MPG Core Tactical 60/40: April 2015 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

Every month we write to you and chat about the markets and how people are behaving based on your results. Sometimes it’s good to refresh (click here) our memory of why we do this and what the MPG Core Tactical 60/40 portfolio is intended to do. First and foremost, our aim with this series of monthly articles is not to “beat the market”, race against any benchmark, or pretend we have a crystal ball. In the most ironic way possible, those that follow this series of articles will eventually understand that the primary focus of this exercise is to show you how picking stocks and trying to “time markets” is usually a hit or miss expedition. At the end of the day (or in this case, whenever we decide to stop writing these “letters”), you will likely see that holding a properly disciplined and balanced portfolio of instruments tracking specific indexes beats out most “potpourri” type portfolios. Every month of the year offers the financial media something to tease investors with. Here come all the headlines that tend to repeat themselves much like in the movie Groundhog Day. It begins with reminders of the supposed “January Effect” and ends in December with the “Santa Claus Rally”. As 2015 races along we’re already in May and it’s time to digest fabled warnings of “Sell in May and Go Away”. Some things never change (the media) and some things always will (the market). What’s different this past month is that volatility really slowed down. April still jostled investors around but for the most part the month ended with mixed results and couldn’t really give us a feel for any real direction. Unlike what we saw in March, the market roller coaster flattened out a bit. The Dow Jones only had four days of triple digit swings (up or down). We also witnessed a few highs mid month to only see them come right back down and essentially give it all back to keep us range bound. Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (May 11, 2015). Click here to compare our portfolio against the benchmark” What adjustments did we make? We decided not to dance too much with Mr. Market in April: 4/9/15:  Sold ~236 shares of DXMIX (Direxion Managed Futures Index) @ $42.74 ~ $10k worth 4/9/15:  Bought 200 more shares of VWO (Vanguard Emerging Markets Index) @ $43.85 ~ $9k worth The challenging part about making this adjustment, albeit minor, is that it’s extremely difficult to sell something we love. Taking a bit of money off the table by trimming our exposure to Managed Futures is not easy. Over the past rolling 12 month period this investment has returned just over +16% versus the S&P 500 at around +12%. Oddly enough this position is not supposed to be doing that well in an environment where the stock market is running towards record levels. Our intent with this holding is to prepare for when the stock market gets stung again. Owning alternative investments like Managed Futures is akin to “fixing your leaky roof on a sunny day”. Speaking of Alternative investments…one piece of that puzzle finally began to break down a bit in April; REITs (Real Estate Investment Trusts). REITs had been the hottest asset class in 2014 and trounced the stock market. They finally turned south and are now down -0.99% YTD versus the S&P which is up +2.77%. This recent pullback is partly due to fears of the Fed raising interest rates but also because there was some profit taking. We have decided to keep our exposure at roughly 5% of the MPG Core Tactical 60/40 portfolio. In other words, don’t rush to exit door yet…As a matter of fact we believe there are still some pockets of value in REITs and rates are not going up yet. Simply put, the economy has to be a lot hotter for the first rate hike to materialize and even when it does, our view is that it will be so overly telegraphed and already “baked into the pie”. We find it interesting that those who predicted a rate increase in the first quarter forgot to mention how badly they missed the mark. In a world where the 10-year Treasury offers less than 2% we think REITs still should hold a place in every portfolio. The current yield on VNQ (Vanguard REIT Index) is 3.71%. The MPG Core Tactical 60/40 portfolio is now +1.52% YTD. Aside from both Small Caps (+4.16%) and Mid Caps (+5.16%) beating Large Caps YTD, the equity asset class that is really outperforming is International. Both developed International (+9.97%) and Emerging Markets (+9.80%) are surprising all those who seem to be traditionally underweight to this piece of the allocation puzzle and those that raced to add domestic exposure during the first quarter of this year. With our 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 sold equities and bought bonds: 4/30/15:      Sold 6 shares of IVV (S&P 500 Index) @ $209.85 ~$1k Bought 98 shares of BND (Vanguard Total Bond Index) @ $82.91 ~$8k This very “quiet” adjustment speaks to how range bound and sideways the market essentially moved for the month. Had we made the move mid-month as opposed to the automatic reallocation at the end of the month, the adjustment would have obviously been greater. Where are we going from here? Let’s revisit the good feelings some investors are enjoying with their allocation towards International equities. In some of our recent writings we actually spoke of the “changing of the guard” from domestic leadership to international. That being said, however, make no mistake about it…nobody is out of the woods yet. Take for example the headlines in Greece that somehow seem to have been swept under the rug. Has anything truly been resolved over there? This whole market (both domestic and international) could blow up in an instant. The underlying issue is the massive debt levels our entire global economy is saddled with. Global debt has risen a whopping 33% over the past seven years! While we could make economic arguments on how some debt levels can be beneficial, the reality is that eventually markets will be forced to react when the proverbial “Band-Aid” gets ripped off. Part of the reason we touched on the near-term appeal of holding REITs even amongst a threat in eventual rate hikes, is that the Fed is basically handcuffed right now. Raising interest rates is their tool to fend off inflation but our reality is becoming more of a disinflationary environment. In other words, our ridiculous debt levels will have a causation effect of creating deflation at the extreme. Don’t let the constant media drum beat of rising interest rates change your discipline or adherence to an intelligent portfolio allocation. In a nutshell, you’ll notice that we continue to maintain a very heavy balance towards Alternative investments. Although it may not intuitively feel right, even a conservative portfolio needs at least 20% exposure to them. If you’ve missed previous articles and the reasoning to hold commodities, currencies, REITs and the like…just know that when the markets eventually crumble you will be beyond grateful owning investments that are not highly correlated to traditional stock or bond indices. For now, however, we must all play the game and continue dancing with Mr. Market. Avoiding equities is difficult to do and even though this environment feels like Groundhog Day…a different ending is brewing. See you next month!

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