Dear clients, friends and family:
Following is the 2015 second quarter net performance for CMG’s Tactical Investment Strategies along with our thoughts on each strategy over the past quarter. In addition, we have provided the net performance for the CMG Managed Blends and the CMG Classic Blends. We have also reflected the net performance for our tax-deferred variable annuity tactically managed programs. 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 +0.06% for the second quarter, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned +0.25% for the second quarter, net of fees. The strategy began the quarter invested long in high yield bonds. High yields trended higher for most of the quarter before pulling back in June, leading to a sell signal in the strategy and a move to a defensive position and out of high yields. The strategy finished the quarter in a cash position. High yields, a hybrid asset class, face headwinds from both equity and bond markets. Equity indices remain near record highs and are due for a correction and bond markets are facing a likely rate hike at some point in the near future. High yields will struggle in the face of those headwinds and supports the need for a risk managed approach as we face a different investing backdrop than the past several years. As tactical managers, we believe that actively managing risk and awaiting an opportunity to re-enter the market at lower bond prices and higher yields is prudent at this point in the interest rate cycle.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +0.63% for the second quarter in the TCA (Trust Company of America) portfolio, +0.46% in the TDA portfolio and -0.67% in the ETF portfolio, net of fees. The Jefferson National Tax-Deferred Variable Annuity portfolio returned -2.88% for the second quarter, net of fees. The strategy began the second quarter in a modest risk position with approximately 16% allocated to fixed income and 84% to diversified equity positions. During the quarter, the strategy decreased allocations to convertible bonds and technology rotating into healthcare and inflation protected bonds. The equity allocation in the portfolio shifted from technology and biotech into healthcare and mid-cap stocks. The strategy remains in a moderate risk position heading into the third quarter with the low allocation to fixed income (16%). 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 +6.18% for the second quarter, net of fees. Scotia Dynamic generated strong strong performance in April with allocations to biotechnology, healthcare and energy services. In May, the strategy was again overweight basic materials, energy services, and healthcare equities while at the same time holding larger than average cash positions. In particular, allocations to energy services, healthcare and precious metals contributed to positive performance for both months. Equity markets were particularly volatile during June as Greece appeared headed for a Euro exit. For June, the strategy was overweight biotechnology, electronics, healthcare and small caps. Electronics and small caps contributed positive performance for the month while biotechnology and healthcare were the largest detractors.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned -4.54% for the second quarter, net of fees. Tactical Rotation began the quarter positioned 50% to international equities (EFA) and 50% to REITs (VNQ). Equity markets trended higher for the month generating strong positive returns in international equities while REITs, along with bonds, posted losses for the month. The strategy rotated out of REITs and into domestic equities and was allocated 50% to international equities (EFA) and 50% to domestic equities (SPY) for May. U.S. equities outpaced international stocks, which declined modestly, driving positive performance for the strategy. June was a tumultuous month for global equity markets as the debt crisis in Greece reached a tipping point. In June, the strategy held the same allocations as in May with a 50% to international equities (EFA) and 50% to domestic equities bonds (SPY). Both domestic and international equities struggled during the month. Commodities were the only positive performing asset class for the month as bonds and REITs also posted negative returns. The strategy held its international equity position (EFA) into July with the remaining 50% of the portfolio allocated to cash.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) returned -6.36% for the second quarter, net of fees. For the quarter, the strategy generated 15 total trades, 6 of which were profitable and 9 that were not. Furthermore, the strategy generated 14 long trades and 1 short trade (an overbought mean reversion trade). Scotia’s losses came primarily from long trades with 8 losing trades out of 14. The long-term indicator for the strategy was bullish for the entire quarter while the intermediate-term indicator switched from bullish to bearish on two separate occasions. When the strategy’s long- and intermediate-term trends are in disagreement, the strategy typically remains in cash (the strategy’s mean reversion overlay may still trigger a trade independent of the core trend-following model).
While the focus for most of the year has been on the Federal Reserve and the timing of an interest rate hike, Greece and China made all the headlines in the past quarter. The situation in Greece is nothing short of a tragedy at this point. The fear of a Grexit (a Greek exit from the Euro and potentially from the EU) was never more acute than in June and July. Brinkmanship with the Troika group of creditors (the European Commission, the European Central Bank and the International Monetary Fund) led Alexis Tsipras, the Greek Prime Minister, to stage a hastily organized national referendum in which Greeks said no to more austerity and the terms of the Troika’s proposal. As Greek banks remained shuttered for several weeks, the Troika did not budge forcing a humbling reversal for Tsipras in which he was forced to accept the harsher terms for the extended bailout than the Greeks voted against in the referendum. He was forced to sack his Finance Minister, Yanis Varoufakis, who was at the heart of the failed negotiations. While the Troika may have won the standoff, there are no winners as Greek democracy has been subverted and the fundamental economic challenges have been kicked down the road. It is hard to fathom how Greece will be able to implement the prescribed reforms or escape from a depression that now rivals the U.S. Great Depression in both depth and duration.
After a spectacular run up in late 2014 and early 2015, China’s stock market has crashed. At its peak, the Shanghai Composite Index was 150% higher than a year ago before the crash that has now whipped out more than $4 trillion of equity value. China’s main share markets have lost close to 30% since mid-June and remain volatile as the Chinese authorities attempt to implement a number of measures to provide stability. Unfortunately their attempts to ban short selling, impose restrictions on trading and potentially criminalize trading have only exacerbated the volatility and undermined confidence in the market. This reaction now threatens the economic liberalization that is needed for China’s economy to grow and transform into one more balanced than the manufacturing, export-driven economy that has powered growth for the past two decades.
Against the backdrop of Greece and China, the focus is coming back to the Federal Reserve and the potential for a rate hike in September. Fed Chair Yellen is in a difficult situation as economic indicators continue to send mixed signals on the U.S. economy. Growth is still forecasted to be in the 3% range for the year but masks a number of concerns, namely declining commodity prices that have hit some states particularly hard and a stronger dollar that has slowed export growth. Robust employment data and slack in inflation support the case for a rate hike but it may come at the risk of international stability. A rate hike would likely add fuel to an already strong dollar and for many emerging markets increase the likelihood of a dollar funding crisis. Additionally, are stock markets prepared for a revaluation based on a new interest rate environment? From our perspective, we believe that equity valuations have outpaced growth expectations and fundamentals, increasing the likelihood for a correction that is long overdue and not fully priced in by investors. Despite the gyrations of the past six months, stock and bond markets are frustratingly flat for the year. While Greece and China may fade into the background, investors should expect more of the same in the second half of the year – more volatility and modest return expectations.
With kind regards,
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative 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.
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.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
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.
CMG Global Equity FundTM, CMG Tactical Bond FundTM and the CMG Tactical Futures Strategy FundTM: Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Global Equity FundTM, CMG Tactical Bond FundTM and the CMG Tactical Futures Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456 (1-866-264-9456). Please read the prospectus carefully before investing. The CMG Global Equity FundTM, CMG Tactical Bond FundTM and the CMG Tactical Futures Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).