January 20, 2022
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:25): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (10:40): Interview with Steve Blumenthal, Executive Chairman and Chief Investment Officer, CMG Capital Management Group
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: Steve Blumenthal is Co-Portfolio Manager of Mauldin Smart Core as well as Chairman and Chief Investment Officer at CMG Capital Management Group where he where he manages the CMG Beta Rotation Strategy. Steve will give us his take on the current market environment and provide insights into the Beta Rotation 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 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 Mauldin is a noted financial expert, a New York Times best-selling author and market commentator. Together with Mauldin Economics, John hosts the Strategic Investment Conference every year. And he has written many books – several of which have appeared on the New York Times best-seller list.
John, welcome to the quarterly conference call. John, welcome to the call.
John Mauldin: Thank you. It’s always good to be with you, Brian.
Brian 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 outperformed the Morningstar Category for US Fund Tactical Allocation for the quarter ending December 31: Smart Core was up 6.3 percent in the fourth quarter of 2021 while the US Fund Tactical Allocation group was up 4.9 percent.
For the full 12-month period of 2021, Smart Core was up 11 percent while the US Fund Tactical Allocation group was up 13.1 percent. John how do you assess the performance of the strategy?
John Mauldin: Well, I mean I’m pleased with it. It’s doing exactly what I want to do, which is reducing volatility and giving us a reasonable chance for returns without having to take a lot of risk in index funds, by bang long only.
Brian Schreiner: Agreed. We’ve been pleased with the performance as well, and look forward to seeing how it will perform in what will probably be some tenuous market conditions, which I’d like to talk with you about now.
On January 7th, you published your 2022 outlook in Thoughts from the Frontline, in an article called a path dependent year WWJ – What Would Jerome Do? You said that Chairman Powell and his Committee had really no good options and that they somehow will have to manufacture a soft landing by reducing inflation, while at the same time, trying to avoid a recession. They need to address inflation, but the economy has become dependent on their easy money policy. How do you think the Fed is going to walk this tight rope?
John Mauldin: Well, I mean, you clearly heard Joe Biden yesterday saying we’ve got to take inflation down. I mean the entire Democratic Party machine is saying, you got to deal with inflation. The Fed is arguing that they’re going to move fast. I mean, getting rid of 120 billion worth of QE over three months, four months is really fast. And the odds of a March rate increase are something into, the market’s pricing in something like 80%. So they are aggressively working on getting inflation down. We’re going to see a slow first quarter, simply due to Omicron and you can only have so many workers out, even though it’s only temporary. I mean, you’re losing tens of millions of workers. So those are out, if it’s five or six days, those days add up. You’re seeing Atlanta Fed now has already dropped (GDP) to 2%. Mark Zandi dropped his to 2, and there’s a lot of normally bullish actors dropping their outlook and that’s going to have a weight on the market. I think we could see an easy potential for a bear market in the next few months, especially if we get a slowing economy, it’ll happen.
Brian Schreiner: I’m going to be talking with Steve Blumenthal in the next segment about, that question, the market outlook, what kind of market environment are we likely to face. And I know both of you have been writing it about it. In fact, you just published a follow up to the Great Reset paper that you wrote a couple of years ago, kind of that 10 page assessment of where we are today. And you suggest that we might be closer to moving to that.
John Mauldin: I would like to see the economy slow down inflation, because that’s my definition going to fight inflation. Even if we had a mild recession, it would be, I would hope just be that. Hopefully it’ll be enough to drive a stake in the heart of inflation. Then the fed can move back to being a little bit more accommodated and markets come back and all is right with the world. But in the meantime, you need to be careful about the volatility.
Brian Schreiner: Yeah, that does sound like kind of a best case scenario. We get a lower inflation maybe along with a little bit of a slowdown in the economy, but that would be the soft landing. If the Fed is not so bullish on fighting inflation, or if they don’t take inflation head on, if Chairman Powell doesn’t take your advice, what would the implications for the economy be?
John Mauldin: If Powell doesn’t proceed to really deal with inflation, which right now it kind of sounds like he does, but if he doesn’t, then inflation will become a problem, a real problem. And the markets will not act kindly. So I think he’s damned if he do and damned if he don’t. So he might as well go ahead and do the one thing that he can do, which is kind of be a mini Paul Volker and try to kill inflation. He’ll have help from a slow economy. He’ll have help from better year-over-year comparisons. He’ll have help from supply chain’s getting fixed. There’s a lot of cash sitting in individual’s hands. So it’s not exactly, it could look more like a recession that we had in 1991, if you will. There was slow down, but it wasn’t much of a recession. I don’t think we’re going to see anything on 2008 or 1982 or anything like that. As long as they don’t go crazy, stay the core slide inflation, get it down.
Brian Schreiner: And so when you think about your portfolio, have you made any major adjustments going into this year? Or how are you thinking about your investments?
John Mauldin: I haven’t made any major adjustments. I mean, I still have my explore portfolio. My core portfolio is pretty much fixed income, Mauldin Smart Core, things like that. Things that I don’t think are going to have a lot of volatility.
Brian Schreiner: Well, I think that makes sense. In talking with investors, I think now is when we are able to really earn our keep here at CMG. A risk manager is very important right now and being active in the portfolio and able to reduce risk. If we do face volatile markets this year, it’s going to be important to be able to lighten exposure, inequities, and rotate into more defensive sectors.
I appreciate your time today. We’ll continue to read your Friday letters and look forward to talking with you next quarter.
John Mauldin: Thank you, sir.
Brian Schreiner: Thanks John.
Brian Schreiner: Okay, we’re back for the second segment of the Mauldin Smart Core quarterly conference call.
As a reminder, if you have any questions or you would like to learn more about our investment strategies, please contact us by phone at (800)891-9092 or by email at firstname.lastname@example.org. I’m very glad to be here with Steve Blumenthal, chairman and chief investment officer here at CMG. Steve manages the CMG Beta Rotation strategy. One of the four individual investment strategies within Mauldin Smart Core.
Steve began his career at Merrill Lynch in 1984. And as over 37 years of investment experience. He writes a weekly market commentary called on my radar. And in 2020 Forbes books published On My Radar: Navigating Stock Market Cycles – How to Grow and Defend Your Wealth. This was Steve’s first book. He’s a Forbes contributor, has been published in the Wall Street Journal and Barons Investor’s Business Daily. And has appeared on other media outlets, including Bloomberg CNBC, Fox Business News and others.
Steve, welcome to the call today.
Steve Blumenthal: Hi Brian. Thanks for having me.
Brian Schreiner: The CMG Beta Rotation strategy seeks to enhance the roles of equities in investors’ portfolios by employing an investment process that measures stock market price trends. The objective of the strategy is to outperform or to provide returns that are in line with the broader stock market, but while simultaneously reducing risk. Steve, how does the Beta Rotation strategy seek to achieve these goals?
Steve Blumenthal: Well, it’s good to step back and give some consideration to, first of all, the role that a strategy like this might play into a portfolio, because it leads into the objectives of what we’re trying to achieve. One is, what we’re seeking to do is grow and gain when markets are healthy and to risk protect when markets are in secular bear markets or in significant down trends. What this strategy does, it has essentially several steps to it.
Step number one is it analyze the relative performance of the total US stock market. So large cap, midcap, small cap stocks, that’s available to all of us through an ETF. So it analyzes the trend of the total US stock market. And it compares that against the trend of the US utilities market. So you can think of higher risk or higher beta, meaning an industry term to achieve a return in the overall market.
High beta would be a higher risk market exposure and lower beta would be more conservative exposure. So higher beta in this portfolio is the total US stock market and the lower beta is the utilities. And what you’ll find is, and especially we’ve seen this in December and in January of this year, is that value oriented or safer types of sectors have done a lot better than the overall market. So while the general market S&P and the total us stock market, large cap, mid cap, small cap may be under more pressure or doing better at different periods of time. This strategy seeks to be in line with where there’s opportunity. So when a risk is off, oftentimes value or utility plays may be doing better. And that’s been the case the couple months. So think high beta, it switches to total US stock market and low beta it moves to the utilities, when the utilities is outperforming.
So we’re looking to be positioned in either higher risk or lower risk, depending on which of those things are performing better than the other. And then the next element to the strategy is that we have a risk component to it, where we measure the performance of both of these sectors. Sometimes we’re in utilities like we are currently and have been for much of the last two months. It creates a performance line for us, and we measure that performance line. And we put a series of what we call moving averages – where when the majority of them – they might be short term moving averages. Most of us are familiar with things like the 50-day moving average and the 200-day moving average, a common rule is if it breaches those long term trend lines, people reduce equity, exposure and move to cash.
What we look at are a series of five indicators that range from several short-term indicators, intermediate term indicators and long-term indicator. And then if the majority of them, meaning if four of them are breached that the trend line of our model, meaning equities, low beta and high beta are below its moving average, then we move to cash. We rarely do that in the history of the strategy, The last time that that actually happened, and the only time this happened since 2014, was in the COVID crash in March of 2020.
Brian Schreiner: So the strategy is either 100% in the broader US stock market, 100% in utilities or 100% in cash, right?
Steve Blumenthal: That’s correct. And all the vast majority of the time, it’s either in the broad US stock market or in utilities – either or.
Brian Schreiner: So recently, actually on New Years’ Eve day, you published your 2022 Investment Outlook. And you did that in On My Radar. You believe that there could be some significant market volatility in the first half of the year. How do you expect Beta Rotation to perform in this kind of environment?
Steve Blumenthal: Well, that’s actually why we have a strategy like this because my forecast and let me be really upfront and clear. It could be wrong. We see a significant slowing in the global economy in the first six months. And we’ve got the Fed that is moving in a different direction than all the QE that they’ve been giving us for a number of years here. So they’re attempting to escape. Inflation has them a bit trapped, and they’re looking to raise interest rates and they’re cutting back on the bond, buying all that in March.
So we’re moving in a different environment than where we’ve been in. And we’re at a starting condition where valuations are as high as they’ve ever been. And the concentration of investor assets is in just a handful of stocks. Because the way most of our indices work, they’re cap weighted. So the bigger something gets, so most, you got five stocks that make up the S&P 500 Index, and they represent 25% of the exposure of the entire 500.
So people are highly concentrated in just a few names. And then the last piece of the puzzles were leveraged in terms of margin. So think of margin betting and what the investors are doing in accounts. I’m not saying you are as an investor, but I’m saying that the margin debt has never been higher and that’s starting to reverse its direction.
So all these conditions lead me to believe that if we have a major slowing in the Fed, moving in, either call it wrong foot or moving the other direction to fight inflation. These aren’t conditions that are as favorable for the markets. And I suspect that it’s probable, we could have a 30% stock market decline in the first six months of the year. If that thesis is correct, then how might it play out in our strategy?
Well, the market has been under some degree of indigestion for last couple month. Year-to-date the NASDAQ is down 10% and the S&P is off 4%, from its high. So we’re kind of in the early innings of whether this outlook comes to be or not. But how might Beta Rotation? Well currently, we’re positioned in a safer market exposure in utilities, and that’s been the right place to be.
I’m not sure if my view of minus 30%, if utilities are going to continue to outperform meaning outperform and hopefully drive a positive return in the first six months, – possibility – then I would expect that the strategy Beta Rotation will be largely in the defensive side in utilities and will have an opportunity to do better in that environment. Don’t know, we’ll see. But what gives me confidence is that we have a way to risk-manage, that if both of these things, if the total market, the US total stock market and utilities are both in a bad way, then we de-risk and we move to cash.
So to answer your question, how might it play out? Don’t know for sure, but we’ve put in place within the strategies, disciplines to deal with risk.
Brian Schreiner: Well, to me, this makes all the sense in the world. I spend a lot of time talking with clients and we all have our concerns about market risk and where the markets are headed. The bottom line though, is we don’t know. And I think, even the wisest market guru will admit that too – we just don’t know. But that doesn’t mean that we can’t manage the portfolio in a way that can protect on the downside. Of course, we’re not going to be able to exit at the top, but we can read the market, allow the markets to tell us how healthy it is, what’s happening, and then respond accordingly.
So today the strategy is in and utilities, if the market has broader deterioration, there may be a time that we move fully to cash, but we don’t just move to cash because Steve thinks there might be a 30% decline. He’s the first one to tell you, we doesn’t know, we just suspect that that may happen. And if it does, then we have to be positioned to do that. And that’s why I think active management is so important. And the strategy blended with the other three managers in the portfolio gives you a diversified approach to investment management.
Steve Blumenthal: We have a particular way of thinking about wealth and we call it “core and explore.” And in the core bucket, our objective is to manage the money. We can’t guarantee that we can’t lose money, no investor or advisor or professional money manager could ever state that. The risks just simply exist. But what we feel that we can do is by diversifying to a number of different trading strategies, none of these are perfect, but you want experience. You want a process and you want managers that have the discipline to be able to stick to their process. And then by combining different strategies together, in what we call this core portion of a client’s wealth, we want to minimize, downside, and we’re seeking a return objective. Frankly, what bonds use to give us for safe money and bonds at 2% bond, yielding bond funds they can’t help us at all when inflation is well north of 2%. And if interest rates move up, they lose. A 1.8%, 10-year Treasury can’t help us.
So what we’re seeking to do in the core bucket is find things like a well collateralized short-term, private credit that might yield in the mid to high single digits and combine them with a series of trading strategies like Beta Rotation. None of these are perfect, but combined together, it smooths the outcome. That’s the objective. And if we can get 80% of our core wealth to grow in the mid to high single digits, in four to five years, we’ve got that safe money well protected. If somebody needs income, you mix the different things together to fit the objectives that’s important for the investor.
So Beta Rotation is I think an excellent strategy. It’s been around since 2014, it had a 14.8% net return year in 2021. And it was up about 9% in December, but importantly in the draw down period and that’s what we’re after… So in the COVID crash period, there was a 20% decline in the strategy when the market lost 30%, that is frankly higher than we would like to see, but we don’t know what the outcome is. And if you recall how quickly the market crashed almost overnight, V-bottom and then recovered. And this strategy also got back in risk-on, and the one time that the moving average rules kicked us out was in that March and then got us right back in again.
Brian Schreiner: Well, the private investment world is something that we’ve been focusing on more with clients at CMG. I didn’t realize how large the market is in general, there’s over 7.5 million private companies in the United States contrast that with 4,400 publicly traded companies. Now, most of those private companies are small, but there are 1.1 million private companies with over or 1,000 employees. So the size of the market for private investments is gigantic. And I think these are going to be a growing part of investor portfolios going forward.
Steve Blumenthal: Yes, it’s important, but there’s a couple other elements to this that really are important as well, because there’s a significant level of risk. So how do you do your due diligence? What’s your network look like? Where did you source and get ideas? Who else is investing alongside of you? Where are they in the progression of their company and the potential for a payoff for investors?
John Mauldin, as you mention, has such a broad network of relationships, his years in his business, the speakers that he gathers to his conference. So that network is really important. And then you said something at the top of this call, 37 years. It doesn’t feel like 37 years. It feels like yesterday, but over those many years in the business, since the early days at Merrill Lynch, you develop relationships. And hopefully you develop relationships that are really valued with credible good people that come from the right place, that are smart, have made many mistakes and learned from those mistakes. So I guess what I’m getting to is how do you gain access to these types of opportunities?
Well, when you have a large family office, you network with other families and you share ideas and you trade things, you go to conferences and you might get in a deal that another large family was able to get to. But most people don’t have access to that sort of network. In our multi-family office side of our business, we work with clients that are typically somewhere between 2 million and a couple hundred million that don’t have the resources to build their own structures, their own CFAs, their own networks. So they plug into us. And John has, from his years of experience, a lot of important, valuable relationships that were created and ideas come from that. We have, because of our years in our business and relationships that we’ve put in place, people that we really enjoy, we source ideas with. And so that’s where ideas come from.
Brian Schreiner: Steve, thank you for your time. If you want to follow Steve, the best way to do that is to read On My Radar. That comes out every Friday. If you’re not getting on my radar, make sure you reach out to us at email@example.com. You can go to our website and connect with our social media channels through the website. Steve, thanks again for your time. Look forward to having you on another call soon.
Steve Blumenthal: Thanks, Brian. I’ll add one last thing. The letter’s free.
Brian Schreiner: Thanks, Steve.
Steve Blumenthal: Thank you, everybody take care.
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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