January 12, 2021
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:47): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (13:15): Interview with CMG Mauldin Smart Core ETF Strategist, Michael Hee, Managing Director of Investment Research, CMG Capital Management Group
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: Mike Hee is Managing Director of Investment Research at CMG where he oversees both the CMG Beta Rotation and CMG High Yield Bond Program. Mike will give us his take on the current market environment and provide insights into the CMG investment strategies which are two 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 good to be here with you.
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. Looking at performance last year compared to the Morningstar Category for US Fund Tactical Allocation. The Mauldin Core Fund finished the year, through December 31, up 5.8 percent while the US Fund Tactical Allocation group was up 8.9 percent over the same period. Over the last 6 months of the year, the Mauldin Core Fund was up 11.9 percent while the US Fund Tactical Allocation group was up 15.5 percent. John, are you pleased with how the strategy has been performing?
MAULDIN: Well, it’s doing what I wanted it to do. What we’re trying to do is establish a portfolio that is focused on growth and is just as focused on managing volatility. And this year there hasn’t been – other than the March periods – a lot of volatility. We didn’t drop nearly as much [as the broad market indexes]. Mauldin Smart Core is designed for not having to worry about getting out of everything you’re going to cash because the managers within our system can go to cash for you – it’s an active management approach.
SCHREINER: In my 20-year career, and I know Steve Blumenthal (and several in our firm have been around even longer than I have) but I can say for sure that during this period we’re being as creative as ever with our clients’ portfolios. We’re going beyond the traditional asset allocation by using trading strategies, non-correlated strategies and other kinds of investments. And I think this is the environment that calls for that. Reading your “Thoughts From the Frontline” letter on Friday, you offer your forecast for the year ahead. You call it, “The Year of the Gripping Hand.” What do you mean by that?
MAULDIN: Right. Well, it refers to science fiction – two books really. One was called The Mote in God’s Eye, the other was On the Gripping Hand, by Jerry Pournelle and Larry Niven. And they basically talked about a three handed race that was very aggressive and they probably made to deal with. But if you were that alien race, you had a left hand or right hand. As economists say on the one hand and on the other hand, this race would say on the one hand, on the other hand and on the gripping hand. And the gripping hand was not as dexterous as the regular hands, but it was the strong hand.
And in my view today, it takes that kind of three-handed view to look at 2021. The problem with COVID is that it’s a known unknown. We know what the problem is because the virus is spreading, but what’s unknown is how fast are we going to roll out the vaccine. How many people are going to take it? Is there enough productive capacity? And the answer is no, there’s not enough production capacity to give us all of the vaccines that we want, not just for us, but for the world. We literally need Johnson & Johnson’s vaccines. It should be coming out in February or March. To be successful, we need their production capacity. We need, frankly, some of the other lesser-known companies for them to be successful and to add their production capacity. It’s a very complex situation and I think it’s going to take longer to come back from it.
We’ve turned off 140- 150,000 businesses – basically just closed them down. Well, it’s not going to be like turning your car back on and then those 150,000 new businesses just show up again. It takes capital; it takes time; it takes finding employees; it takes finding customers; it takes people willing to go out and do things and travel again. It takes people being safe; it takes people wanting to travel again. We don’t know what recovery will look like. We could be in a recession in the sense of, we’re not getting back to the GDP levels we had. We’re not seeing the growth rates that we once had and for longer than we might expect. I hope that’s not the case.
I mean, best case is that, Moderna and Pfizer can come up with more production capacity just like AstraZeneca over in Europe. And we need the rest of the world to get vaccinated. It’s just not the United States. This is a global economy, whether we want to think about it or not. And we need them producing and growing and getting back to normal. That means we need more vaccines and we don’t know how that’s going to work. That’s not clear. We know what the problem is, what’s going to happen is unknown and that puts the risks in 2021 to be more unknowable, more difficult than we would like.
SCHREINER: A couple of the tailwinds you mentioned in the letter: innovation and technology. They seem to be moving forward faster than ever.
MAULDIN: The virus has pull forward so many changes that were going to happen over the next five to ten years anyway. But now they’ve been pulled forward. More of us are working from home. We knew that was a trend that was going to happen. You’ve seen, we’ve seen five years’ worth of innovation happen in nine months. I could go on for an hour… you’ve heard me, Brian.
SCHREINER: I know you can; on technology.
MAULDIN: I get very excited about the shifts in technology. I’m excited about what I think is going to be a massive new wave of agricultural innovation coming through that people don’t even comprehend. It’s going to be as big as a green revolution in the forties and fifties. It’s beyond what we can understand.
SCHREINER: What about the oldest technology, trade? You seem optimistic that trade relations or trade partners – that our relationships with those partners could improve under the Biden Presidency.
MAULDIN: Well, I think our trade relations with most partners has been the same. And, frankly, we’re doing more trades than ever with China. What I’m hopeful is that Biden will remove the tariffs, which I’ve written about for 20 years as one of the worst inventions ever. This is not a new stance. I was critical of Trump when he initiated the tariffs to begin with . Do we need to deal with China? Absolutely. Do we need to be company focused? Absolutely. Should we do something about Walway in particular, that’s the easy target to talk about? Yes. Is the relationship with China dicey? Yes, it is. Is it going to end up a hot war? No. Could it be a cold war? Probably. That’s just going to be the way that things are, but I expect that we’ll be doing more trade globally in 10 years than we will be today. Still, Ricardo: There are still countries that have natural advantages – and that’s not a bad thing.
SCHREINER: Before I let you go, I want to ask you about the FED that balance sheet exploded last year. What impact is this going to have? And I know we can’t be specific, but what are your concerns? And what’s on your mind when you think about the FED?
MAULDIN: My concern is that they’re destroying the capital markets. The bond market is becoming more and more creature, just like it has in China. They’re now buying investment grade corporate stocks. I mean, why do they need to buy Apple debt? I don’t understand. Apple doesn’t need cheaper debt. Pick any number of a hundred companies.
They’re messing around with the capital markets. They are making the divide between the wealthy and the poor. That’s income wealth disparity and they’re making it worse, not better. They are repressing savers. It is financial repression. I am not happy with this Fed and how they’re going about doing their job. Their third unwritten mandate that they seem to think is there is there’s now is to close the market and to keep the stock market up, which means that it keeps the assets of the wealthy better. And so we get bubbles like we’ve got right now.
SCHREINER: John as always, thank you for your insight today. And we look forward to your coming letters. I think next week, you’re going to write more about your 2021 outlook.
MAULDIN: I’ll probably be doing another two letters on the 2021 outlook.
SCHREINER: Wonderful. We’ll look forward to them. Thanks a lot, John. Appreciate your time. Have a great day.
SCHREINER: We’re back for the second segment of the Mauldin Smart Core quarterly conference call for the quarter of 2020. As a reminder, if you have any questions or you want to learn more about our investment management services, contact us by phone at (800) 891-9092 or by email at email@example.com.
I am very glad to be here with Michael Hee, Managing Director of Investment Research, here at CMG. Mike oversees both the CMG Beta Rotation and CMG High Yield Bond Strategy which, combined, account for 25% of Mauldin Smart Core.
Mike is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He joined CMG in 2009 where his primary responsibility is to oversee investment research and investment strategy development here at our firm. Prior to joining CMG, Mike was a consulting actuary and financial risk manager. He holds a Master of Science degree in Mathematics from West Chester University and a Bachelor of Science degree in Mathematics with a concentration in Economics from the University of Delaware. Welcome, Mike!
HEE: Hi Brian, thanks for having me.
SCHREINER: Very glad to have you, Mike. Our clients get to hear from John Mauldin and Steve Blumenthal every week, but they don’t have the opportunity to hear from you or our investment team very often, so I’m very excited to have you on the call today. I thought it would be good just to start off with an explanation or maybe a discussion about CMG’s investment philosophy. How would you describe our investment philosophy here at the firm?
SCHREINER: CMG is a tactical investment manager, so we believe in a tactical approach to investing. One of the pillars of our philosophy is to remove emotion from the decision-making process. So we rely heavily on a rules-based algorithmic approach to investing. We spend the majority of our efforts in our investment research time and developing products that are algorithmic base, rules-based, using primarily price information to develop strategies that are tactical in nature.
We have several different investment strategies here at CMG. Now the strategies we use within Mauldin Smart Core, our beta rotation and our high yield bond program. First, let’s talk about beta rotation. What’s the investment process for this strategy?
HEE: Beta Rotation was developed to get better exposure to the equity space. The investment approach is a relative strength, algorithmic-based approach. We’re measuring the relative strength of the equity markets as represented by the total market index. And we’re comparing that to the utility sector, we’re also measuring the relative strength of utility sector. And the idea behind this is, again, we’re looking for a better approach to equity, to gain equity exposure. And using the utility sector as a defensive play because the utility sector is the most bond-like sector of the equity markets. Utility companies typically carry a lot of debt and as such their interest rates impact their business. Utilities are also at certain times negatively correlated to the equity markets. The typical market cycles don’t impact the utility companies the same way they do the rest of the equity space.
SCHREINER: You mentioned that we use the broad market index VTI, I think is the fund that we’ve been using these days, the Vanguard Total Market fund.
HEE: Yes. The Vanguard Total Market Index, ETF, VTI in particular.
SCHREINER: Right. And which utilities fund do we have in the universe these days?
HEE: We use the Vanguard Utility Sector Fund – VPU.
SCHREINER: How about the current allocation? We are VTI now and have been for some time.
HEE: We rotated a lot of utilities early in the fourth quarter at some point in October of 2020 into out of utilities into equities. So we took our VTI position and then held it through the majority of the fourth quarter, right through today.
SCHREINER: Do you have a strength reading on VTI today? Are you able to tell if we’re close to a trade back to utilities or to cash?
HEE: At this point, the equity sector is showing a strength factor that is much stronger than the utility sector. We are at a minimum, several days away from potential rotation backed to utilities.
SCHREINER: Well, let’s shift gears and talk about the high yield bond program. This is CMG’s longest standing strategy, really the flagship strategy for the firm. Can you talk about the investment process behind our high yield strategy?
HEE: Yeah. So the high yield strategy has been in existence since CMG first started. It was the strategy the firm was built around. Steve has been running the strategy since the early nineties. The high yield strategy is the trend following strategy. Identifying the trend in the high yield space by using Bank of America and Merrill Lynch High Yield Index, depending on how far that index is away from its long-term average. We’re making decisions to whether to keep high yield exposure or whether to lower our high yield exposure and move to cash.
SCHREINER: I know that Steve writes often about high yield or high yield strategy and also his feelings and concerns about the high yield market in general. But I know the high yield strategy is specifically designed to navigate volatility when it’s there. And I think at least in the longer term we do expect, the high yield market to have more volatility than it’s had in recent years. How has high yield position today? And I know in your mind, you like to adhere to that rules-based, objective approach to allow the algorithm and the model to really dictate our position. But do you have any personal views or opinions about the high yield sector in general?
HEE: Currently, we are long high yield and have been for several weeks. I know that Steve writes a lot about high yield and his views on the high yield market. However, our models are rules-based algorithmic bottles and our position that don’t always reflect what Steve represents in his writing. Having said that Brian, you mentioned that there’s a likelihood that we could experience more volatility in the yield space than we have over the more recent history and our models are designed to identify that type of volatility. And in the instance that it returns and becomes significant, we would move aside and wait for that trend to reset before taking on high-low exposure again.
SCHREINER: Yes, agreed. And I think in the first segment today, John Mauldin talked about his concern about where we are, in not just the equities markets, but also the bond markets relative to the Federal Reserve, intervention and asset purchases. So that will play a role as well. And I think, Mike, your approach and your way of thinking makes the most sense. I mean, if there’s one thing I’ve learned in my years is that, I’m just not good at predicting market direction. And the markets will go in one direction far longer than I expect. And so that goes back to this rules-based approach and not making subjective or emotional decisions. So I agree with your thought process.
HEE: There are a lot of uncertainties in the markets right now: political concerns, transfer of power. And we’ve seen what’s happened in Congress over the past week or so. Not to mention we’re in a pandemic, the rates of infection arising, deaths arising and vaccinations. They may have an impact over the next few months to years, but you never know. And you just mentioned the one thing I’ve learned as well, is there have been many trades that I’ve witnessed over the past several years that have been dictated by our rules-based algorithms that at the time the signal came across, I wasn’t really sure how that was going to turn out and my expectations were completely wrong. And allowing our rules-based algorithm to dictate our exposures turned out much better than I ever expected based on my personal views of what I thought was going to happen. So it’s difficult to predict. And removing emotion from your buy and sell decisions has served us well and will continue to into the future.
SCHREINER: Mike, thanks so much for your time today. We look forward to talking to you again in a few quarters as we make the rounds across the managers in Mauldin Smart Core.
HEE: My pleasure, Brian. Thanks for having me.
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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