October 13, 2020
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:58): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (16:54): Interview with CMG Mauldin Smart Core ETF Strategist, Brian Sanborn, Ned Davis Research
BRIAN SCHREINER: Hello. Welcome to the quarterly 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 the economic landscape.
In the second segment, we will hear from one of the portfolio’s four asset managers: Brian Sanborn is a Certified Financial Analyst and Chairman of the Index Committee at Ned Davis Research where he oversees the NDR Dynamic Allocation Strategy. Brian will give us his take on the current market environment and provide insights into NDR Dynamic Allocation Strategy, 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!
MAULDIN: It’s always good to be with you, Brian, and thank you for having me.
SCHREINER: Mauldin Smart Core is an opportunistic, 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. Mauldin Smart Core has performed in-line with the Morningstar Category for US Fund Tactical Allocation year-to-date through September 30th. Smart Core was down 1.4 percent year-to-date through September 30 while the US Fund Tactical Allocation group was down 1.0 percent over the same period. Over the last 12 months, Smart Core was up 0.8 percent while the US Fund Tactical Allocation group was up 3.2 percent.
MAULDIN: Well, yes. We’ve performed in line in terms of performance, but we’ve don’e it with a lot less volatility. Volatility is a big thing on my mind because we’ve got all sorts of potential things in front of us that I think are going to cause increased volatility – at least the potential to be somewhat higher.
SCHREINER: I was reading your October 9th Thoughts From the Frontline letter this weekend, and it attempted to take a look at the forward 12 months. The future is always hard to predict, but you look forward and you included a mix of positive and negative implications for the economy. You’re concerned about employment as well. Talk about what you see in the coming 12 months.
MAULDIN: Well, what we’re seeing is that in certain segments of the economy, we’re getting back to something that looks like normal. Sales are coming back, businesses are starting to perform – they’re not doing that well year-over-year – but they’re improving substantially quarter-over-quarter. And the problem is that it’s not all sectors, obviously the restaurant sector or the service sector including the bottom 25% compared to the top 5% in terms of income earners, are doing worse now than they’ve done in any of the previous four recessions. The job loss has been worse. We still have 25 million people in America that are unemployed. The unemployment number is going down, but that’s because people are dropping out of the workforce. They’re saying, “I’m not looking for a job because I can’t find one,” or “I haven’t been able to even look for one for the last four weeks.” Well, this takes you out of the workforce [data].
That’s not a good reason to have the unemployment number coming down.
Employment benefits are smaller now, though, I do expect a phase four that will increase that. That wouldn’t surprise me that it was done this week. Both Pelosi and Trump would like to see those checks go out before the election. And we’re getting down to the point where if you’re going to get your check before the election, they need to pass something. The small business payroll protection plans has reached the end of their 24 weeks spending period. That’s going to put more people out of work, just like the airlines. The airlines make big news because airlines (are laying off) 10,000 here, 20,000 there, the small businesses are not laying off those large numbers, but in aggregate, when you combine them, it runs into the millions.
Retailers who are continuing to close stores or cut head count and some organizations are predicting that we can see as many in of those in some industries. 30 to 40% of the small businesses just go away, and medium businesses too. I mean, there’s a lot of stress out there. We’re seeing layouts outside of the retail service sector, you know, All State, Raytheon – large layoffs. The recession is spreading, but I don’t want to not offer the positives. We’re seeing the national Federation of independent businesses, they’re starting to rehire again. The numbers that came out this morning were very positive. There’s some survivor bias in it because the people that are responding are those businesses that are still in business. But nonetheless, I expect a recovery that is not unlike the recovery from the great recession. It took four years to get back to where we were prior to the beginning of that recession.
And I’m not persuaded that there’s a magic button. I mean, let’s assume by next summer we can have a vaccine that has actually been distributed and we’ve had a big enough percentage of the people take it – especially those who are more vulnerable. I’m 71 years old and I will be taking it. But even with all that, for entrepreneurs, it’s in their blood to start businesses and they’re going to do that. They’ve got to get the capital, they’ve got to put their plan together, they’ve got to get a building and they’ve got to build a team. I mean, all of those things take time. It doesn’t happen overnight. And it’s just not like you don’t go out and turn the key on and the car starts. You don’t go out and turn on a key and profits start; that’s not the way starting businesses, at least in my experience that’s not how it works.
SCHREINER: One of the things that you did seem pretty positive about was the idea that we may have widespread COVID testing in the coming months and maybe even some pretty simple at-home tests. I think personally that if there could be at-home testing available, I think this would go a long way to bringing the economy back by allowing people and business owners to know who is infected and who’s not. And we could have some more confidence as we’re out-and-about doing our daily business.
MAULDIN: I agree, Brian, I think it’s key. Frankly, I think it’s going to be up to the FDA to allow people to take an at-home test. They now have paper tests. My view is that if you can take a pregnancy test and you can be trusted with the pregnancy test that you could be trusted with a COVID test. The argument is that, well, if you take a COVID test and you’re positive and you don’t tell anybody, you know, sometimes the doctor doesn’t know. I think if you take a COVID test and you just start feeling the call for whatever, you’re going to go to the doctor. You at least need to know if you need to quarantine. So the rational thing to me to do would be for the FDA to approve a testing mechanism, especially if it’s saliva on a piece of paper, which I mean, we’re close. There are supposedly demonstrations of that; we’re close to that now. And there will be some false positives, so people can get a false positive and they’ll go to the doctor and get maybe a more sophisticated test and find out they’re not. But, that’s what it’s supposed to work, and that will give people confidence.
SCHREINER: You seem confident as well that we’re likely to have a [COVID] vaccine. I’m not as confident, but I don’t know that that really matters. How are you thinking about that? And I think you mentioned that you thought the FDA probably will not approve the vaccine that they’ve been looking into that they’re meeting later this month.
MAULDIN: Well, it’s a little early; they’re still finishing up the phase three protocols. It wouldn’t surprise me they approve it in November or December. I mean, even if it’s January, I think it’s highly likely by January; we’ve got four or five real shots on goal by then, we’ll have at least one, maybe several. One of the things that people are not paying attention to, there’s more than a hundred trials going on, and some of them are based on very novel approaches. I mean, just completely out of the blue. You know, some scientist says, “Well, gee, what we’ve been doing in my labs will take out and COVID and be a vaccine. Let’s try that.” I mean, the ones we’re reading about are using known vaccine paths; we know about those. And so, if you’re Pfizer, if you’re one of the big companies, you’re going to take a known path, and that’s good.
The ones that I’m really interested in are the ones that are taking the path less traveled, if you will. We could end up with in April, a lot of very interesting new technologies for vaccines that can be far more effective than the current vaccine. I mean, right now only about half of the people that take a vaccine will actually be immune. The other half, it will dramatically reduce the symptoms and the severity if they get COVID. So, I mean, if you want to take the vaccine, you’ll have about a 50% chance of not getting it at all and a 50% chance of having much reduced symptoms. So I’m looking forward to the new technologies. Wouldn’t be surprised as that we see two or three vaccines approved at the same time, and I’m going to call my doctor whose head of a wellness at Cleveland clinic, and I’m going to say, “Mike, which one are you taking?”
And now, his bias may be, “Well, we’re taking this one because this is what we can get.” But my guess is he can get anything if he wants it. You know, they’ve the biggest hospital system in the country. I’m going to take what he takes and I’ll write about it in my letter and say, “You know, this is a vaccine that Mike’s going to be taking and I’ll be taking.”
SCHREINER: It will be interesting to see how many people take the vaccine or vaccines when they become available as well.
MAULDIN: I really do hope everybody gets a vaccine; that’ll help us a great deal. The more comfortable we get with it, the more we can get back to kind of a normal life. I mean, it’s going to still take time; we dug a really deep hole. The WHO now says lockdowns shouldn’t be the go to method. Well, thanks. I mean, that’s what we were writing last June. You got to protect the at-risk populations. People should be exercising more and you know, thinking about what they’re eating and all that stuff. Taking their blood pressure medicines; just the normal medications – it’ll make a difference in not just whether or not you get COVID, but just in your life and health in general. So, I would encourage people to do the things they know they should be doing. Eat healthier, exercise, take your medicines – these types of things.
SCHREINER: Well, not to put you on the spot before we leave, but by the time we have our next call, we will have a new or the same president elected. Do you have any thoughts on who might be elected and (maybe more importantly) the implications for the asset markets?
MAULDIN: Well, I can probably give you a definite answer that sometime late in November we’ll have one [elected]. I mean, making your predictions today; there are too many variables and too much time. The race is tightening; most pollsters are saying that, so we’ll see how it goes. But, no matter who wins, we’re still going to be running a 3 trillion dollar deficit next year. The economic recession won’t change that much, no matter who wins they will be facing some real problems in 2021. It’ll be challenging, and that’s why I keep coming back to the fact that I am worried about volatility.
SCHREINER: Absolutely. John thanks a lot for your time and insights, as always. We’ll be reading your letters and look forward to having a call with you around year end.
MAULDIN: Okay. Thank you very much.
SCHREINER: Ok, we’re back for the second segment of the Mauldin Smart Core Quarterly Conference call for the third quarter of 2020. 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 email@example.com.
I am very glad to be here with Brian Sanborn, Certified Financial Analyst and Chairman of the Index Committee at Ned Davis Research. Brian oversees the NDR Dynamic Allocation Strategy, which accounts for 25% of Mauldin Smart Core.
Founded in 1980, NDR is a global provider of independent investment research, insights, tools, and investment solutions. In addition to overseeing the NDR Dynamic Allocation Strategy, Brian writes NDR’s Stock Selection publications. Previously, he led NDR’s Research Applications team. Before joining NDR, Brian was an Analyst at Vardon Capital Management, where he performed statistical testing and constructed quantitative investment models. He received a Master’s degree in Statistics from Columbia University and a Bachelor of Science degree in Mathematics and Economics from Davidson College. Brian is a CFA charterholder and is a member of the CFA Institute. Brian, welcome to the call today!
SANBORN: Thanks Brian, I appreciate you having me on.
SCHREINER: We’re glad to have you. I wanted to get your thoughts on the investment environment and your strategy. But before I do, I know the annual Ned Davis research investment conference is less than a month away. It’s scheduled for November 9th and 10th this year. I know our investment team here at CMG is looking forward to attending. Can you tell us what’s on tap for the conference and I think it’s going to be virtual this year. Is that right?
SANBORN: Yes, that’s correct. The conference has shifted to virtual due to COVID-19. And actually, some of the sessions will address how the pandemic has transformed the global economy, as well as the asset allocation framework. Other themes that will be discussed include the role of dividend paying stocks, China’s evolving economy and the political landscape. The conference will be the week after the US election, so I’m sure the outcome and its implications will be at the forefront of everyone’s mind. Also we’re approaching the end of the year, so we will hear NDR strategist views on the outlook for 2021. And finally, there’ll be educational sessions as well, including NDRs approach to model building.
SCHREINER: Yeah, the election is going to be fresh in everybody’s mind and we’ll see whatever market impact comes after the election, so that’ll certainly be interesting. Looking at your strategy, the NDR dynamic allocation strategy is a global stock and bond strategy, which has the ability to go fully to cash. Can you give our investors a high level perspective on the overall investment objectives of the strategy?
SANBORN: Sure. When we develop the strategy, we want it to address a common frustration we heard with traditional asset allocation frameworks, which was that although they may outperform a benchmark over time, they may not fully protect to the downside due to constraints, which always forcing minimums of allocation to stocks. We decided to build a high conviction strategy with a primary focus on reducing drawdowns. This leverages NDRs weight of the evidence approach, which combines indicators from various disciplines. We look at macro and fundamentals to help us determine fair value while using technical and behavioral data, to help us with risk management and timing. When the technical and macro indicators are lining up, we can take a large allocation to a particular asset class. That means that the stock allocation ranges from zero to 100%, versus a 60/40 global stock bond benchmark.
SCHREINER: Well, I like the fact that it takes into account fundamental and technical indicators. And I think that’s important with a strategy like this, where the day to day buy and sell decisions I think are technical in nature. It’s important to do it in a context that takes into account what’s actually going on in the ground from a more fundamental basis.
SANBORN: The analogy I typically give to clients is, if you think of your investment process as a tree with just the indicators being the branches, if you put all of your weight on one branch or just one discipline, no discipline, whether it’s technical, macro fundamental works all the time. They evolve during the different market cycles, and so if you’re putting all of your weight on just one of those disciplines or that branch, if it breaks, you’re going to fall to your demise. Whereas, if you spread your weight across multiple branches even if one or two of those buckle; you’re going to survive.
SCHREINER: That’s a good analogy. I may use that. Talk to us about your investment process; dig in a little bit for us. What is the strategy actually do on a day to day basis?
SANBORN: Sure. The dynamic allocation strategy can trade 13, highly liquid ETFs, and it’s based on two decisions; the first involves a macro and technical diffusion model, again, using that NDR weight of the evidence approach which determines the allocation to global stocks and bonds. And then secondly, we have a technical composite within each asset class that can allocate across the various geographies, sectors and styles represented within the asset class. Once those allocations are determined, we then compare the weightings to the previous rebalance to determine if there’s a significant enough change to warrant a trade. And basically we just want to avoid unnecessary trading charges, the impact of transaction costs, and tax implications.
SCHREINER: Now, I think the strategy trades 13 ETFs and I understand six are stock ETFs, six are bond ETFs, and then the one cash ETF. Do you have handy list of the ETFs that you trade? I think that’ll help investors grasp the strategy a little bit better.
SANBORN: Absolutely. The one thing to keep in mind is that when we build any strategy at NDR, we always start with the underlying indices because then we have the flexibility to change ETFs if we eventually find an ETF with a better cost structure or greater liquidity. Currently, for the stock decision, we use for US large caps, SPY; US small caps, IJR; US growth, QQQ; US value, VIG; international developed IEFA, and emerging markets IEMG. For fixed income, there are seven different options; US short term treasuries, SHY; US long-term treasuries, TLT; US investment grade, LQD; US high yield, JMK; international investment grade, BNDX; emerging markets, EMB, and cash, MINT. We believe that this is a good set of areas across which we can allocate because they respond differently to various macro and market cycles.
SCHREINER: I think the strategy has the performance history of four years or more. Is that right? Is that how long you guys been running the model?
SANBORN: It depends on how you define running the model because we actually had it in our subscription service under the underline alpha models since 2012. We also at NDR, although we’re primarily a research provider, we have a small amount of proprietary assets that we run so we can claim real-time performance on some of our models. So for our dynamic allocation, we’ve been running that since August 31st of 2017.
SCHREINER: One of the things I’ve been talking with investors a lot, and really this is something that they’re very concerned about markets these days, you know, from valuations to everything that’s happening in the global economy. Investors are just cautious, more cautious really than I can recall, and one of the questions I often get from them is can your strategy move fully to cash? I think they foresee a situation where they may want to be entirely out of the market. I think I understand correctly, your strategy can do that. Has it ever gone fully to cash? And can you imagine a scenario where it might do that?
SANBORN: We do not put constraints on the various weighting on the asset classes, so it can take a large cash position. On a real-time basis, we actually did see go to over 28% cash in late 2018. During that same time, the stock allocation got as low as 14%.
SCHREINER: In a difficult market period or in a downturn for the stock market, even if it’s a severe one, like we had early in the year, you might see the strategy rotate, not just to cash, but to defensive positions.
SANBORN: That’s correct. For example, with the US short-term treasury position, SHY; that position was over 20% earlier this year.
SCHREINER: And can you talk a little bit more about how the strategy adjusts. One of the, I think most challenging times for investors when the markets shift from bull to bear, how would the strategy respond from a market condition that would change from bull to bear?
SANBORN: I think it speaks to the discipline and using the weight of the evidence approach. I mentioned 2018 before, and I think that’s a good example to go by because so much happened in that particular year. The period really demonstrated how important it is to adapt to the environment by using just an objective tactical allocation framework. So, entering 2018 stocks have come off a very strong 2017. The MSEI all country world index had risen more than 24%. So, at the start of the year, stocks were doing very well and the dynamic allocation strategy had latched on to that particular trend. Entering 2018, the strategy had over 85% allocation to stocks for six consecutive months. However, over subsequent months in 2018, the global economy had a soft patch trade manufacturing both weekend. And these are two indicators in that model that then went negative. We also then started to see from the technicals as the percentage of global equity markets and uptrends deteriorated during that period.
So combined; this then led to a drop in the equity allocation to below 45%, which at the time was its lowest reading since May of 2016. Stocks underperformed bonds for the first quarter of that year and had negative returns for the first six months of 2018. However, the economy then quickly rebounded; the indicators improved and the equity allocation returned to more than 85% as stocks rally to near all-time highs. At the end of the summer though, the rhetoric really picked up around trade protections and it became hostile with the story focused on the US China trade war. In the fall of that year of 2018, a number of the indicators we use the diamond allocation strategy then turned bearish decisively, including trade, manufacturing, the leading economic indicators, stock bond, relative strength ratio and global equity breath. That’s what then led to that 14% global stock allocation and the significant cash raised that I mentioned earlier.
The only reason for any allocation to stocks at that time was that global central banks remained very accommodative, and that’s another indicator we use in the model. So during that quarter, the fourth quarter of 2018; global stocks were down more than 12%. And all of this is saying, you can see a lot happens in 2018. You have that initial strength in stocks. You have the head sake with the global economic soft patch in the first half of the year, but then you saw a strong rally in the summer followed by a significant decline in the fourth quarter of 2018. And so as the macro environment evolves and markets react to that information, it’s important to lean on an objective process to navigate through the uncertainty. Because I think for a lot of folks, they may be able to get out of markets or reduce their positioning, but sometimes it’s also very hard to get back in. And so, having that objective framework does both where it takes behavioral biases out of the process and allows you to make decisions on both exiting and entering all your stock allocations.
SCHREINER: Brian, if investors want to learn more about NDR, I know your website has a wealth of information. I think your services are geared mainly towards investment professionals. Do you publish material for individuals as well?
SANBORN: So our primary client base is investment professionals, both institutional as well as advisors. We do provide our research to third party platforms, including interactive brokers.
SCHREINER: Good. Well, thank you so much for being on the call today. I know we’re looking forward to the conference and just appreciate the time you’ve taken. I know our investors appreciate your insights as well. We’ll definitely look forward to having you back on another call next year.
SANBORN: Well, I’m looking forward to it. Thanks again for having me on.
SCHREINER: Thanks for listening to our conference call today, and please be sure to listen again next quarter. We will again host John Mauldin and Michael Hee, managing director of investment research here at CMG. Thanks again for listening. Have a great day.
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