The Leuthold Group’s Core Investment Fund (NASDAQ:LCORX), recently marked the 25-year anniversary of the fund’s retail shareclass. In the following Q&A, Leuthold Goup CIO Doug Ramsey and Senior Analyst and Co-Portfolio Manager Chun Wang discuss tactical allocation strategies and the fund’s current positioning.
Q1 2021 hedge fund letters, conferences and more
Q. What are the misconceptions about tactical allocation strategies you’ve run into over the years?
Doug Ramsey: Tactical allocation strategies came to prominence in part when some managers successfully negotiated the 2002 bear market in stocks. That was a two-pronged bear market where, if you weren’t allocated to telecom and technology, you could still do well. And, with yields significantly higher then, you could also make money in fixed income. Today, yields on fixed income are too low to buffer equity performance or provide income. Also, correlations across all asset classes have gone up and stayed there. As a result, lots of “go-anywhere” funds lost money alongside everyone else during this cycle. They couldn’t avoid participating in the intra-year corrections of 2010, 2011, and 2012.
Going forward, we think investors will again discover the real value in disciplines that can take you from much lower to much higher exposures to a given asset class.
Q. With regard to portfolio construction, how important is getting your overall level of equity exposure “right” versus specific industry or stock selections within the equity allocation?
Chun Wang: Asset mix, industry selection, and stock selection are all critical parts of the process. Each of these components adds value in the long term on a stand-alone basis, but it’s the low correlation among these components that has shown to provide better risk-adjusted-performance streams over time. It’s very rare that all components suffer at the same time.
Q. The fund has latitude to invest 30% to 70% in equities. Where are you now?
Doug Ramsey: The Core Fund is currently positioned with net equity exposure of 54%, down from a recent peak near 60%. With many US equity valuation measures nearing - or, in some cases, even exceeding - their Technology bubble peaks of 1999 and 2000, we simply cannot justify anything close to maximum equity exposure here.
Q. So Chun, what is your view on the yield curve and how is it expressed in the fixed-income sleeve and how does it influence the portfolio overall?
Chun Wang: Inflation premium is likely to be the dominant driver of the yield curve. With the Fed’s new inflation regime to let inflation run hot and the prospect of more fiscal stimuli, there is more upside for inflation going forward. That should translate into steeper curves. We favor short-duration bonds in the fixed income sleeve and we’ve also rotated into reflation beneficiaries in our equity portfolio.
Q. Doug, can you talk a little bit about your recent observations that for many financial metrics, the rate of change is as important - or even more important - than absolute levels?
Doug Ramsey: Investors assume that monetary and fiscal policy will remain extremely accommodative for the forseeable future, and they are probably right. But they should be more concerned about whether a peak in monetary and fiscal stimulus is near. Yields on 10-year Treasuries have already doubled in the last six months, and yields on three-year and five-year notes are rising quickly too. In the past, increases like the ones we’ve seen in these yields eventually cause problems for stocks, even when the rise in yields started from a very low level. By the same token, a contraction this year in the federal deficit from 15% of GDP to, say, 10% of GDP will represent a contraction in stimulus. Yes, that level of fiscal stimulus is still massive. But markets have already priced that in, and are likely to at some point to respond to a worsening rate of change, or “first derivative.”
