Leuthold Core Investment Fund Reaches 20-Year Milestone

Q&A with Chief Investment Officer Doug Ramsey and Chun Wang,
Co-Portfolio Manager of the Leuthold Core Investment Fund

Minneapolis, January 15, 2016 – The retail share class of The Leuthold Group’s domestic tactical allocation fund, the Leuthold Core Investment Fund (NASDAQ: LCORX), recently marked its 20-year anniversary. The Leuthold Core Investment Fund pursues U.S.-equity market-beating returns with substantially less risk. On an annualized basis, over the 20-year period ending December 31, 2015, LCORX has outperformed its benchmark, the S&P 500 Index, as well as the Lipper Flexible Fund Index and Morningstar Tactical Allocation Average. (See performance details following Q&A.) The Core Investment Fund is also available in an institutional share class (NASDAQ: LCRIX).

In the following Q&A, Doug Ramsey, Chief Investment Officer of The Leuthold Group, and Chun Wang, Senior Analyst and Co-Portfolio Manager, discuss tactical allocation strategies and the fund’s current positioning. They co-manage the Core Investment Fund together, along with Greg Swenson and Jun Zhu.

Q: What do you think distinguishes the Leuthold Core Investment Fund from its peers?

Chun Wang: The strategy’s inception was in 1987 and the mutual fund version dates back to 1995, so we were one of the first tactical funds. In addition to our longer track record, what sets us apart is the specific way objectivity and flexibility interact in the portfolio. That is, we apply time-tested quantitative disciplines and empirical research that ensure objectivity. At the same time, our approach embraces genuine investment flexibility. We are disciplined but not dogmatic. We respect market action and will not hesitate to go outside our comfort zone in terms of asset class, industry group, and individual security decisions. In combination, this investment philosophy has guided us through multiple full market cycles and dramatically different economic conditions.

Q. Any misconceptions about tactical allocation strategies as the category has grown in popularity?

Doug Ramsey: Tactical investment products came to prominence in part due to some successful navigation of the 2002 bear market in stocks. That was a bifurcated bear market: if you avoided telecom and technology, you could still make money during the bear market. And, with rates 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 up. As a result, many “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 the industry will see real value in having disciplines that can take you from much lower to much higher exposures to a given asset class. In the Core Investment Fund, we have lots of ceilings but no floors apart from a 30% minimum equity allocation. If our disciplines guide us toward leaving an asset class out entirely, that’s what we do. That type of discipline-driven flexibility is rare.

Q. Why should advisors/individuals include a tactical allocation fund in their portfolio? How should this fund fit with a wider portfolio?

Chun Wang: Over the course of a market cycle (time from the onset of a bull market through the end of the ensuing bear market), we strive to deliver improved returns with less downside risk versus the S&P 500. Given our view that the return/risk ratio is currently challenging across almost all asset classes, our ability to “go anywhere” and tactically capture medium-term cyclical opportunities could be a great advantage. This can fit very well in a portfolio with a reasonably long horizon.

Neither stocks nor bonds are trading in a way that rewards a buy-and-hold investment approach. The need, then, is to do something different from the benchmark.

Q. Your fund has latitude to invest 30% to 70% in equities. Where are you now? 

Doug Ramsey: Currently we are positioned defensively with approximately 37%-38% of the portfolio in equities. At some point during 2016, probably in the first half or perhaps into the third quarter, we expect stock market returns to get pretty ugly. However, we might see a rally—perhaps even to new nominal highs for the S&P 500 Index—prior to a sharp decline. In that event, we may maximize our defensiveness with a drop to 30% net equity exposure.

With regard to magnitude of a correction, we anticipate a drop of around 20%, which is in line with a typical cyclical bear market. A lot of things are lining up to support that outlook. Valuations have been high for a couple years. That didn’t bother us while everything was moving upward in unison. But starting just over a year ago, market breadth began to break down. First was the Dow Jones Transports, which topped out on December 29, 2014. Declining Transports has historically indicated more widespread declines to come. And over the past year we’ve seen a parade of industries topping out.

Q. Your equity strategy focuses on industry selection. Which industries are attractive now?

Chun Wang: At present we like domestically focused, service-oriented industries more than goods-producers. Companies in U.S.-focused service industries tend to be less negatively impacted by global disinflationary headwinds. Data processing and outsourced services, airlines, auto retailers, managed health care, oil & gas refiners are all top industry group holdings right now.

Doug Ramsey: With regard to industries that may perform better than others in the context of widespread stock market declines, we would look to existing leadership, which includes some of the health care and technology industry groups. This isn’t a time to buy up what’s cheapest, as cheap stocks tend to suffer during strong downturns. They represent opportunity coming out of the slide, on the way back up.

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 may provide better risk-adjusted performance streams over time. In other words, the best feature of our process is that it’s very rare that all components suffer at the same time.

Q. Over the past year you have emphasized that Federal Reserve “tapering” effectively equates to rate increases. Has anything fundamentally changed upon our seeing an actual rate hike last month?   

Chun Wang: Tapering is tightening and the current tightening cycle is already two years old. This is why all liquidity-sensitive assets, including small caps, emerging markets, high yield bonds, and commodities have suffered huge losses since the “taper tantrum.” The actual rate hike does not materially change anything as financial conditions in the U.S. have already tightened due to a strong dollar and higher real yields. The bottom line is, tightening is well underway and the cycle is late, which typically bodes ill for risky assets.

Doug Ramsey: It’s clear in hindsight that the Fed should have raised rates a couple years ago. The concern now is that if we see share deterioration in the next couple months, after just one or two rate hikes, we’re likely to go right back to QE discussions and accompanying hand-wringing about what the Fed might be forced to do.

 

Performance

Over the 20-year period ending December 31, 2015, LCORX has returned +8.43% on an annualized basis, outperforming its benchmark, the S&P 500 Index (+8.19%), as well as the Lipper Flexible Fund Index (+6.05%) and Morningstar Tactical Allocation Average (+4.60%).

*Returns for periods less than 1-year are not annualized. Per Prospectus dated 1/30/15, excluding dividends on short positions and acquired fund fees, annual net operating expenses for LCORX/LCRIX were 1.15%/1.05%; gross operating expenses including dividends on short positions and acquired fund fees were 1.32%/1.22%. There were no fee waivers or expense reimbursements.

Performance data shown represents past performance and is no guarantee of future results. Investment return and principal will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. For performance current to the most recent month-end, visit LeutholdFunds.com or call 800-273-6886.

1 S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy. Lipper Flexible Fund Index is composed of funds that allocate investments across various asset classes, with a focus on total return. MSTAR Tactical Allocation Average measures performance of funds in the Morningstar Tactical Allocation category. Barclays U.S. Aggregate provides a broad based measure of investment grade fixed-rate debt markets. These indexes cannot be invested in directly. Performance return figures are historical and reflect the change in share price, reinvested distributions, change in net asset value, and capital gains distributions, if any. 2 LCORX inception date 11/20/95; minimum investment $10,000 or $1,000 for an IRA. LCRIX inception date 1/31/06; minimum investment for all accounts is $1 million.

Risks: Short Selling–fund will suffer a loss if a security rises rather than falls; in theory, short selling could result in unlimited loss. Foreign Securities–foreign stocks may be less liquid & more volatile; subject to currency rate fluctuations & economic instabilities. Credits–issuers of debt may default on interest/principal payments & are subject to quality downgrades leading to greater price volatility. Asset Allocation–dependent on ability to correctly anticipate asset class relative returns & risks.

Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The Prospectus contains this and other information about the Funds. For current Prospectus, call toll-free 1-800-273-6886, or go to www.LeutholdFunds.com. Please read the Prospectus carefully before you invest.

Distributor: Rafferty Capital Markets, LLC, Garden City, NY 11530

About The Leuthold Group

Based in Minneapolis, The Leuthold Group is a pioneer in tactical asset allocation. The firm manages approximately $1.8 billion in both separate accounts and five mutual funds. Learn more at LeutholdFunds.com

© 2015 Leuthold Weeden Capital Management
Not FDIC Insured. No Bank Guarantee. May Lose Value
Mutual Fund Distributor: Rafferty Capital Markets, LLC, Garden City, NY 11530