MPG Core Tactical 60/40: August 2014 Performance Update


MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

As always it’s important for both our new readers and in some cases…our existing ones to revisit what we are doing here with this series of articles:

Click here to revisit the first edition of the MPG Core Tactical 60/40 Portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (September 2, 2014).

Click here to compare our portfolio against the benchmark.

The expression of “the writing is on the wall” could not be more appropriate as we inch closer to wrapping up 2014. We work and interact with countless people in the financial services industry ranging from those who manage billions in the most sophisticated manners available, all the way to a retired blue collar worker who wants straight forward investor education and service on how to invest.

What each of these two parties have in common is that they don’t trust tomorrow and all of the warnings about a frothy and dangerous investing environment are as documented as they’ve perhaps ever been.

What adjustments did we make?

The moves we made in were as follows:

8/18/14: Sold entire position of LSOFX (LS Opportunity Fund) @ $118.20 (~$50k total)

8/19/14: Sold 100 shares of TSLA (Tesla Motors) @ $254.87/share (~$25k total)

8/25/14: Bought 8,260 shares of MABFX (Merk Absolute Return Currency Fund) @ $9.08/share (~$75k total)

8/26/14: Bought 1,569 shares of FTGC (First Trust Global Tactical Commodity Fund) @ $31.85 (~$50k total)

With the exception of the Tesla sale our moves this month were all in line with reallocating our exposure to alternative investments. We’ll touch on this more later but let’s first address the sale of a market darling that we haven’t owned for all that long.

The simple rationale behind this move was to take profit on a stock that has returned north of 40% for us since the time we bought it. The reality and likelihood of it running even higher is actually strong but in a case like this it’s critical to maintain some “sell side discipline”. Holding on a trendy stock for a few more months while the broader markets are also closer to the side of overheating is just asking for trouble. We may buy it back but even if takes off for the races again…this old adage will be applicable, “ You never go broke taking a profit.”

So…let’s get back to the main portfolio adjustment; Alternative Investments! Depending on who you speak to, it’s either described as (1) the future and the sophisticated way to invest or (2) more gimmicky products that mutual fund companies are pitching to their clients even though their performance has been dismal relative to the stock market.

Sometimes it’s important to reset expectations and remember the “WHY” behind what you bought as an investment. In the case of alternatives you typically invest in them to hedge your portfolio against either (and/or both) stock and bonds going down together. Think of an asset class that you would feel comfortable investing in right now with the “writing on the wall” in the bond markets being one that could really sting investors accustomed to boring and steady returns; or a stock market that is setting records even though for the most part it’s not uncommon knowledge that the real economy doesn’t reflect the best of times. The “smart” and ultra wealthy money is actually avoiding both stocks and bonds right now.

We’ll write more in future articles on the science and reasoning behind why you need alternative investments in your portfolio mix but for now just know that we are increasing the allocation towards them. This month we just made sure we have the right ones and in the case of LSOFX (LS Advisors Opportunity) it wasn’t performing in line with expectations and falling behind its peers in dramatic fashion. Normally one should exercise more patience with an investment like this but in a nutshell, the fund exhibits too much of a correlation to the stock market and that’s not really what we want right now.

As for the standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the last trading day of the month we bought more bonds with proceeds from equities:

8/29/14: Sold 111 shares of IVV @ $82.58 (S&P 500 Index) and bought 282 shares of BND @ $201.96 (Vanguard Total Bond Index)

What’s interesting to note about this month’s reallocation is that it in essence was your standard “ho-hum” buy low and sell high type of adjustment. If you look back to last month you’ll see that each sale was at a higher price than the respective purchase and vice versa. Part of this exercise that we are tracking with the MPG Core Tactical Portfolio is to give you a running record with proof that even in some of the trickiest markets simply staying disciplined and almost taking a calloused approach to making your portfolio moves according to the appropriate asset allocation mix for your risk tolerance is what can often beat “timing the market”.

At one point in the month the MPG Core Tactical Portfolio rebounded quite well compared to its benchmark. Our continued defensive moves really closed the gap but as you may know…this market continues to defy odds and we saw the S&P 500 scratch, fight, and claw back the last two weeks of August. On August 16th the gap between the passively managed 60/40 index blend was only ahead of the MPG Core Tactical Portfolio actually by about 10 basis points.

The MPG Core Tactical Portfolio is +3.55% YTD. The passively managed 60/40 Benchmark is up +6.75% YTD. The S&P 500 was pretty much trading sideways in a fairly narrow range but those last two weeks bumped the index up to where it is now at +8.56% YTD. The Nasdaq is still leading all equity indices at a very impressive clip of +11.33% YTD.

Lastly, even though there still remains increased caution over bonds the bond index is tracking at +2.97% YTD.

Where are we going from here?

Clearly, your guess is as good as anyone when it comes to what lies ahead. Let’s keep it simple and focus on things we can hopefully all agree on. It’s increasingly clear that these mini-corrections (market pull-backs really) won’t satisfy the wicked personality of Mr. Market when he finally decides to really sell off. He is also know as the “Great Humiliator” and if you’re a fairly bright person who has been on the other end of a market that isn’t behaving the way history or the way that logic tells us it will…you will begin to get more and more defensive.

The bottom line is that we run the risk of sounding like everyone else (depending on if you’re in the bull camp or the bear camp). In our opinion there is a case for a continued longer-term bull market but in the interim EVERY SINGLE THING WE MONITOR tells us to remain cautious in the near-term. We’re not trying to play the role of “Chicken Little” or the “Boy Who Cried Wolf” but with the odds at such…we’re buying more the things we own that are NOT correlated to either stocks or bonds.

See you next month!

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