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Mutual Fund Q&A: 
Groups in Uptrend
Leuthold Global Fund
Management: Matt Paschke

Author: Manish Shah
Last Update: 13:57 PM ET February 02 2012

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Investing in global markets requires a disciplined approach to selecting regions in addition to a careful stock selection process. Matthew B. Paschke, portfolio manager of the Leuthold Global Fund, believes in picking a basket of stocks in uptrend from globally represented groups that are clearly defined by proprietary models. The fund offers risk protection through additional diversification into bonds and commodities.

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.
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