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Leuthold: the lights have all turned red, time to lighten up on stocks

The Leuthold Group originally was an research provider to institutional and HNW investors. The success of their research enterprise led them to begin managing money for rich people as a side business, and then to managing money for bright individual investors. Since investing is purely a mind game (a stock is worth what people believe it's worth, a market rises when people believe it will rise ... an act accordingly), they have identified and continuously track at huge variety of cue that have more or less greater predictive reliability when it comes to the economy and markets.

The snapshot is their Major Trend Index, which looks at changes in four broad aggregates: sentiment, valuations, technicals (e.g. trendlines or market breadth) and cyclicals (the behavior of assets that rise and fall with the rhythms of the economy and market). They say: "Major Trend Index is a weekly email update on the status of our 130+ factor assessment of stock market risk."

As of yesterday, it went broadly negative.
The Major Trend Index slipped into its Negative zone as of the week ended October 6th, after spending the last nine months oscillating within the Neutral zone. Thanks mostly to a falloff in the Technical category, the reading dropped one notch to -2. (Scores of -2 to -5 are considered Negative for stocks in the intermediate term.)

The MTI’s decline prompted us to further reduce equity weightings in our tactical portfolios. In the Leuthold Core Fund, Core private accounts, and Leuthold Global Fund, equity hedges were adjusted to decrease net equity exposure to 44%. The Leuthold Core ETF exposure was also lowered to 44% via a reduction in long equity positions. Prior to yesterday’s changes, these portfolios had been positioned with net equity exposure around 47-48%. ("MTI: Turned Negative, Trimming Equities Further," 10/10/2023)
Two notes: (1) they're pretty good at what they do. Their core product is Leuthold Core Investment which is a five-star, Gold rated tactical allocation fund. Neither allocation is 60/40 but they can drop stocks as low as 40%. Since inception in 1995, they've made 7.8% APR; in every trailing period they post higher returns than their peers (0.7-3.5% APR) with noticeably lower volatility. Their portfolio decisions are driven by the output of their quant models, not by their managers' gut. On whole, I would describe them as institutionally cautious.

(2) this is not a "deep red" state yet. The system goes from three red stars to three green ones. Right now, the graphic summary is two red stars. Technicals are deteriorating (that the whole magic talk of 400 day moving averages and crossing or converging trend lines and such); up until now the other factors had been red but technicals were holding up.

Morningstar dislikes tactical allocation funds as a group. The argument is that most of them suck, and some suck badly, through a combination of mistimed guesses and high expenses. (Which, by the way, is true of almost all managers: whether it's a professional trading stocks or an amateur trading ETFs.) I own two such funds (FPA Crescent and Leuthold) because I know that I don't like losing money and don't have the time and expertise to tweak my portfolio. For those looking for managers who obsess about allocation so you don't have to, Bruce (despite the passing of the elder Mr. Bruce) and Columbia Thermostat tend to be in the top tier for Sharpe ratio across most trailing evaluation periods.
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Comments

  • edited October 2023
    Being curious. LCORX v BRUFX v FBALX chart from 2004 to present being limited by Bruce inception at 2004.

    FPACX v CTFAX v FBALX chart. Please correct me if FPA Crescent fund is not the correct ticker. Both the FPA and Thermostat are the loaded versions of these funds. There may be other choices.

    Remain curious,
    Catch
    Hi, catch! Pardon the intrusion on your post. FPACX is the correct symbol but it is a no-load fund with a $1500 minimum. Thermostat "A" has a load though those are increasingly nominal. It is, for example, no-load/NTF at Schwab. And there are, indeed, lots of other choices! David
  • @catch22 : Do you know why FBALX appears to breakout 03 / 2018 ?
    Thanks for the chart, Derf
  • Thanks, David_Snowball. I am confused why you own two tactical allocation funds but you recommend two entirely different ones, neither of which is Leuthold.
  • @Derf I added SPY and AGG (bond proxy) to a new chart that reflects total returns, 1 year prior and 1 year following March, 2018 to look for clues. It appears FBALX was better positioned to follow SP500 at the time. One may note the end of 2018. If my brain cells are working properly, was this not a very short period 'flash crash' of the equity market??? Help me remember, eh? CHART

    Meanwhile, I have classic rock music playing 'loud' behind my seated position and perhaps that is affecting my recall.:)
  • edited October 2023
    FBALX is classified as M* Moderate-Allocation with its nominal-equity of 62.24%. But its effective-equity is about 78.32% that should put it in Moderately-Aggressive-Allocation. Moreover, it has a growth tilt.
  • edited October 2023
    @yogibearbull Yuppers.....a most decent fund over the years.....1986.
  • Hi, BaluBalu.

    I own two because they have broad discretion of where to invest, similar philosophies ("make decent returns but don't lose Snowball's money") but different strategies (absolute value fundamental vs relative value quant).

    To be clear, I don't recommend any of them. I'm willing to report that I own two because they made sense given my personal circumstances and attitudes, and that, additionally, there are others which seem pretty consistently successful. Consistency is important to me, since it frees me from the need to look at my portfolio more than once a year. Other folks surely have other perspectives and so might well thrive with a momentum-tracking strategy or an options-hedged one or a mechanical one (Thermostat) or one that specializes in smid-value (Bruce).

    Think of it as fodder.

    David
  • @catch22 : I see management has been in place since 2008. Also only one bad year out of ten from being in top 25% !!
  • Thanks, David_Snowball. Tactical allocation is a tough strategy / category, unless it is strictly rules based like CTFAX. I do not own any of them. I am happy with PRWCX and FBALX. I am probably not beating either of them.
  • edited October 2023
    Agree, BaluBalu. Those who know me know that I've spent a lot of time looking at the Allocation-type funds over the years, and while traditional bonds have done them no favors with rates rising; we're already talking about reductions next year - maybe. Of all of these types of funds, PRWCX and FBALX seem to always stand at the head of the class.
  • I like AGOX.
  • I see that AGOX is listed as Tactical Allocation, but all I see at present is equity. Has it ever held fixed income?
  • I prefer PRWCX . It beat FBALX for 3-5-10-15 years and tie for one year and with lower SD.
    One of the only funds that looks everywhere. PRWCX has a big % of its bonds in HY+BL.
  • Agree, BaluBalu. Those who know me know that I've spent a lot of time looking at the Allocation-type funds over the years, and while traditional bonds have done them no favors with rates rising; we're already talking about reductions next year - maybe. Of all of these types of funds, PRWCX and FBALX seem to always stand at the head of the class.

    You should get to know the history of FPACX
  • Agree, BaluBalu. Those who know me know that I've spent a lot of time looking at the Allocation-type funds over the years, and while traditional bonds have done them no favors with rates rising; we're already talking about reductions next year - maybe. Of all of these types of funds, PRWCX and FBALX seem to always stand at the head of the class.

    You should get to know the history of FPACX
    From my post, it would be logical to assume that I am quite aware of its history. I’ve owned it and it is quite good… but… He always seems to be holding a lot of cash; regardless of the investing environment. That’s been fine recently, but there were times when I would rather have seen him buying something; especially when cash was paying nothing. Obviously, that has been beneficial recently. It’s one of the funds I routinely watch.

    In any event, M* has FBALX and PRWCX in the first quartile of performance every year other than 2022 (ten times). FPACX hit that milestone four times; two of those in the last two years when cash was better than most traditional fixed income vehicles. What do you see that you think I don’t?
  • @racqueteer

    I don't see why it would be logical since you don't mention it.
    Ah, maybe you meant

    >> Those who know me know ...

    Romick's cash thing has been discussed here for decades, iirc, and I myself care only about returns as a function of UI and vice-versa.
    FBALX has waaay higher UI most of the time (in keeping with Fidelity's ever aggressive equity-favoring approaches).

    I've no other thoughts on what you don't see. FPACX has nontrivially outperformed PRWCX the last few years, yes, and with lower or the same UI. If you knew all that, bully.
  • “ FPACX has nontrivially outperformed PRWCX the last few years,”

    Let’s be clear…. M* has PRWCX ahead by about 6% in 2020 and 3.5% in 2021. Behind by about 1.7% in 2022 and 1.6% this year. I’m not sure that supports your statement, but it certainly supports the notion that the cash helped its return recently.

    Again, I have no issue with FPACX being a decent fund, but I can’t see a good reason to prefer it over the other two. Ymmv
  • I see that AGOX is listed as Tactical Allocation, but all I see at present is equity. Has it ever held fixed income?

    Not sure I've seen it hold bonds, but the cash position has been significant from time to time. Also holds many etfs, you need to look at "others" under MS "holdings."
  • @racqueteer

    To be clearer, and to support my statement, FPACX has done better 3y, 1y, and ytd.

    Cumulative. I do not look at, care about, or judge by single years.

    That's all. Don't own any of them currently, but wish I had for the last decade.

    >> ... can’t see a good reason to prefer it over the other two.

    Again, as I said, whether UI matters. (Also the matter of availability.)
  • Does anyone know what is wrong with
    VY® T. Rowe Price Capital Apprec S ITCSX

    Slightly higher fees 0.89% vs 0.72%, but open?

  • edited October 2023
    The M* ITCSX report (10/28/2022) indicates this fund has been closed to new investors since 2014.
  • VY means that it's offered through a Voya retirement plan. It would open and close in rhythm with the main share class of the fund. Price would not offer access to Voya investors that it denied its own.
  • The M* ITCSX report (10/28/2022) indicates this fund has been closed to new investors since 2014.

    Without logging into Morningstar, it shows ITCSX as open, that’s why I asked. But of course it is limited to only certain group and it is closed anyway.
  • I dont remember when PRWCX closed but I could start a new position in ITCSX in an old VOYA retirement account I kept open in 10/2019, so ITCSX was open then.
  • sma3 said:

    I dont remember when PRWCX closed but I could start a new position in ITCSX in an old VOYA retirement account I kept open in 10/2019, so ITCSX was open then.

    I opened a small position in my IRA on June 16 of 2014, shortly after the coming closure was announced.
  • LCR is the Leuthold ETF. Do you think, will this perform as well as LCORX? Much lower ER.
  • edited October 2023
    LCR is a fund of funds. LCORX hold individual equities, bonds, etc.

    LCR seems like the sort of product Jan Loey's is not in favor of--as discussed in this thread.

    As described at etf.com:
    LCR is an actively managed fund of funds that provides exposure to a broad range of asset classes from global markets including emerging. The Fund uses a quantitative investment approach that focuses on sector selection. LCR considers multiple factors when making its allocations, including economic conditions, monetary factors, inflation, interest rates, investor confidence, and technical stock market measures. Under normal conditions the fund will hold 30%-70% of the portfolio assets in a combination of both stock and bond exposure with up to 20% in near-cash investments. Bonds selected will have no regard on issuer, maturity, and credit quality. LCR adjusts its portfolio as needed to keep the fund invested in sectors which can result in high portfolio turnover that reduces returns. The Fund may also invest in REITs, MLPs, commodities, volatility indexes, managed futures and short sales.
    Do I really need to pay leuthold .85 cents to invest 20% in money markets, 15% in tech, 15% in short-term treasuries, etc?

    It should also be noted that LCR is about 50% equities, while LCORX is about 16% equities.
  • @racqueteer

    To be clearer, and to support my statement, FPACX has done better 3y, 1y, and ytd.

    Cumulative. I do not look at, care about, or judge by single years.

    That's all. Don't own any of them currently, but wish I had for the last decade.

    >> ... can’t see a good reason to prefer it over the other two.

    Again, as I said, whether UI matters. (Also the matter of availability.)

    I don't want to come off as being argumentative generally, but I think this is an important point...

    The 3y and 1 yr figures are heavily influenced by the ytd figures. In a sense, you're counting them over and over this way. As a result, recent returns skew those two values. That's why I prefer to look at rolling or annual results for decision-making, but not "single years". I think it potentially gives one much more insight into performance. That FBALX and PRWCX have dominated during an 11-year period makes me prefer them long-term. That FPACX is performing well in the last couple of years makes it interesting as a current choice. That it is available, whereas PRWCX is not, is certainly a point in its favor.

    Now, at the risk of appearing ignorant, and because I've been unable to come up with an answer independently, what is "UI" again?
  • edited October 2023
    Using the trick here, https://www.mutualfundobserver.com/discuss/discussion/comment/168701/#Comment_168701

    FBALX 3-yr Rolling Returns, w/start 10/22/12, https://stockcharts.com/h-sc/ui?s=FBALX&p=W&st=2012-10-22&id=p19590251121

    Now for PRWCX, https://stockcharts.com/h-sc/ui?s=PRWCX&p=W&st=2012-10-22&id=p85194984576

    FBALX may have had better bounces, but PRWCX is more consistent - not surprising.
  • David, thank you for making me aware of the Leuthold update and star system.
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