Weekly RS Recap

September 2, 2014

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (8/25/14 – 8/29/14) is as follows:

perf 09.02.14 Weekly RS Recap

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Power 4 Model Holdings

September 2, 2014

Current holdings of the DWA PowerShares Sector 4 Model are shown below:

power 42 Power 4 Model Holdings

Click here for model details.

The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs.  Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. 

The PowerShares DWA Sector Portfolios are calculated by NYSE Euronext or its affiliates (NYSE Euronext). The PowerShares DWA Sector Momentum ETFs, which are based on Dorsey Wright indexes, are not issued, endorsed, sold, or promoted by NYSE Euronext, and NYSE Euronext makes no representation regarding the advisability of investing in such product.

NYSE EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE DORSEY WRIGHT INDEXES OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

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Sector Performance

August 29, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/28/2014.

sector 08.29.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Fund Flows

August 28, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 08.28.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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Corporate Repurchases: “Single Biggest Category of Stock Buyers Today”

August 27, 2014

The longer this market moves higher, the more questions there seem to be about why.  ”What is causing the market to move up?”  Is it corporate earnings, interest rates, The Federal Reserve, companies buying back their own stock, or something else?  Admittedly, we spend little time trying to pinpoint what is causing demand (buying) or supply (selling) because it changes over time, and ultimately it is not necessary for an investor to understand the reason for the trend in order to participate.   In the words of Tom Dorsey:

While many of the concepts I learned in Economics 101 have been improved on over the years, one remains unchanged—supply and demand.  It is the driving force behind all price changes.  If there are more buyers than sellers willing to sell, then the price will rise.  If there are more sellers than buyers willing to buy, then the price will decline.  This is as true for the price of tomatoes as it is for the price of stocks.

That said, here is some interesting information about one very strong source of demand today.  From MarketWatch:

From arlines to 21st Century Fox Inc., U.S. companies keep buying back their own shares.

Buyback announcements jumped to a three-month high in July after faltering for a couple of months, and 2014 is on track to become the third-biggest year for buybacks ever, according to Minyi Chen, portfolio manager for the AdvisorShares TrimTabs Float Shrink ETF which picks stocks in part on their buyback trends.

He sees three big reasons for the boom in buybacks, and argues that companies shouldn’t be criticized so much for repurchasing shares in bull markets. Here are the three reasons:

1. Financial engineering: By repurchasing shares, companies can maintain or boost their earnings per share, even when their actual earnings aren’t so hot. The buyback shrinks the denominator — shares outstanding. “You can call it a little bit of financial engineering,” Chen told MarketWatch, but he said he sees the logic behind it for a company that wants to bolster its per-share earnings and sustain its stock’s momentum.

2. A better way to return money to shareholders: Companies are often criticized for buying back shares instead of investing in equipment or hiring, but Chen suggests that makes about as much sense as blasting dividend payments. He said a buyback is just another way of distributing corporate profit to shareholders, and it could be seen as a better (and increasingly popular) way of doing so because it avoids the double-taxation issue seen with cash dividends.

3. Offsetting employees who cash in: “A lot of people are criticizing the public companies for being poor market timers,” Chen said, referring to buybacks ramping up after stocks have climbed. But these critics don’t understand that “companies need to buy high,” he said, as they try to offset employees cashing in. When stock prices advance, more employees have in-the-money stock options and exercise them, while when stocks drop, employees hold back from exercising their options because they’re out of the money, the TrimTabs portfolio manager said.

Just how significant have corporate repurchases been?  According the the WSJ:

Companies purchasing their own shares represent the single biggest category of stock buyers today, according to a study this month by Jeffrey Kleintop, chief market strategist at brokerage firm LPL Financial.

Maybe, retail investors will come back to the equity markets en masse in the years ahead.  Maybe, corporations will continue to buy back shares.  Again, as trend followers it is most important to follow the trends, even without a full knowledge of the underlying sources of supply and demand.  The beauty of a point & figure chart is its ability to clearly reflect the broad trends in the market and that trend continues to be positive, as shown below in the chart of the S&P 500.

SP 500 Corporate Repurchases: Single Biggest Category of Stock Buyers Today

As of 8/27/14

This example is presented for illustrative purposes only and does not represent a past recommendation.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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High RS Diffusion Index

August 27, 2014

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 8/26/14.

diffusion 08.27.14 High RS Diffusion Index

After falling to a single day low of 30% on 7/31/14 this index has rebounded sharply.  The 10-day moving average of this indicator is 66% and the one-day reading is 77%.

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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DWA ETFs

August 26, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 8/25/14):

pdp3 DWA ETFs

dwas3 DWA ETFs

dwaq3 DWA ETFs

piz3 DWA ETFs

pie3 DWA ETFs

pez3 DWA ETFs

pfi3 DWA ETFs

prn chart2 DWA ETFs

psl3 DWA ETFs

ptf3 DWA ETFs

pth3 DWA ETFs

pui3 DWA ETFs

pxi3 DWA ETFs

pyz3 DWA ETFs

fv3 DWA ETFs

IFV1 DWA ETFs

The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).

 PDP: Prior to the fund inception date (3/1/07), chart is created using extrapolated index data.

DWAS: Prior to the fund inception date (7/19/2012), the chart is created from extrapolated index data.

DWAQ:  Prior to fund inception date (4/30/03), chart is created using extrapolated index data (DYO), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA NASDAQ Technical Leaders Index (TLNASDAQ)

PIZ: Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.

PEZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZZK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Cyclicals Technical Leaders Index (TLCONCYC)

PFI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZFK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Financial Technical Leaders Index (TLFINANCE)

PRN: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZLK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Industrials Technical Leaders Index (TLINDUST)

PSL: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZSK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Staples Technical Leaders Index (TLCONSTA)

PTF: Prior to the fund inception date (10/12/2006), chart is created using extrapolated index data. and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Technology Technical Leaders Index (TLTECH)

PTH: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZXK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Healthcare Technical Leaders Index (TLHEALTH)

PUI: Prior to fund inception date (10/25/05), chart is created using extrapolated index data (DWU), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Utilities Technical Leaders Index (TLUTIL)

PXI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZKK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Energy Technical Leaders Index (TLENERGY)

PYZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZBK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Basic Materials Technical Leaders Index (TLBASMAT)

FV: Prior to the fund inception date (3/6/2014), chart is created using extrapolated index data (FTRUST5)

IFV: Prior to the fund inception date (7/23/2014), chart is created using extrapolated index data.

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Relative Strength Spread

August 26, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 8/25/14:

spread 08.26.14 Relative Strength Spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Momentum: “One of the most strongly tested in all of modern finance”

August 25, 2014

David Garff on momentum (The Journal of Investment Consulting, Volume 15, 2014):

Momentum is the “tendency of investmetns in every market and asset class, to exhibit persistence in their relative performance for some period of time” (Berger et al. 2009).

Since the first significant studies on momentum in the 1990s (Jegadeesh and Titman 1993; Asness 1994), this theory has been one of the most strongly tested in all of modern finance, with more than 300 academic and practical papers including 150 in the past five years.  Asness et al. (1997), the first to evaluate momentum across countries, concluded that even accounting for currency effects, the momentum effect was consistent.  In a subsequent study, Balvers and Wu (2004) revealed that a combination of short-term momentum and intermediate-term mean reversion provide strong risk-adjusted returns.  Extending the work of Asness et al. (1997), Griffin et al. (2004) find that price and earnings momentum profits are significant globally.

Again, the theme that recent ouperformance tends to continue in the near term is consistent across geographies and asset classes.

John Lewis’ contributions to the body of knowledge of momentum investing can be found here, here, here, and here.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  A momentum strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

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“Quite a Comeback for This Momentum ETF”

August 25, 2014

ETF Trends highlights the strong recovery of the PowerShares DWA Momentum ETF (PDP):

This year’s momentum sell-off is, mostly, in investors’ rearview mirrors. You know, the one caused by sharp retrenchments in biotechnology, Internet and social media stocks.

The one that sent beloved exchange traded funds such as the Global X Social Media Index ETF (NasdaqGM: SOCL) and theiShares Nasdaq Biotechnology ETF (NasdaqGM: IBB) to ominous flirtations with bear markets. [Momentum Lost in April]

Imagine how bad things were during the March/April momentum sell-off for ETFs that actually have the word “momentum” in their titles. The Powershares DWA Momentum Portfolio (NYSEArca: PDP) endured that nightmare, tumbling almost 8% from its March peak to its April trough. That decline was not bad compared to biotech, Internet and social media ETFs, but because PDP is framed as a momentum fund, it was cast in the same negative light even though the ETF holds no Internet or social media stocks and has only scant biotech exposure.

Too often those that are willing to highlight an ETF’s fall from grace are also reluctant to acknowledge that fund’s resurgence. Too bad because they are missing out on the fact that the $1.27 billion PDP is one of 30 ETFs (at this writing) to have touched a new all-time high Tuesday.

Some say the momentum factor as it pertains to ETFs is cooling.

PDP did not get the memo. With Tuesday’s modest gain, PDP is up 6.3% over the past 90 days while the S&P 500 is higher by about 5% over the same period. [Overlooked Alternative Index ETFs]

As is the case with some other momentum ETFs, PDP reminds investors, and it is a critical reminder at that, that there is a big difference between dangerously inflated momentum as it pertains to high-flying stocks from the Internet and social media realms and steady, but still impressive price action. [Marrying Momentum With This ETF]

PDP tracks the Dorsey Wright Technical Leaders Index, “which takes into account, among other factors, the performance of each of the approximately 1,000 largest companies in the eligible universe as compared to a benchmark index, and the relative performance of industry sectors and sub-sectors,” according to PowerShares.

With the possible exception of Apple (NasdaqGS: AAPL), few if any of PDP’s top-10 holdings have the look of true momentum stocks. Again, the ETF holds no Internet and social media stocks. To be fair, PDP does hold some true momentum names, such as Netflix (NasdaqGS: NFLX) and Tesla (NasdaqGS: TSLA), but the ETF’s weights to those names are light.

What PDP does feature is a combined weight of nearly 48% to the consumer discretionary and industrial sectors, two laggard groups this year. Yet PDP is up almost 9% this year while cap-weighted discretionary ETFs are still trying to get to year-to-date gains of 3%. Traditional ETFs are clinging to gains in the 4% to 5% range.

PDP’s 15.7% allocation to the materials sector has been a boon for the ETF as five of the ETF’s six largest materials holdings have traded higher this year and four of those five names have posted gains north of 10%. [An ETF Trade for the Summer Blues]

pdp Quite a Comeback for This Momentum ETF

Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.  A list of all holding for the trailing 12 months is available upon request. Dorsey Wright & Associates is the index provider for PDP.  See www.powershares.com for more information.

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Weekly RS Recap

August 25, 2014

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (8/18/14 – 8/22/14) is as follows:

ranks 08.25.14 Weekly RS Recap

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Nutrients and Risk Factors

August 21, 2014

Critical points by Andrew Ang in Asset Management: A Systematic Approach to Factor Investing.  Ang makes the comparison between risk factors (like value, low volatility, and momentum) and nutrients in food:

Just as different people have different nutrient needs, different investors have different optimal exposures to the different sets of risk factors…

…There is one difference, however, between factors and nutrients.  Nutrients are inherently good for you.  Factor risks are bad.  It is by enduring these bad experiences that we are rewarded with risk premiums.  Each different factor defines a different set of bad times.  They can be bad times for investments–periods when the aggregate market or certain investment strategies perform badly.  Investors exposed to losses during bad times are compensated by risk premiums in good times.  The factor theory of investing specifies different types of underlying factor risk, where each different factor represents a different set of bad times or experiences.

“It is by enduring these bad experiences that we are rewarded with risk premiums.”  I think that is a point that is lost on a lot of investors.  Many often seek to rotate in and out of momentum based on when the factor is in favor.  Market timing factors is pretty tough.  I’m not saying it is impossible, but it is definitely pretty tough.  Remember, momentum itself is dynamic (as is value and low volatility).  If the stocks that a momentum strategy own lose steam, the strategy is designed to rotate out of those stocks and into the new leadership.  I think most investors interested in factor investing would be best served by making static allocations to different return factors.  Investors could do much worse than a balanced diet of one third momentum, one third value, and one third low volatility with the knowledge that each of these factors will periodically go through rough stretches.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  A momentum strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

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Can Momentum Be Arbitraged Away?

August 21, 2014

Will momentum “work” in the future just because it did in the past?  Or, is momentum susceptible to having its returns arbitraged away?  Valid question, and one that comes up regularly.

First, just a quick review of how momentum has performed in the past.  There are a number of white papers on this topic, but results of a white paper by RBC Capital Markets are summarized below:

exhibit 1 Can Momentum Be Arbitraged Away?

Over this period of time, momentum outperformed in every single decade.  It also outperformed the S&P 500 by 3.7% annually over the test period.  This is just an academic formulation of momentum and there are other formulations that may be better or worse, but the conclusion is pretty clear: momentum is a very robust return factor.

I think there are two key reasons why momentum returns have not been arbitraged away up to this point and why they are unlikely to be arbitraged away in the future.

First, as long as there is momentum in the underlying fundamentals of companies, there will be price momentum in stocks.

Consider, the strong momentum of revenue of Microsoft (MSFT) in the 1990′s.  I only had revenue data going back to mid-1994, but the explosive growth is very clear.

msft1 Can Momentum Be Arbitraged Away?

Source: FactSet, June 1994 – December 1999, Trailing 12 month revenue for each quarter

Just as there was momentum in the underlying fundamentals of the company, there was also strong price momentum in the stock during the 1990′s.  In fact, MSFT outperformed the S&P 500 nine out of ten years in the 1990′s.

Also, consider the revenue growth of Apple Computer since 2000:

aapl Can Momentum Be Arbitraged Away?

Source: FactSet, December 1999 – June 2014, Trailing 12 month revenue for each quarter

Again, there was tremendous momentum in the underlying fundamentals of the company and there was also strong price momentum in the stock.  AAPL has outperformed the S&P 500 every year since 2000, except for three.

In a capitalistic economy, I suspect that there will always be those companies that break out from the pack and are able to experience dramatic growth.

Second, there is a behavioral explanation for momentum that I don’t believe is likely to go away.  This is summarized by Andrew Ang in his book Asset Management: A Systematic Approach to Factor Investing.

In the main behavioral theories, momentum arises because of the biased way that investors interpret or act on information.  Suppose good news on a stock comes out.  Momentum can be generated in two ways.  First, investors could have delayed overreaction to this news, causing the price to persistently drift upward.  Second, investors could underreact to the news.  The price initially goes up, but it does not go up as much as it should have to fully reflect how good the news actually was.

This behavioral explanation is in direct conflict with the Efficient Markets Hypothesis which states that prices immediately reflect any good news.  As Ang points out, rather than investors immediately reacting the news, there tends to be a delayed response, a cascading effect, that creates price momentum in the stock as more and more investors act on the good fundamental news from the company.

So yes, I think it is possible for momentum returns to be arbitraged away, but I just don’t think it is likely.  That is a tall task for momentum in underlying companies to cease to exist and for investors to overcome behavioral tendencies that have been in place for a very long time.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  These examples are presented for illustrative purposes only and do not represent a past recommendation.  A momentum strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Dorsey Wright currently owns AAPL.  

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Fund Flows

August 21, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 08.21.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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Relative Strength Spread

August 19, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 8/18/14:

spread 08.19.14 Relative Strength Spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Rebirth of Separately Managed Accounts

August 18, 2014

InvestmentNews on the strong growth of separately managed accounts:

A class of products that have been around for a long time are undergoing a rebirth: separately managed accounts, or SMAs.

The recent sales figures have been impressive. SMA market assets have bounced back to levels last seen before the financial crisis — more than $762 billion at year-end 2013, according to Cerulli Associates Inc., with one-year growth of 23.1%. Cerulli Associates projects growth rates in separate accounts of 11.3% to 12.2% in each of the next four years.

The success of SMAs lies in their advantages: customization, transparency, tax efficiency and professional management. They can also offer flexibility in fees and a high value perception for clients attracted by the cachet of owning a professionally managed strategy in a more exclusive wrapper.

The concept is easy to explain, one reason that SMAs are gaining traction with clients. They fill the needs of retail investors wealthy enough to invest $100,000, and in some cases as little as $50,000, who want to move beyond pooled vehicles like mutual funds into portfolios with individual security ownership that are actively managed by professional asset managers.

Customization is a key differentiator in the marketplace. SMAs can help financial advisers demonstrate they are listening to the individual needs of their clients. Each SMA can be tailored to meet specific needs and goals. When investing in SMAs, advisers and clients can express preferences or restrictions concerning strategies or individual stocks, which can give them a greater sense of control.

For this reason, they are particularly attractive to clients with specific investment guidelines, and those who require additional hand-holding from their adviser. Increased demand for environmental, social and governance portfolios is fueling momentum in SMA strategies that apply sustainability-focused ESG integration. A shift away from traditional style box investing to outcome-oriented solutions is also fueling the movement to SMAs, as investors express greater desire for products addressing income, longevity and volatility risk.

In the wake of the financial crisis, transparency has become even more important to clients. With SMAs, advisers and clients see their actual holdings. They also receive full details on fees. This level of transparency lets high-quality asset managers prove their worth.

SMAs also provide excellent vehicles to assess and balance tax liabilities. The run-up of the equity markets has created considerable tax implications for many investors. The fiscal condition of public budgets indicates that taxes are likely to increase, not decrease, and many investors are seeking tax advantages mutual funds do not offer. Within an SMA there are no unearned gains and often trades can be balanced to address tax loss and gain harvesting. That can be highly attractive to investors who have large taxable assets and want access to particular portfolio managers or investment strategies. SMAs can also help those who want to create benefits for charitable giving.

All of the points that are made in this article ring true to my experience as well.  Click here to see where our SMAs are currently available.

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Weekly RS Recap

August 18, 2014

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (8/11/14 – 8/15/14) is as follows:

perf ranks 08.18.14 Weekly RS Recap

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Buffett’s Drawdowns

August 15, 2014

Drawdowns of perhaps the world’s greatest investor, Warren Buffett:

Yesterday Warren Buffett’s Berkshire Hathaway stock price broke $200,000. Buffett’s performance over the years is an amazing feat.

Since 1980, when the price was in the $200-300 range, the stock has compounded at an annual rate of 21% per year. That’s good enough to double your money every three-and-a-half years.

But those returns didn’t always come easy to Buffett or his investors. There were times when his patient style of value investing was out of favor and the stock experienced large losses. Here are the biggest losses in Berkshire Hathaway stock since 1980:

buffett Buffetts Drawdowns

No way to earn the types of returns he has generated without taking some lumps along the way.

Source: Ben Carlson

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Top International Holdings

August 15, 2014

Among our SMA strategies that have been in highest demand this year has been our Systematic RS International portfolio.  Top holdings are shown below:

intl hldgs Top International Holdings

As of 7/31/14

Here is a quick overview of what these companies do (Source: Yahoo! Finance):

Bitauto Holdings (BITA): Bitauto Holdings Limited provides Internet content and marketing services for the automotive industry primarily in the People’s Republic of China.

Vipshop Holdings (VIPS): Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People’s Republic of China.

Gruma SAB de CV (GMK): Gruma, S.A.B. de C.V., through its subsidiaries, produces, and sells corn flour, wheat flour, tortillas, and other related products.

Empresa Distrib Comercializadora Norte (EDN): Empresa Distribuidora y Comercializadora Norte S.A., a public service company, is engaged in the distribution and sale of electricity in Argentina.

Seiko Epson (SEKEY): Seiko Epson Corporation, together with its subsidiaries, is engaged in the development, manufacture, and sale of information-related equipment, devices and precision products, sensing and industrial solutions, and others, as well as provision of related services.

Vestas Wind Systems (VWDRY): Vestas Wind Systems A/S engages in the manufacture and sale of wind turbines and wind power systems worldwide.

Pampa Energia SA (PAM): Pampa Energía S.A., together with its subsidiaries, generates, transmits, and distributes electricity in Argentina.

Telekom SA Soc LTD (TLKGY): Pampa Energía S.A., together with its subsidiaries, generates, transmits, and distributes electricity in Argentina.

YFP SA (YFP): YPF Sociedad Anónima, an energy company, is engaged in the exploration, development, and production of crude oil, natural gas, and liquefied petroleum gas (LPG) in Argentina.

Sysmex (SSMXY):  Sysmex Corporation, together with its subsidiaries, engages in the research and development, production, sale, service, and support of diagnostic instruments, reagents, and software worldwide.

To receive a fact sheet for the strategy, please e-mail andyh@dorseywright.com or call 626-535-0630.

There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates. A list of all holdings for the past 12 months is available upon request.

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Sector Performance

August 15, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/14/14.

sector 08.15.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Fund Flows

August 14, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 08.14.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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Quote of the Week

August 13, 2014

Pre-commitment to a rational investment plan is important, because the intuitive impulse to act otherwise is strong. —Shlomo Benartzi

Understated quote by Shlomo Benartzi, but essential for investment success.

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Can You See the Future?

August 13, 2014

A key excerpt from Andrew Ang’s book Asset Management: A Systematic Approach to Factor Investing:

Investors must use past data to estimate inputs for optimization problems.  But many investors simply take historical averages on short, rolling samples.  This is the worst thing you can do.

In drawing all of the mean-variance frontiers for the G5, or various subsets of countries, I used historical data.  I plead guilty.  I did, however, use a fairly long sample, from January 1970 to December 2011.  Nevertheless, even this approximately forty-year sample is relatively short.  You should view the figures in this chapter as what has transpired over the last forty years and not as pictures of what will happen in the future.  As the investment companies like to say in small print, past performance is no guarantee of future returns.  The inputs required for mean-variance investing—expected returns, volatilities, and correlations—are statements about what we think will happen in the future.

Using short data samples to produce estimates for mean-variance inputs is very dangerous.  It leads to pro-cyclicality.  When past returns have been high, current prices are high.  But current prices are high because future returns tend to be low.  Thus, using a past data sample to estimate a mean produces a high estimate right when future returns are likely to be low.  These problems are compounded when more recent data are weighted more heavily, which occurs in techniques like exponential smoothing.

Mean-variance optimization (a darling of financial theory) works just fine when you can accurately predict returns, volatilities, and correlations.  But, if you can’t (or should I say when you can’t), mean-variance optimization is useless.  As Ang points out, simply taking historical averages “is the worst thing you can do.”  Alas, coming up with the optimal asset allocation that will allow us to create wonderful returns with a small amount of volatility is comforting to wish for, but real life is much messier than the theory.

Trend following may, admittedly,  be somewhat simple (although as John can attest, the computer programming required isn’t for simpletons).  But, the only question that ultimately matters is does it work.  Click here and here for some material to help answer that question.

Past performance is no guarantee of future returns.  A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

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DWA ETFs

August 13, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 8/13/14):

pdp1 DWA ETFs

dwas1 DWA ETFs

dwaq1 DWA ETFs

piz1 DWA ETFs

pie1 DWA ETFs

pez1 DWA ETFs

pfi1 DWA ETFs

prn chart DWA ETFs

psl1 DWA ETFs

ptf1 DWA ETFs

pth1 DWA ETFs

pui1 DWA ETFs

pxi1 DWA ETFs

pyz1 DWA ETFs

fv1 DWA ETFs

ifv1 DWA ETFs

The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).

PDP: Prior to the fund inception date (3/1/07), chart is created using extrapolated index data.

DWAS: Prior to the fund inception date (7/19/2012), the chart is created from extrapolated index data.

DWAQ:  Prior to fund inception date (4/30/03), chart is created using extrapolated index data (DYO), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA NASDAQ Technical Leaders Index (TLNASDAQ)

PIZ: Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.

PEZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZZK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Cyclicals Technical Leaders Index (TLCONCYC)

PFI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZFK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Financial Technical Leaders Index (TLFINANCE)

PRN: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZLK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Industrials Technical Leaders Index (TLINDUST)

PSL: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZSK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Staples Technical Leaders Index (TLCONSTA)

PTF: Prior to the fund inception date (10/12/2006), chart is created using extrapolated index data. and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Technology Technical Leaders Index (TLTECH)

PTH: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZXK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Healthcare Technical Leaders Index (TLHEALTH)

PUI: Prior to fund inception date (10/25/05), chart is created using extrapolated index data (DWU), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Utilities Technical Leaders Index (TLUTIL)

PXI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZKK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Energy Technical Leaders Index (TLENERGY)

PYZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZBK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Basic Materials Technical Leaders Index (TLBASMAT)

FV: Prior to the fund inception date (3/6/2014), chart is created using extrapolated index data (FTRUST5)

IFV: Prior to the fund inception date (7/23/2014), chart is created using extrapolated index data.

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When Ignorance May Not Be Bliss

August 12, 2014

In case there was any question about whether or not investors need advice (Forbes):

The stock market was up 30% in 2013, but if you’re like most investors, that’s news to you.

A new Gallup survey shows that nine out of ten people are unaware that the stock market climbed 30% last year. Most believe that stocks performed well, just not that well — 17% say stocks increased 20% and 37% say stocks increased 10%. Three out of ten people thought stocks stayed the same or decreased.

Investors Estimates of 2013 When Ignorance May Not Be Bliss

The bull market is well into its fifth year, but many Americans haven’t reaped the gains.

Just 52% of Americans were invested in the stock market last year, down from 62% in 2008, according to a previous Gallup survey.  Another study pegs equity allocations at their lowest levels over the last half century. This includes workers who own equities through money invested in a 401(k) or other retirement account.

“Every bull market, such as the one the country is now experiencing, has the bear’s shadow hanging over it. And that shadow tends to grow bigger and darker with every additional month of market gains,” notes Gallup.

What if investors were handed $10,000 to save or invest now?  Just 41% would put it in the stock market, while 36% would keep it in cash and 20% would buy a CD.

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