Dear clients, friends and family:
Following is the 2016 first quarter performance for CMG’s Tactical Investment Strategies along with our thoughts on each strategy over the past quarter. Market index performance is presented at the bottom of the chart.
Within the total portfolio construction process, we believe it is important to include a number of non-correlating risk diversifiers (equity, fixed income and tactical exposure), that performance evaluation should be considered over a three to five year period vs. months and quarters, and that one should compare equity performance against an equity benchmark, bond against a bond benchmark and tactical against a tactical benchmark. Asset classes are non-correlating for a reason and should be viewed from that perspective. Of course, past performance does not predict or guarantee future returns.
* Please note all strategy returns are reported net of a 2.50% management fee.
CMG Tactical Fixed Income Strategies
The CMG Managed High Yield Bond Program (“CMG HY”) returned -0.52% for the first quarter, net of fees. The strategy began the quarter in a long position but moved to cash during the second week of January as the equity market decline pulled high yield bonds down with it. The strategy moved back into a buy by the end of the month but was whipsawed in early February and moved to a defensive cash position where it remained until the end of February. The strategy was long for almost the entire month of March before trading back to a defensive position on the 28th.
Beginning the year, forecasts for HY bond returns ranged from -3 to +6%. With the Barclays HY index rising over 3% in the first quarter, it appears that upside may be limited for the rest of the year relative to forecasts. Regarding default rates, the average forecast for the year was in the 3% range with some banks predicting defaults as high as 5.5%. Energy and energy related credits were the wild card in this forecast and it appears that oil prices may have put in a bottom for the year. Indeed, oil is up significantly off its lows. Default forecasts for energy related high yields were approximately 10% when we started the year but if oil has bottomed out, then that default estimate may turn out to be high this year.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +1.01% for the first quarter. The Jefferson National Tax-Deferred Variable Annuity portfolio returned +0.84% for the first quarter, net of fees. The strategy began the quarter in a moderate risk position and quickly migrated to more defensive positions as equity markets had one of their worst starts to a year ever. In January the strategy moved out of equity positions into fixed income and commodities, specifically gold. By the end of February, the strategy was in a conservative risk position with the majority of the portfolio in fixed income and gold. Within fixed income, the largest portfolio allocation was to Treasuries (including long-term and short-term), municipal bonds and corporate bonds. Also during the month, half of the equity allocation in the strategy was positioned in utilities, a defensive sector that is often used as a safe haven in equity market drawdowns. While equity markets bottomed, the strategy moved back to a moderate risk position as equities were once again the largest asset class allocation within the portfolio by the end of the quarter. Equity allocations at the end of March were diversified across emerging markets (broad based and Latin America), real estate, communications and utilities. Fixed income positions were split between Treasuries, municipal bonds, corporate bonds and emerging market bonds. While it was a difficult and volatile quarter for equity markets, we were pleased with how nimble the strategy was in its asset allocation, getting defensive early in the quarter and adding risk in equities as markets rebounded. The strategy held the following allocations (individual portfolio allocations may vary) to fixed income, equities, commodities and cash at the end of January, February and March:
For a more detailed summary of current allocations for each specific portfolio and allocation changes over the past month, please visit our website at the following links to view the monthly update for each portfolio: TCA, TDA, ETF, and Jefferson National.
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned +7.57% for the first quarter, net of fees. Scotia Dynamic generated strong performance during the quarter despite maintaining an above average cash position (55%) relative to historical levels for the strategy. In January, the strategy was overweight precious metals, basic materials and biotechnology. Allocations to precious metals contributed positively to performance while trades in biotech were the largest detractor. In February, the strategy outperformed equity markets on the strength of allocations to precious metals and basic materials, which benefited from the rebound in commodities that started during the month. As equity markets rebounded from oversold conditions in early March, the strategy overweighted positions in biotech, basic materials, electronics, large cap, transportation and energy leading to strong positive performance.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned -4.80% for the first quarter, net of fees. Tactical Rotation began the quarter positioned 50% to domestic equities (SPY) and 50% to REITS (VNQ). Equities and REITS declined during January as global markets sold off while only bonds posted positive returns. January performance accounted for the entirety of the losses for the strategy during the quarter. The strategy reduced risk in February with a 50% allocation to bonds (BND) and 50% to cash and posted a positive return as riskier asset classes like equities and commodities continued their decline. In March, the strategy remained allocated 50% to bonds (BND) and 50% to cash. Early in the month, the ECB eased monetary policy and the Federal Reserve left interest rates unchanged sparking a rally in equities and REITS. As the end of the month, the strategy reallocated out of cash and was invested 50% to bonds (BND) and 50% to REITS (VNQ) for the month of April.
Market Commentary and Outlook
Last quarter we focused on three major themes that would impact global markets in 2016: Fed rate hikes, China and oil. All three played a role during a volatile quarter. After hiking rates in 2015, the Fed signaled the possibility of five rate hikes in 2016. By the end of March, the Fed was more dovish than in late 2015 and market prognosticators believe there will be in all likelihood three or less rate hikes this year (we are in this camp and believe that we may only get one). China has stabilized its equity markets but concerns about Chinese economic growth, the ongoing campaign against corruption, the pivot from investment to consumption and the increasing debt bubble will not go away. Although the Chinese government thinks long term with respect to economic planning, markets often react short term. This mismatch of investment horizons and expectations will lead to ongoing volatility as Chinese data is scrutinized to determine which way the economy will move. Few global markets drive such polarized views as China. Finally, the commodity route and the plunge in oil prices may have reached its bottom during the first quarter. Most commodities and, in particular, oil are now well off their lows. As supply and demand reach a better balance (probably by mid-year), oil prices are likely to settle into a range between $40 and $60. If prices remain stable, equity markets are likely to be stronger and high yield credits may hold up better than expected.
In addition to these three themes, in our 2016 outlook we addressed the likelihood of a U.S. recession and the potential for an emerging markets debt crisis. We believe that while there is still a real risk of both happening, the probabilities have declined significantly. U.S. growth remains modest yet unspectacular and while estimates have been downgraded further, growth will remain positive. Rising oil prices and a softer dollar will act as a tailwind. Furthermore, the cyclicality of a presidential election year will also act as a tailwind (if history is any indication) as the second half of an election year is typically very bullish. However, this bears watching closely as this year’s election has been anything but typical. Globally, growth remains moderate after several downward revisions (IMF) and will continue to reflect the divergence of the major global economies, both advanced and emerging. Within developed markets, the U.S. is likely to continue its leadership as it restarts its rate tightening cycle on the back of strong employment while the EU and Japan continue to apply QE to facilitate growth. Within emerging markets (aside from China), outcomes will be country specific: for example, India is growing strongly after central bank policy has stabilized the rupee, while Russia and Brazil (to cite just a few large EM countries) will continue to struggle due primarily to the political situation in each country (massive corruption in each case that will play out in different ways given that Russia is an autocracy and Brazil is a democracy). The probability of emerging market debt contagion has declined but bears watching on a country by country basis.
In his recent best-selling book, The Only Game in Town, Mohammed El-Erian uses the metaphor of a T-junction to describe where the global economy may be going. Policymakers can choose one road that leads to more coordination, productive policymaking and robust growth or the global economy can turn in the other direction if policymakers fail to live up to their responsibilities. This path will lead to lower growth, more pain (higher unemployment and lower living standards) and the significantly heightened risk of another crisis. Although the current economy is growing, the time to implement many needed structural changes to the economy is slipping away. After the financial crisis, central banks implemented historically unprecedented monetary policies to stabilize the economy. The effect of those policy decisions (whether you agree with them or not) has been to buy time for fiscal policymakers to make larger structural changes to the tax code, financial regulation and infrastructure spending (to name a few key issues). However, while the current bull market has become the second longest on record, there has been practically no movement on any of the major policy issues in the U.S. The same can be said in Europe (Greece has been kicked down the road, the refugee crisis is unresolved, and the potential for a Brexit is real) and Japan (lack of structural reforms to match the first two arrows of Abe’s shock therapy). The longer these important decisions are postponed, the less likely they are to be implemented as the political climate globally becomes more polarized, populist, nationalistic, anti-immigrant, and less conducive to compromise. The impact on markets will be more volatility, more exogenous events and the likelihood of more “black swans” that will catch investors off guard. Risk management and tactical investing will be key to navigating these more challenging markets.
With kind regards,
IMPORTANT DISCLOSURE INFORMATION
Investing involves risk. Past performance does not guarantee or indicate 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.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
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Performance Disclosure: Performance results from inception to the present are net of the current advisor fee for the program, 2.50%, paid quarterly in arrears. Performance is not net of custodial fees. The performance results shown include the reinvestment of dividends and other earnings.
Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
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