Q:  What is the history of the Leuthold Group? A : In 1981, Steve Leuthold founded The Leuthold Group as an independent institutional research firm based in Minneapolis, Minnesota. We expanded to asset management in 1987, and began managing mutual funds in 1995. We have three different tactical asset allocation mutual funds—the Leuthold Core Fund, the Leuthold Asset Allocation Fund, and the Leuthold Global Fund. Roughly three-fourths of our firm’s assets of $3.3 billion are in mutual funds, with the balance in separately managed accounts and limited partnerships. Within the Leuthold Global Fund, the equity portion is driven by the same global industry analysis the drives our Leuthold Global Industries Fund. The track record for that global equity strategy goes back to December 2006, including an LP structure. Q:  What are the underlying principles of your investment philosophy? A : Our belief is that emotion is one of the biggest destroyers of capital in this business. We attempt to remove as much of the emotion from the investment process as possible by tying ourselves to discipline based on our quantitative tools. We believe in top-down and disciplined investing, and incorporate both fundamental and technical analyses into our investment process. Essentially, our goal is to earn equity-like returns with substantially less risk. Q:  Would you provide some information on the Major Trend Index that you employ? A : In order to facilitate our macro allocation, we use our proprietary tool called the Major Trend Index that encompasses all different aspects of the market. There are five categories in the Major Trend Index: intrinsic value, economic/interest rate/inflation, attitudinal, supply/demand, and momentum/breadth/divergence with roughly 190 indicators between those five categories. The intrinsic value category looks at valuation in terms of how the overall market is priced from a variety of measures, including: price-to-cash flow, book value and dividend standpoint. The economic/interest rates/inflation category focuses on the inflation horizon, where the rates are headed and general economic data points. The attitudinal category is based on sentiment, and the supply/demand category looks at where cash is going and the general direction of fund flows in mutual funds and ETFs. The last category is the momentum/breadth/divergence category. Here we use technical analyses to help gauge whether or not the action of the market is healthy. Each factor is scored independently and ultimately we take a ratio of the sum of the positive points over the sum of the negative points. Q:  Would you highlight some of the analytical steps involved your research process? A : Our proprietary research includes technical and quantitative analyses. We feel that part of the added value in our product is the idea of what we call group investing, whereby we strive to diffuse security-specific risk by buying a basket of securities in similar industries. At that level, we utilize a process called group selection scores. Here, we take a country-agnostic approach and focus on analyzing a collection of companies grouped together based on {{what}} they do as opposed to {{where}} they are located. Our equity universe consists of the 5,000 largest companies with the most liquid names in the world, which we break into 92 industry groups. In essence, we run those groups through a multi-factor model that ultimately produces a ranking of groups, and we update this model on a monthly basis. Having ranked these 92 industry groups from most attractive to least attractive at the end of each month, we focus on using the most attractive names to create our portfolio. Once we rank the groups, we break them into quintiles. The top quintile is labeled our attractive groups. Per discipline, those are the only groups we consider buying. If a group we own falls into the second quintile, we view that group as a hold and while we wouldn’t add to it, we might reduce it. By a similar token, if a group that we own falls into the third quintile, we would consider selling that group. Here, the group has to not only fall but underperform the benchmark in order to be kicked out of the portfolio. At that point, we would deactivate the group and then begin the process of determining which stocks we want to hold versus which should be sold. Our holding tank process is also considered for individual names in deactivated groups. Stocks can move into the holding tank and remain in the portfolio as long as they continue to outperform. The idea here is to allow our winners to run, while not getting caught in value traps. Q:  Why do you put emphasis on group trends? A : The way our investment model works is primarily through the identification of group trends—we look for groups that we believe are entering a sustainable trend and attempt to select the best relative values within that group. We look for some confirmation at the group level that a trend is beginning to form. As soon as we see that happen, we will invest in a basket of securities within the industry group in an effort to capture the move. When we buy a group, we initiate a group position in the 5% to 8% range and buy around ten securities per group. While we don’t exactly equal-weight the securities our approach is much more flat than any sort of market-cap weight system. Every group is different and its composition depends on what we see in the names and country exposures. We also consider stock trading volume and market cap with some subjectivity depending on how the group generally fits into our current macro view. We have found there is a sweet spot when securities will move in a similar fashion as the group trend. At some point, the group trend will slow down and we begin to see the performance of the names separate. But if there is a real winner in that group, we want to hang on to it as long as the security continues to outperform. That is where our holding tank concept comes into play and has proven to add value. Our holding tank philosophy consists of a handful of unrelated securities. But as soon as lose their momentum, on a relative basis, over roughly a one-month timeframe they would be kicked out of the portfolio. Q:  How is a group designed? Could you give an example of a group? A : The industry groups we use are derived from the Global Industry Classification Standard structure (GICS). GICS has four levels: Level 1 comprises 10 sectors, level 2 is about 24 industries, level 3 includes 68 industry groups, and level 4 has 154 sub-industry groups. Because our process is based on 92 groups, we are using a hybrid version of level 3 and 4. We look at where GICS classifies every security and then apply a common sense approach to building investable groups, allowing for adequate market cap and volume in every single group as well as a minimum number of names. There are some GICS level 4 groups that do not have enough securities, market cap or trading liquidity to be a true investable group. So, we might combine two level 4 groups into a single group in order to make sure the concept is investable. Another distinctive aspect of our approach is our custom-weighting of securities in every group. We actually break the universe into deciles, which means 500 securities per decile, and then we assign points per decile. In this way, the top 500 securities would each get five points and the bottom 500 securities would get 0.1. So, the biggest multiple differential in any single stock relative to another stock inside of any single group is 50. This custom process created better signals in group pricing than traditional market cap weighting. Q:  How do you build your portfolio? A : The equity portion of our portfolio consists of roughly 15 groups. Each group will have around ten securities with the number varying from one group to another. Looking for companies with better debt-to-equity ratios and operating margins, we measure every month how our portfolio compares to the benchmark on a variety of valuation metrics. Currently, we are 63% in long equities. We are overweight in consumer discretionary and healthcare sectors, and have market weight in consumer staples, energy, and are underweight in financials and tech companies. We also have a 3% equity hedge to offset our long position, bring our net equity exposure to about 60%. In addition, we have about 21% in fixed income, 5% in physical metals, which is roughly three-fourths in gold and one-fourth in silver, and we own a 5% position in REITs. Currently, we hold about 3% cash. Our equity portion currently has about 130 names. Given that we are somewhat defensive at this time, we have more allocated to large caps which allows us to take bigger positions. However, we try to maintain the number of holdings around 150 names. In a normal environment, the fixed-income weighting in our portfolio would be between 30% and 70%. At present we are bearish on bonds in general, which is why we have only 21% in fixed income right now and most of that is in corporate bonds. We have a little bit of government bonds, TIPS, and Build America Bonds. We also look at government bonds from developed countries and emerging markets, convertible bonds, high-yield bonds, and government agency bonds including mortgage-backed securities. We make a top down assessment of the current environment to determine the appropriate mix of risk we are willing to take. Q:  How do you set your equity exposure? A : Since we are top-down investors rather than stock pickers, we believe the biggest and most important decision is to adjust the equity weight in the fund appropriately. Overall, our equity exposure has a 30% minimum to 70% maximum and we look for the big moves in the marketplace to get our equity exposure right. Generally speaking, our equity exposure in the fund depends on our view of the market. When we are constructive on the market we set equity exposure between 50% and 70%, and if we are neutral on the market, that range will drop to between 40% and 60%, and it will go further down to between 30% and 50% when we are negative on the market. Q:  What is your sell discipline? A : There are two separate decision points involved when we talk about our sell discipline on the equity side. The first point of consideration is the deactivation of a group and the second is the actual selling of securities. For instance, if a group we own ranks in the third, fourth, or fifth quintile of our group distribution, it becomes a candidate for selling. We then look at how the group as a whole is performing relative to the universe. If it is outperforming, it is given more time. However, if it has dropped into the third quintile or below and underperforms, it would be deactivated. At that point, the secondary decision point comes in, when we decide which securities in the group should move into the holding tank and which securities are actually sold based on relative performance. If individual securities are outperforming, they will move into the holding tank, but in the opposite scenario they will be sold. When it comes to selling bonds and alternative parts of the portfolio, we consider what we hold relative to where our bond allocation tools are telling us. We want to hold securities consistent the over environment and future outlook. Q:  How do you control risk in the portfolio? A : We are benchmark agnostic but we closely monitor our diversification to keep risk in check. While we have no minimums in any sector, country or group, we have ceilings across all three levels. Also, our maximum exposure in any one sector is 35%, and the smaller sectors like telecom, materials and utilities have a lower ceiling at either 20% or 30%. Furthermore, we have a country ceiling that is tied to some multiple of our underlying universe in addition to group maximum levels. That said, we will make an exception to our 15% group ceiling only if it is a high-ranking group in which we have strong conviction. In addition to these primary risk control tools, we monitor factor exposure and attribution each month. We do not use leverage in the portfolio and we do not hedge currency based on our equity portfolio. We focus on the unintended bets by using traditional risk analytics. On the fixed income side, we have a proprietary tool known as the Risk Aversion Index, which gives us a feel for the general appetite for risk in the market.