What's in Your Investment Kitchen

 What’s in Your (Investment) Kitchen? By John Mauldin 

For the past four to five years, I have been on a journey to develop a comprehensive set of portfolio programs and strategies that fit my worldview and also reflect what I believe are likely probabilities for the coming decade. 

I’ve often said this coming decade presents great opportunity––and serious risk. How do we capture that in a portfolio? Quite simply, one ingredient at a time. I have put together an all-star team of portfolio managers and strategists, having delved deeply into my contact list to broaden potential investment targets, while trying to avoid the problems that come with being either too big or too small. I think I’ve done it. Or, more accurately, we have done it. (Well, at least to my satisfaction. You will have to make your own assessment.) 

I refer to all of the various firms and professionals I engage as “Team Mauldin.” Through CMG Capital Management Group (CMG), based in Malvern, Pennsylvania, an SEC registered investment advisor of which I am the Chief Economist, we have developed a series of what we think of as “core portfolio ingredients,” which can be adapted alongside other strategies to meet individual investor needs.

 Internally, we have been referring to the rather large number of strategies on our platform as our “kitchen.” Essentially, a member of our team of trained investment professionals can help you create a portfolio designed for your personal situation and unique set of circumstances. There is no one size-fits-all. 

Frankly, one of the advantages of working with Team Mauldin is our access. We have the advantage of being the right size and having the right amount of connectivity. Access to many of the investment opportunities we favor are too small for the big investment firms. On the other hand, many small advisor/brokers don’t have our breadth of connections and the access we have. 

Thus, we can get into the largest of hedge funds—often with multi-million-dollar investment minimums––for smaller investment minimums. We have multiple short-term private cash flow investment strategies on our menu, which provide income opportunities that  far exceed those in typical bond mutual funds or ETFs. Our absolute return managers are at the top of the list, in my opinion. And our kitchen will become your kitchen. 

There is no requirement to order the full menu. You may be happy with much of what is already in your portfolio but would like to add a dessert or a side salad. Maybe an adult beverage? We have all that and much more in the Mauldin Kitchen.

Following is a brief description of what is in the kitchen and––just as importantly—some insight on how the team came together. After reviewing it all, you will have a chance to decide for yourself whether to take a more extensive tour of what we have to offer. In keeping with the theme, I can almost guarantee you that you will find some new and different items to delight your investment palate. 

What’s in the Mauldin Kitchen? 

To begin with, we divide typical portfolios into what we call “core” and “explore” strategies. From a basic philosophical standpoint, we might assume that 80% of the portfolio should be considered core. (As the following graph shows, that number can vary due to individual portfolio needs.) That 80% core position is designed to grow back to 100% within four to five years, so it’s not very aggressive––especially in the more conservative models. 

But we think it is also not as volatile. (With that said, past performance is not indicative of, or guarantee in any way, future returns.)  Then, we have the explore side. That’s where we look for investments that have far greater potential for multiples over time. Typically, those are for accredited investors, but we also have some opportunities for those with a net worth less than $1 million—which I outline below.

 We think of core as a mix of absolute return strategies, dividend return strategies, short-term private credit, and cash flow/fixed income portfolios. If you are an accredited investor, there will be both private and public funds available. 

Again, in the explore category, we are looking for growth opportunities with the potential for significant multiples. One example of a public investment would be a portfolio strategy we use based upon the highest conviction stocks chosen by Cathie Wood of ARK Invest, who runs ARK’s growth technology ETFs. 

As an example, her flagship ETF has about 50 stocks in it. She also has another series of specialized ETFs, with additional companies. The strategies she has created for us have 10-12 of her firm’s highest conviction ideas.  

This is not a static portfolio; in fact, as of the week of this writing, she actually removed two companies and added two others. It also has the potential to be highly volatile with high risk, typical of concentrated growth strategies, so you would want to have a long investment time if you were to select it. 

We also have other growth portfolios, depending on your risk tolerance. Similarly, we have a smaller portfolio of private companies that we believe have the potential for substantial growth. If they are successful, at some point they will go public or be purchased by another company. 

Those are purchased through a broker-dealer with which we are associated (I will explain below). The private opportunities we offer come from the network of investment resources and venture capitalists that I have built over the years. Your Team Mauldin professional can tell you about their individual backgrounds. These are people I want on my team, and I think you will want to “draft” them as well.

 Given that I am writing this the week after the Super Bowl, I think they are comparable to Tom Brady (long term performance and track record!) in their respective arenas.

 Sidebar: a number of people asked me what I think about Bitcoin. While I wish I had bought it when I first heard about it––at under one dollar––I didn’t. So, let’s start with the opportunity it presents today. First of all, while I am a huge believer in the potential of blockchain technologies, I am not sure that I understand Bitcoin and see all sorts of risks that accompany the real potential it offers. Is it the right investment for my explore category? Maybe, but just a small allocation of my portfolio, in my view.

 There are so many other opportunities that I think provide far more potential than what Bitcoin might present, especially in terms of risk to reward. So, I take what some might think of as an explore opportunity in Bitcoin and put it in a portfolio of companies I think have literally magnitudes more potential. Will some disappear? Probably. But hopefully some will do even better than I think. That’s why you diversify your explore portfolio. Back to the kitchen… 

Philosophically, this is one of the reasons that your core portfolio is so important. It is an anchor for your total portfolio so that your net worth (and future lifestyle) is not severely compromised if your explore portion doesn’t work––all while giving you the freedom to capture the potential of the exciting new technologies that will be developed this decade. 

Below is a simple pyramid representing how we think about portfolio allocation. Note that there is some significant variation in the allocations toward each category. Every investor is different and has different needs. Some investors of a certain age and net worth should be focused primarily on cash flow opportunities and ignore the explore portion. Others who may be younger and have higher net worth and/or large incomes may want to have a greater portion of their funds dedicated to exploration. 

Then again, you may have your explore portion of the portfolio covered and need to concentrate more on core––or vice versa. Regardless of your circumstances, we are here to help. At Team Mauldin, we have the flexibility to tailor a portfolio to your individual situation and goals. And, as I said earlier, your personal situation may dictate that you just want the salad or desserts from the Mauldin Kitchen. 

We can tailor our menu to your individual investment “appetite,” including those who feel the market is over-valued.

Thinking About Core 

In my opinion, more conservative core portfolios should generally focus on absolute return strategies. Investors with a longer time horizon might look at core dividend strategies, which have market risk, but also a long-term historical track record of outperforming during difficult market periods following times when valuations were high. 

In fact, let’s start by looking at high and growing dividend strategies, which are useful in understanding the overall absolute return strategy. First, let’s look at this chart from my friend and Team Mauldin partner Kevin Malone at Greenrock Research. He developed it to illustrate the longer-term potential of high and growing dividend strategies. As such, it does not refer to any particular strategy on our platform. It is a generic index. 

The first chart captures returns on the S&P 500 by decade. Note that the “aughts” had a negative (almost -1%) return. Today’s valuations resemble those of the year 2000. Why should we expect different results? The 2010s were marked by an extraordinary bull market. You were more or less rewarded for staying in the market for 20 years, though with the smallest average annual return since 1960. Source: Kevin Malone 

 Kevin then shows what a dividend-focused strategy would have returned over the same periods. This chart uses Jeremy Siegel’s data, taking the 100 highest-paying dividend stocks in the S&P 500 and rebalancing every year.1 Source: Kevin Malone 

We have multiple dividend growth strategies in the Mauldin Kitchen, both US and foreign, each with a different focus, that have specifically chosen investment targets. 

Our Greenrock High and Growing Dividend stock strategy comprises global dividend stock portfolios of approximately 25 highest conviction stocks. That is different than most ETFs and mutual funds, which––because they end up becoming quite sizeable––are forced to have a large number of companies and typically larger portfolio companies for liquidity purposes. I prefer more targeted approaches, and, in some cases, we can negotiate costs that are very competitive with or even lower than ETFs or mutual funds. (Obviously, costs vary from manager to manager and strategy to strategy, so you will have to ask your Team Mauldin professional for the details on fees and risk. Past performance is not indicative of future results. And an investment advisory fee will also be paid.) 

We also have a menu of absolute return strategies. Some of these are hedge funds only available to accredited investors and/or qualified purchasers. Typically, they are larger, more established funds. Full disclosure: I have a significant portion of my portfolio in these funds. 

Like the dividend strategy above, they outperformed during the 2000s and clearly underperformed the S&P 500 during the last decade. However, these are typically long-term, less liquid investments. (Liquidity may vary from one month to one year or more.) 

In 2020, of the 18% total return from the S&P, 14% came from just six stocks. A diversified portfolio of hedge funds for absolute return strategies are generally not going to keep up with that kind of outperformance. 

Then again, in hindsight, we should have all put our money with Cathie Wood’s ARK ETF in 2020, which returned 165% last year. But remember past performance is not indicative or a guarantee of future results.

Again, philosophically, we diversify among a number of strategies for our core, trying to grow our 80% back to 100% in four to five years. That includes our cash return portfolio, which I will explain in a moment. 

While it may not be traditional (but then again, I am not traditional), my benchmark for my core portfolio is not the S&P 500 or some other theoretical index. It is zero. How much above zero did my core portfolio return? Enough to be getting back to 100% in four to five years? If so, am perfectly content with that. 

Regardless of how I invest, you must determine your own financial goals and investment strategies. The ARK strategy might make up a portion of your explore portfolio. We recommend those considering it have a five-year time horizon (at minimum). Any strategy that can grow 165% in one year can have a significant drawdown at any time or underperform for a period. 

But longterm, as a diversified portion of an explore portfolio? It might be appropriate for you, and our professionals can help you decide. We have lots of exciting opportunities for explore. Some are not liquid and some are, and some may appeal to you more than others. Or not. 

Getting Cash Income in a Zero Rate World 

As I write, high yield bonds, also known as junk bonds, have a yield of approximately 4%. The junkiest of junk bonds (rated CCC and worse) are barely returning 7%. From my admittedly narrow viewpoint, that presents a lot of risk for very little return/reward. 

But when 10-year Treasurys are yielding 1.15% (as I write today on February 10, 2021), it demonstrates that investors are desperate for yield. A small rise in interest rates could wipe out that return very quickly. 

So, what’s an investor to do? First, if you are not an accredited investor, there are income opportunities that pay mid- to high single-digits but are not traditional fixed income/bond portfolios. They carry different risks, which can be readily understood, but certainly compare favorably risk to reward-wise, to high yield bonds yielding 4% in my opinion. 

We are onboarding a very select portfolio of closed-end funds managed by a well-known, very experienced manager, that will yield high single-digits, of course accompanied by market risk. Ask your Team Mauldin professional about the various strategies and how to manage the risk. 

If you are an accredited investor, the world of opportunities opens up significantly. There are a number of short-term private credit opportunities that offer mid to high single-digit returns or more. Again, with varying risk. This is where the connectivity/access of Team Mauldin comes into play. 

Fortunately, we get to see a lot of opportunities through our various networks and partners As I mentioned, that is due in large part, to the fact that we are actually in the sweet spot. Several of the private opportunities we have are frankly too small in size for the larger investment firms. A big wirehouse would take down their entire annual offering in one day with just a few brokers, making the other 10,000 who missed out upset. They are perfect for us. 

Access to the manager that CNBC calls the greatest ETF trader in history? Of course. He is up on the shelf in the Mauldin Kitchen. A portfolio of these absolute return style traders? Easy. You really want to see what’s behind curtain—or cabinet—number three. 

I would be surprised if there weren’t a few items in the Mauldin Kitchen that didn’t tempt you. You might even want a full meal. Now, let’s talk about how to access all of this opportunity––and how it all started. 

The Beginnings of the Mauldin Kitchen 

I have worked with Steve Blumenthal, founder of CMG, for almost 20 years. He has developed a team of financial professionals and consultants that are second to none. Those who know us know we are very close friends. 

I am the Chief Economist of CMG, as well as an investment advisor representative. Philosophically, we approach investment portfolio design in much the same manner: cautiously, but with a sense of optimism. 

And at today’s valuations, we think buy-and-hold index investing is going to be a monumental mistake—with outcomes along the lines of the Great Recession or after the bursting of the tech bubble.

 In a typical 60/40 portfolio using index funds, the bond portion of your portfolio is essentially paying almost nothing. In my view, the large majority of portfolios using that standard fixed income strategy needs to be rethought. Yields of 2% or less won’t cut it; especially, if we see inflation and rising rates.

 That’s why we do not follow the 60/40 portfolio standard. Steve and I began to work through what a real-world appropriate portfolio would look like: something you could actually execute. 

Fortunately, the world of financial technology (or fintech as it is called) has dramatically changed the playing field. There has been a Cambrian-level explosion of new products and services. We created some of our own funds, which are just a partial answer to a total portfolio, and then began to add others.

 Enter Kevin Malone of Greenrock Research, a Chicago-based registered investment adviser. Kevin ran pension consulting at Paine Webber years ago, and later partnered with Robert Southard. Robert co-founded investment giant Pacific Investment Management Company, LLC (PIMCO) in 1985. 

I met Kevin in the early part of the last decade at a conference. It turned out that we were at numerous conferences together over the next few years. We always made a point to sit down and talk, often at length over dinner. 

 Kevin and I are the same age, and I have never met anyone that I have essentially mind melded with on portfolio construction the way I have with Kevin. And of course, he knew Steve. 

The three of us began to talk about how to work together, combining Kevin’s and Steve’s portfolio options (along with a few of my ideas), some of which had decades-long histories.

 The state of technology today allows us to work together seamlessly, without having to merge firms. While we combined our research teams, Kevin is pretty much the heavyweight of all of us. And finally, long-time readers know that I had for many years a relationship with a company called Altegris Investments. 

It was bought by a series of private equity firms and the business models changed. One of the original partners, Dick Pfister, left about five years ago to form his own investment advisory firm called AlphaCore Capital. AlphaCore is based in La Jolla, a suburb of San Diego. 

It has been quite successful, and he essentially agrees with my own philosophy of diversifying trading strategies and not necessarily asset classes, although he clearly diversifies to trading strategies within asset classes. It is a very intriguing platform. 

Ironically, in the last buyout of what had been Altegris, the acquiring firm wanted the technology of the larger program at that firm, but not necessarily the money management business. They also wanted the world-class risk analysis technology Dick developed, FactorE. 

They couldn’t agree on a price, until they offered the private client business to Dick. Deal done. Since the entire team was made up of people that he had trained and who were familiar with both me and my clients and leads, he immediately called and asked if we could work together again. Once again, technology to the rescue. 

The reality is there is very little difference, if any, between the philosophy of how we look at client portfolios. As our researchers began working together, it became clear that there were products on both platforms that needed to “cross over.” Partnering with AlphaCore’s seasoned financial customer service professionals meant we could handle all of the referral interest I could develop through my letter and other writings. Admittedly, that has been a problem in the past. Problem solved. To sell certain private offerings, we need access to a broker-dealer. We have chosen to work with Amera Securities of King of Prussia, Pennsylvania, member FINRA/SIPC. (Amera is also conveniently located near Steve, and Steve’s team at CMG have taken their Series 7 exams and are registered representatives of Amera Securities. I am also a registered representative with Amera. My broker-dealer firm, Mauldin Securities LLC (member FINRA and SIPC) has a referral agreement with Amera. More below.) This enables us to bring you private equity and private credit opportunities that have been approved by our research team. As a group, we can painlessly and seamlessly help you with your entire portfolio needs or with just a portion, depending on your personal preference. We are here to serve you. You should soon be getting a call from a member of Team Mauldin, whether from CMG or AlphaCore. I urge you to take that call. Candidly, we will be working through the list of responses as fast as we can. If you would like to be contacted sooner, simply reply here and we will bump you up the list. And as always, feel free to ask me any questions you may have. And don’t be surprised if you get a call from me personally. I have decided that I want to get a better feel for what clients are thinking and needing. Of course, I get feedback from the team, but there is nothing quite like hearing it directly from you. So, I will be making a small number of calls every month myself. I am really quite excited about the prospect. If you are interested in speaking to us right now, please email me at mauldin@cmgwealth.com. 

Your looking forward to helping you analyst, John Mauldin Chief Economist & Co-Portfolio Manager