10 year and that relationship is such that it looks completely broken right now. And that the 10 year bond has a negative yield. And our yield is still, you know, between 1.6 and 1.7% this morning. And so I think interest rates are high, I think there’s a lot of room for interest rates to not only stay low but to fall further.
And so when there’s a pickup in equity market volatility, which I believe will happen sooner rather than later, when we get a flight to safety, there’s still a lot of room for yields among duration treasuries to move lower. I believe that during the next downturn, we will see the 10 year Treasury trade below 1%. I believe we’ll see the 30 year Treasury trade below one and a half percent.
And it’s not entirely impossible that the 30 year would trade below 1% as well. So I do believe that that portrays well for our strategy in terms of being able to use a flight to safety or a safe haven, like US Treasuries a hedge when the equity markets go into the next correction.
So do you think that’s what’s driving interest rates lower? Is it just a flight to safety? So many investors are concerned? So much so that investors in Europe are willing to lock in a loss of capital just to own government bonds?
Yeah, a lot of it is the basic three regulations that have come out that are requiring this financial institutions to have a massive amount of their portfolio and specified asset classes, like sovereign debt.
I do believe that interest rates are low because there’s tremendous demand. And again, I believe that’s why interest rates are going to go up in the US if you’re in an insurance company or a pension fund, and you have to have assets allocated for fixed income. Are you going to buy a 10 year Swiss bond yielding negative 2025 basis points? Or you’re going to buy a US back Treasury that might be yielding, you know, 1.6 or 1.7%?
I mean, there’s no question that demand for US Treasuries will remain high. You have to balance that against the level of borrowing that the US is having to do. Obviously, debt is increasing. We’re looking at a trillion dollar deficit for just one year. I mean, you don’t have to go back that far. We’re a trillion dollars was the entire debt, not the annual deficit.
And you know, now we’re looking at a trillion dollar deficit, but at least for the foreseeable future, and by that I mean, three to five years out. I believe that there will be no issue where the supply of that debt greatly exceeds the demand, which would cause yields to go higher. I think the opposite is going to be true demand will continue to be strong. And that when we get the next recession, which by very definition or deflationary, meaning rates are going to fall, I think we’re going to see a new cycle low and interest rates that a lot of people today will probably be shocked by.
Brian, thanks for joining us today. Listeners, if you want to learn more about Peak Capital, please be sure to visit the website. It’s pcmstrategies.com. Brian, thanks again.
All right, great to be with you. Thank you.
Sure, well, listeners please be sure to listen to our call. Next quarter we’re going to have John Mauldin on once again, of course. And then we’re going to feature our own strategy here at CMG our tactical asset strategy and we’ll have Michael Hee, Managing Director of investment research to join us for the second segment of that call. Thanks for listening again and have a great day.
IMPORTANT DISCLOSURE INFORMATION
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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