Objective and strategy
Leuthold Core pursues capital appreciation and income through the use of tactical asset allocation. Their objective is to avoid significant loss of capital and deliver positive absolute returns while assuming lower risk exposure and lower relative volatility than the S&P 500. Assets are allocated among stocks and ADRs, corporate and government bonds, REITs, commodities, an equity hedge and cash. At one time, the fund’s commodity exposure included direct ownership of physical commodities. Portfolio asset class weightings change as conditions do; exposure is driven by models that determine each asset class’s relative and absolute attractiveness. Equity and fixed-income exposure each range from 30-70% of the portfolio. At the end of 2013, equities comprised 67% of the portfolio. At the end of 2015, 55% of the portfolio was invested in “long” equity positions and 17% was short, for a net exposure under 40%.
Adviser
Leuthold Weeden Capital Management (LWCM). The Leuthold Group began in 1981 as an institutional investment research firm. Their quantitative analyses eventually came to track several hundred factors, some with data dating back to the Great Depression. In 1987, they founded LWCM to direct investment portfolios using the firm’s financial analyses. They manage $1.6 billion through five mutual funds, separate accounts and limited partnerships.
Manager
Doug Ramsey, Chun Wang, Jun Zhu and Greg Swenson. Mr. Ramsey joined Leuthold in 2005 and is their chief investment officer. Mr. Swenson joined Leuthold in 2006 from FactSet Research. Ms. Zhu came to Leuthold in 2008 after earning an MBA from the Applied Security Analysis Program at the University of Wisconsin-Madison. While there, she co-managed a $60 million university endowment fund run by students at the program. Mr. Wang joined in 2009 after a stint with a Hong Kong-based hedge fund and serving as director of research for Ned Davis Research. Collectively the team shares responsibility for testing and refining the firm’s quantitative models and for managing four of their five funds, Grizzly Short (GRZZX) excepted.
Strategy capacity and closure
About $5 billion. Core was hard-closed in 2006 when it reached $2 billion in assets. That decision was driven by limits imposed by the manager’s ability to take a meaningful position in the smallest of the 155 industry groups (e.g. industrial gases) that they then targeted. Following Steve Leuthold’s retirement to lovely Bar Harbor, Maine, the managers studied and implemented a couple refinements to the strategy (somewhat fewer but larger industry groups, somewhat less concentration) that gave the strategy a bit more capacity.
Management’s stake in the fund
Three of the fund’s four managers have investments in the fund, ranging from Mr. Swenson’s $50,000 – 100,000 on the low end to Mr. Ramsey at over $1 million on the high end. All four of the fund’s trustees have substantial investments either directly in the fund or in a separately-managed account whose strategy mirrors the fund’s.
Opening date
November 20, 1995.
Minimum investment
$10,000, reduced to $1,000 for IRAs. The minimum for the institutional share class (LCRIX) is $1,000,000.
Expense ratio
1.16% on assets of $871 million, as of January 2016.
Comments
Leuthold Core Investment was the original tactical asset allocation fund. While other, older funds changed their traditional investment strategies to become tactical allocation funds when they came in vogue three or four years ago, Leuthold Core has pursued the same discipline for two decades.
Core exemplifies their corporate philosophy: “Our definition of long-term investment success is making money . . . and keeping it.”
It does both of those things. Here’s how:
Leuthold’s asset allocation funds construct their portfolios in two steps: (1) asset allocation and (2) security selection. They start by establishing a risk/return profile for the bond market and establishing the probability that stocks will perform better. That judgment draws on Leuthold’s vast experience with statistical analysis of the market and the underlying economies. Their “Major Trends Index,” for example, tracks over 100 variables. This judgment leads them to set the extent of stock exposure. Security selection is then driven by one of two strategies: by an assessment of attractive industries or of individually attractive stocks.
Core focuses on industry selection and its equity portfolio is mirrored in Leuthold Select Industries. Leuthold uses its quantitative screens to run through over 115 industry-specific groups composed of narrow themes, such as Airlines, Health Care Facilities, and Semiconductors to establish the most attractive of them. Core and Select Industries then invest in the most attractive of the attractive sectors. Mr. Ramsey notes that they’ll only consider investing in the most attractive 20% of industries; currently they have positions in 16 or 17 of them. Within the groups, they target attractively priced, financially sound industry leaders. Mr. Ramsay’s description is that they function as “value investors within growth groups.” They short the least attractive stocks in the least attractive industries.
Why should you care? Leuthold believes that it adds value primarily through the strength of its asset allocation and industry selection decisions. By shifting between asset classes and shorting portions of the market, it has helped investors dodge the worst of the market’s downturns. Here’s a simple comparison of Core’s risk and return performance since inception, benchmarked against the all-equity S&P 500.
| APR | MaxDD | Months Recover | Std Dev | Downside Dev | Ulcer Index | Bear Dev | Sharpe Ratio | Sortino Ratio | Martin Ratio | |
| Good if … | Higher | Lower | Lower | Lower | Lower | Lower | Lower | Higher | Higher | Higher |
| Leuthold Core | 8.4 | -36.5 | 35 | 11.0 | 7.5 | 8.9 | 6.8 | 0.55 | 0.81 | 0.68 |
| S&P 500 Monthly Reinvested Index | 8.2 | -50.9 | 53 | 15.3 | 10.7 | 17.5 | 10.3 | 0.38 | 0.55 | 0.34 |
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Over time, Core has had slightly higher returns and substantially lower volatility than has the stock market. Morningstar and Lipper have, of course, different peer groups (Tactical Allocation and Flexible Portfolio, respectively) for Core. It has handily beaten both. Core’s returns are in the top 10% of its Morningstar peer groups for the past 1, 3, 5, 10 and 15 year periods.
Our Lipper data does not allow us to establish Leuthold’s percentile rank against its peer group but does show a strikingly consistent picture of higher upside and lower downside than our “flexible portfolio” funds. In the table below, Cycle 4 is the period from the dot-com crash to the start of the ’08 market crisis while Cycle 5 is from the start of the market crisis to the end of 2015. The 20-year report is the same as the “since inception” would be.
| Time period | Flexible Portfolio | Leuthold Core | Leuthold | |
| Annualized Percent Return | 20 Year | 7.1 | 8.4 | |
| 10 Year | 4.9 | 5.3 | |
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| 5 Year | 4.1 | 5.6 | |
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| 3 Year | 3.3 | 8.6 | |
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| 1 Year | -5.2 | -1.0 | |
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| Cycle 4 | 7.3 | 11.9 | |
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| Cycle 5 | 2.8 | 3.1 | |
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| Maximum Drawdown | 20 Year | -38.6 | -36.5 | |
| 10 Year | -36.5 | -36.5 | |
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| 5 Year | -14.9 | -15.4 | |
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| 3 Year | -11.1 | -3.7 | |
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| 1 Year | -9.4 | -3.2 | |
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| Cycle 4 | -23.8 | -21.8 | |
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| Cycle 5 | -36.9 | -36.5 | |
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| Recovery Time, in months | 20 Year | 50 | 35 | |
| 10 Year | 43 | 35 | |
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| 5 Year | 18 | 23 | X | |
| 3 Year | 12 | 4 | |
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| 1 Year | 8 | 7 | |
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| Cycle 4 | 39 | 26 | |
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| Cycle 5 | 43 | 35 | |
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| Standard Deviation | 20 Year | 11.9 | 11.0 | |
| 10 Year | 11.7 | 12.0 | X | |
| 5 Year | 9.3 | 8.5 | |
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| 3 Year | 8.1 | 7.0 | |
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| 1 Year | 8.7 | 4.9 | |
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| Cycle 4 | 9.9 | 10.4 | X | |
| Cycle 5 | 12.7 | 12.9 | X |
Modestly higher short-term volatility is possible but, in general, more upside and less downside than other similarly active funds. And, too, Leuthold costs a lot less: 1.16% with Leuthold rather than 1.42% for its Morningstar peers.
Bottom Line
At the Observer, we’re always concerned about the state of the market because we know that investors are much less risk tolerant than they think they are. The years ahead seem particularly fraught to us. Lots of managers, some utterly untested, promise to help you adjust to quickly shifting conditions. Leuthold has delivered on such promises more consistently, with more discipline, for a longer period than virtually any competitor. Investors who perceive that storms are coming, but who don’t have the time or resources to make frequent adjustments to their portfolios, should add Leuthold Core to their due-diligence list.
Investors who are impressed with Core’s discipline but would like a higher degree of international exposure should investigate Leuthold Global (GLBLX). Global applies the same discipline as Core, but starts with a universe of 5000 global stocks rather than 3000 domestic-plus-ADRs one.
