While teaching a professional development class in Minnesota this week The Joseph Group’s Chief Investment Officer, Travis Upton, had the opportunity to visit with the portfolio management team at the Minneapolis-based investment firm, The Leuthold Group. Travis was able to talk with a number of the portfolio managers at the firm, including Leuthold Chief Investment Officer, Doug Ramsey. Here are two key takeaways from the meetings:
- The foundation for The Leuthold Group’s asset allocation decisions is its “Major Trend Index,” a proprietary mix of indicators across value, economic, sentiment, supply and demand, and momentum factors. As a result of their disciplines, the positive move means Leuthold is removing its hedges and increasing market exposure. According to Ramsey, “It’s a struggle to put together a compelling fundamental argument for U.S. stocks here, but cannot ignore the improvement in the MTI.” Ramsey noted he believed high valuations, the end of Fed tightening and a broad earnings contraction would lead to a correction deeper than the 14% setback experienced by the S&P 500. While a bigger correction may still lie ahead “prices move ahead of fundamentals, and perhaps the Major Trend Index is discounting better times in the months ahead.”
- Ramsey and Emerging Markets Portfolio Manager Jun Zhu both expressed optimism about emerging market stocks. According to Zhu, “fundamentals for emerging market stocks do seem as bad as what their low prices seem to imply.” Ramsey also noted Leuthold’s “Emerging Market Allocation Model” is on the verge of turning positive after being in negative territory since February of 2011.
Meeting and talking with other investment firms and fund managers is an important part of the work we do at The Joseph Group on behalf of our clients. Leuthold’s work and views on emerging markets reinforce our own – emerging market stocks as a category are extremely cheap and the combination of low valuations and improving performance may mean they merit a larger weight in portfolios. Also, it is worth noting that while Leuthold’s Major Trend Index is positive, their allocation to stocks is closer to the middle of their target range than the maximum. We agree with the implication – in a market like this it’s important to strike a balance between the risk of losing money, and also the risk of missing opportunity.