Tom Dorsey and John Lewis on AdvisorShares AlphaCall

March 21, 2017

Click here for a replay of their recent conversation on our International strategy, available as AADR and as an SMA.

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Relative Strength Spread

March 21, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 3/20/17:

rs spread

The RS Spread has declined for most of the past 12 months as the RS laggards have performed better than the RS leaders, but that dynamic appears to be changing.  The RS Spread has now moved above its 50 day moving average, a potentially positive development for relative strength strategies.

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

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Process over Short-Term Outcome

March 20, 2017

Jim O’Shaughnessey, author of What Works on Wall Street, recently wrote about 7 traits that he believes are required for active investors to win in the long run.  I fully agree with all 7, but I found #2 on his list to be particularly compelling:

2. Successful Active Investors Value Process over Outcome.

“If you can’t describe what you are doing as a process, you don’t know what you’re doing.”

~W. Edwards Deming
The vast majority of investors make investment choices based upon the past performance of a manager or investment strategy. So much so that SEC Rule 156 requires all money managers to include the disclosure that “past performance is not indicative of future results.” It’s ubiquitous–and routinely ignored by both managers and their clients. In keeping with human nature, we just can’t help ourselves when confronted with great or lousy recent performance. “What’s his/her track record?” is probably investors’ most frequently asked question when considering a fund or investment strategy. And, as mentioned above, the vast majority of investors are most concerned with how an investment did over the last one- or three-year period.

Yet successful active investors go further and ask “what’s his or her process in making investment decisions?”  Outcomes are important, but it’s much more important to study and understand the underlying process that led to the outcome, be it good or bad. If you only focus on outcomes, you have no idea if the process that generated it is superior or inferior. This leads to performance chasing and relying far too much on recent outcomes to be of any practical use.  Indeed, shorter-term performance can be positively misleading.

Look at a simple and intuitive strategy of buying the 50 stocks with the best annual sales gains. Consider this not in the abstract, but in the context of what had happened in the previous five years:

Year                            Annual Return            S&P 500 return

Year one                      7.90%                          16.48%

Year two                     32.20%                        12.45%

Year three                   -5.95%                         -10.06%

Year four                     107.37%                     23.98%

Year five                     20.37%                        11.06%

Five-year

Average Annual

Return                         27.34%                        10.16%

$10,000 invested in the strategy grew to $33,482, dwarfing the same investment in the S&P 500, which grew to $16,220. The three-year return (which is the metric that almost all investors look at when deciding if they want to invest or not) was even more compelling, with the strategy returning an average annual return of 32.90% compared to just 7.39% for the S&P 500.

Also consider that these returns would not appear in a vacuum—if it was a mutual fund it would probably have a five star Morningstar rating, it would likely be featured in business news stories quite favorably and the long-term “proof” of the last five years would say that this intuitive strategy made a great deal of sense and therefore attract a lot of investors.

Here’s the catch—the returns are for the period from 1964 through 1968, when, much like the late 1990s, speculative stocks soared. Investors without access to the historical results for this investment strategy would not have the perspective that the long term outlook reveals, and thus might have been tempted to invest in this strategy right before it went on to crash and burn. As the data from What Works on Wall Street make plain, over the very long term, this is a horrible strategy that returns less than U.S. T-bills over the long-term.

Had an investor had access to long-term returns, he or she would have seen that buying stocks based just on their annual growth of sales was a horrible way to invest—the strategy returned just 3.88 percent per year between 1964 and 2009! $10,000 invested in the 50 stocks from All Stocks with the best annual sales growth grew to just $57,631 at the end of 2009, whereas the same $10,000 invested in U.S. T-Bills compounded at 5.57 percent per year, turning $10,0000 into $120,778. In contrast, if the investor had simply put the money in an index like the S&P 500, the $10,000 would have earned 9.46 percent per year, with the $10,000 growing to $639,144! What the investor would have missed during the phase of exciting performance for this strategy is that valuation matters, and it matters a lot. What investors missed was that these types of stocks usually are very expensive, and very expensive stocks rarely make good on the promise of their sky-high valuations.

Thus, when evaluating an underlying process, it’s important to decide if it makes sense. The best way to do that is to look at how the process has fared over long periods of time. This allows you to better estimate whether the short-term results are due to luck or skill. We like to look at strategies rolling base rates—this creates a “movie” as opposed to a “snapshot” of how strategies perform in a variety of market environments.

This is a philosophy you’ve repeatedly heard from us as well.  Short-term outcomes are important, but process ultimately determines long-term results.  Among the ways that this can be illustrated is by looking as some of our white papers on relative strength investing.  John Lewis’ white paper, Point and Figure Relative Strength Signals detailed the long-term investment results of a relative strength process that took 1,000 U.S. stocks and categorized them into one of four portfolios based on their PnF relative strength signal (BX-buy signal and in a column of X’s; BO–buy signal and in a column of O’s; SX—sell signal and in a column of X’s; or SO—sell signal and in a column of O’s).  Portfolios were equal-weighted and rebalanced on a monthly basis.  Performance of these four portfolios from 12/31/1989 to 12/31/2015 is shown below.  As detailed in the paper, following a disciplined process of investing in stocks with the highest momentum (BX portfolio) generated significant outperformance over this test period.

base rates

Click here for disclosures

Long-term success with active management comes from doing sufficient due diligence to either design a robust investment process yourself (or to employ one designed by someone else) and then to execute, execute, execute.  If the process is sound, long-term outcomes should take care of themselves.

The performance above is based on total return, inclusive of dividends, but does not include transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Some performance information presented is the result of back-tested performance.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period. The hypothetical returns have been developed and tested by DWA, but have not been verified by any third party and are unaudited. Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight. Model performance data (both backtested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

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False Sense of Security with Passive?

March 14, 2017

Peter Chiappinelli in Advisor Perspectives sheds some interesting light on the active versus passive debate as it relates to fixed income exposure.  See below for a few excerpts of his recent article.

The trends are clear. 2016 was the year in which the investment community warmly embraced passive portfolios. Our worry, however, is that investors are feeling a false sense of security, particularly with passive bond portfolios–namely those funds and Exchange Traded Funds (ETFs) linked to a common benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index (the Agg). There is nothing passive about this index, and we would argue it is aggressively taking on more risk at the worst possible time. There are three main reasons for our concern: the simple math of bond duration; the changing composition of the index; and the very logical financing behavior of corporate borrowers.

Bond math and duration

Without doing a rehash of intricate bond math, duration is an important calculation of bond risk. Though it has many variants, at its root duration measures the sensitivity of a bond’s price to a shift in yields. For example, a bond (or a bond portfolio) with a duration of 5 years means that for every 1% shift upwards in yields, there is a 5% drop in the price of the bond. Duration is measured in years because it is a function of the timing and magnitude of a bond’s cash flows (coupons and principal repayment): the more distant the cash flows, the higher the sensitivity (i.e., higher risk) to a change in interest rates, all else held equal. The cleanest example of this is the 30-year zero-coupon bond, which pays a single massive cash flow 30 years down the road, and therefore this bond has a duration of exactly 30 years. There are no coupon payments along the way that would dampen its sensitivity to a change in yields. Generally speaking, the smaller the coupon, the higher the duration (and vice versa); the longer the maturity, the higher the duration (and vice versa). That’s just how the math of bond risk works.

Unfortunately for investors in passive bond portfolios or ETFs tied to the Agg, bond math is making this “safer” bond portfolio much riskier than it was even a few years ago. It is now much more sensitive to a possible rise in bond yields (as we saw in November) due simply to a lower “cushion” of coupons. As shown in the chart below, coupons have dropped dramatically since the Financial Crisis of 2008 and the introduction of Quantitative Easing by the Federal Reserve (Fed). For many years leading up to 2008, the Agg happily paid its investors a healthy coupon of over 5%, but today it is a measly 3%, a number that is among some of the lowest ever recorded. This is problem number one.

coupons

Changing composition of the Agg

Problem number two is that the Agg has dramatically changed its stripes since the Financial Crisis. Eight years ago, the largest bond sector was securitized loans (e.g., asset-backed securities, mortgage-backed securities), and most of these types of securities have shorter maturities and duration. Today, longer-dated Treasuries are now the dominant sector of the Agg, while securitized bonds have dropped off significantly. This, again, has shifted both the maturity and duration of the Agg upward.

Click here for the rest of Chiappinelli’s article, but following paragraph is a nice conclusion to his analysis:

The bond math of lower coupons, the changing composition of the Agg, and the issuance of longer-maturity bonds by corporate America all conspired to increase risk, at possibly the worst time. By any reasonable fiduciary standard, this was a time to be reducing duration, yet the Agg, and the passive bond portfolios and ETFs tied to it, has seen a 62% increase in duration over the past 8 years. There is nothing passive about the Agg–it has actually become more aggressive! Be careful.

Contrary to popular belief, passive does not necessarily mean static.  The composition of the Aggregate Bond Index has changed dramatically over time and this has important implications for its investors.  Part of the reason that we introduced our Tactical Fixed Income portfolio (available as a separately managed account) in 2013 is that we thought that we were likely  entering a period of time where active could be increasingly important in the fixed income space.  See below for the FAQ on this strategy:

Why is there a need for Tactical Fixed Income?

Bond buyers face a dilemma. Yields are very, very low. If interest rates stay low this low, bondholders are facing minimal returns, all the while having those returns eaten away by inflation. If interest rates rise, bondholders are facing potentially significant capital losses. Both outcomes, obviously, are problematic. This situation demands a tactical solution that can manage through either outcome.

At Dorsey Wright, we have taken our time-tested relative strength tools and have applied them in a unique way to the fixed income markets. This solution is now available as a separately managed account. We think it will be welcome news for bond holders and prospective bond buyers who are grappling with the current bond market dilemma. Equally important, we think it will be a robust solution in the future across a broad range of possible interest rate environments.

What is the investment universe for the Tactical Fixed Income strategy?

The Tactical Fixed Income strategy can invest in short-term and long-term U.S. Treasurys, inflation-protected bonds, corporate, convertible, high yield, and international bonds. This is a broad universe of fixed income types that have varying yields and volatility characteristics.

How is the risk managed in the Tactical Fixed Income portfolio?

The Tactical Fixed Income model structures the portfolio in a way that balances risk and reward. Certain types of fixed income behave better in “risk-on” environments, while other fixed income categories are more defensive. Our model is built to ensure that the portfolio remains diversified. It’s very important to understand that this is designed as core fixed income exposure. We’re trying to generate good fixed income returns, without creating equity-like volatility.

Our model compares the relative strength of all of the ETFs in the investment universe. Those fixed income sectors exhibiting the strongest trends will be represented in the portfolio.

How does the strategy handle a rising rate environment?

Although the general trend of interest rates has been down over the past three decades, there have been periods where rates have generally risen. The period of mid-2003 to mid-2007 was generally a period of rising interest rates, while the period of mid-2007 to late 2016 was generally been a period of declining interest rates. Sectors like long term government bonds tend to perform much better in a declining interest rate environment while sectors like convertible bonds tend to perform much better during rising rate environments.

Our Tactical Fixed Income strategy is designed to be adaptive and seeks to add value in both environments.

Will the strategy invest in inverse bond ETFs?

We do not use inverse bond ETFs in the portfolio due to the cost of carrying the short positions, which includes the management fees of the ETFs as well as paying out the interest payments while you own these funds. However, a rising rate environment typically is accompanied by a strong economy. We do have ample ability to have exposure to sectors of the fixed income market, like high yield, international, and convertible bonds, that may perform well during these environments.

How has the strategy performed since it was introduced in March 2013?

We have been pleased with the performance of this strategy.  As shown below, it has outperformed the Barclays Aggregate Bond Total Return Index since inception:

TFI performance

As of 2/28/17

To receive the fact sheet for this portfolio please e-mail andyh@dorseymm.com or call 626-535-0630.

Net performance shown is total return net of management fees for all Dorsey, Wright & Associates accounts, managed for each complete quarter for each objective. The advisory fees are described in Part II of the adviser’s Form ADV. All returns since inception of actual Accounts are compared against the Barclays Aggregate Bond Index. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. 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.

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International Climbs the Ranks

March 6, 2017

While the bull market in U.S. equities is capturing plenty of headlines, perhaps less well understood is the strength taking place in International equities. Dorsey Wright’s main asset allocation tool, Dynamic Asset Level Investing (DALI), ranks six asset classes based on their relative strength. As shown below, U.S. equities remain firmly in first place, but International equities currently finds itself in the number two spot.

The whole point of a tool like DALI is to be able to identify asset classes that are in favor as well as asset classes that are out of favor so an investor’s portfolio can be positioned to capitalize on those trends.

dali

Source: Dorsey Wright, 3/2/17

The chart below shows the historical rank of International equities in DALI. As shown below, it wasn’t all that long ago that International equities was ranked dead last. Over the last year, this asset class has made a powerful move higher.

int'l_dali

Source: Dorsey Wright, 3/2/17, based on monthly tally ranks

Chances are good that your clients have a healthy allocation to U.S. equities, but are they currently light on exposure to International equities? If so, we have a suggestion for how you go about getting that exposure for your clients.

On March 31, 2006 we launched our Systematic Relative Strength International Portfolio that was designed to start with an investment universe of ADRs from developed and emerging markets, small, mid, and large cap stocks and then to evaluate that universe based on our relative strength model. Our model seeks to overweight strong sectors and to underweight weak sectors. It also makes its buy and sell decisions by relative strength rank. Stocks are bought from the top quartile of our ranks and they are sold when they fall out of the top half of our ranks. It is a disciplined trend following approach to international equity exposure. The results have been something that we have been very proud of. See below for details:

intl 1

intl 2

As of 2/28/17.

This portfolio is available on a large and growing number of SMA and UMA platforms. To receive the fact sheet for this portfolio, please call 626-535-0630 or e-mail andyh@dorseymm.com.

The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model. Net performance shown is total return net of management fees, commissions, and expenses for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. The advisory fees are described in Part 2A of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the NASDAQ Global ex US Index. The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. 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.

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Relative Strength Spread

March 2, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 3/1/2017:

spread

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

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Ever-Increasing Efficiency

March 1, 2017

For those of you who have been in this business for a decade or longer, how much more efficient is your business today than it was when you began?  I suspect that the answer to that question is “much more efficient.”  Why?  Because those advisors who failed to innovate and streamline their business are likely already on to a different career.  We are all aware of just how much competition there is in this industry and have seen the general trend in lower fees and increased automation.  Yet, in my humble opinion, there is still no better place to be.  In fact, for the advisor who is on the right side of these trends, who continues to find ways to operate more efficiently, and continues to increase their value proposition to their clients, the future is as bright as ever.

While recently reading Martin Ford’s book Rise Of The Robots, I came across the following passage which speaks to the pace of innovation and ever-increasing efficiency in our economy.

In 1988, workers in the US business sector put in a total of 194 billion hours of labor.  A decade and a half later, in 2013, the value of the goods and services produced by American businesses had grown by about $3.5 trillion after adjusting for inflation—a 42 percent increase in output.  The total amount of human labor required to accomplish that was…194 billion hours.  Shawn Sprague, the BLS economist who prepared the report, noted that “this means that there was ultimately no growth at all in the number of hours worked over this 15-year period, despite the fact that the US population gained over 40 million people during that time, and despite the fact that there were thousands of new businesses established during that time.”  (Shawn Sprague, “What Can Labor Productivity Tell Us About the U.S. Economy?,” US Bureau of Labor Statistics, Beyond the Numbers 3, no. 12 (May 2014)

Kind of amazing, isn’t it?  42% more output with the same amount of human labor.  As you look at your business today, what parts need to become more efficient?  Marketing, reporting, compliance, investment management, customer service, client onboarding?  Perhaps, a little of all of the above?  While we don’t profess to be all things to all people here at Dorsey Wright, we can make a major impact on your investment management process.

Let me suggest 3 ways that Dorsey Wright can help your business become more efficient.  This is by no means an exhaustive list, but it does include some which I believe to have the most potential to take your business to the next level.

  1. Become an expert in implementing one or more of the following tools across your client portfolios: Team Builder (to employ a process for defining your investment inventory and then building a diversified allocation while selecting best of class funds), Portfolios (to track your current holdings and to receive alerts when any of those holdings fall below an acceptable technical attribute of fund score), Tactical Tilt (to enable tactical shifts within strategic boundaries), Models (to put to work pre-built sector rotation, fixed income rotation, or country rotation models),  Matrix Plus (to facilitate the automation of buy and sell decisions based on relative strength rank within a customized investment universe).  Each of the above tools are scalable, giving you the opportunity to provide world class investment management in a time-efficient manner.
  2. Leverage the expertise of Dorsey Wright’s Systematic Relative Strength Portfolios.  Perhaps, part of becoming more efficient for your business is to outsource some of the investment management to a 3rd party money manager–especially to one whose investment process is one that you believe in.  Click here to see a list of SMA/UMA platforms where these portfolios are currently available.  E-mail andyh@dorseymm.com to receive the brochure.
  3. Leverage the expertise of Dorsey Wright through the use of ETFs or mutual funds which DWA is involved in managing.  Click here for the list of options.  These products give you turn-key access to relative strength strategies, driven by Dorsey Wright’s global technical research.

I suspect that that success as a financial advisor in the future will require the capability to continually streamline your investment management process in a way that is clearly differentiated from the competition.  Dorsey Wright research tools and managed products can be instrumental and foundational in that effort.

The 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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Q&A With John Lewis, CMT

February 27, 2017

As we approach the 12-year anniversary of the launch of our family of Systematic Relative Strength Portfolios, we check in with Senior Portfolio Manager, John Lewis, CMT for an update.

Q: How much of your own personal net worth have you invested in the Systematic Relative Strength Portfolios?

A:  The majority of my personal net worth is invested in the same strategies we run for our clients.  I do have some other investments where DWA investment strategies are not available, such as my 401k, but for the most part we believe in eating our own cooking.

Q: What do you think is the single biggest benefit to a person who commits money to one of our Systematic Relative Strength Portfolios?

A: The discipline in which the strategies are implemented is a huge part of what makes the SRS series so special.  Day in and day out we are using the same models to harness the power of the momentum factor.  The momentum factor isn’t always in favor, but the process is designed to just cut through the noise and keep tilting the portfolio that way so when momentum is in favor we are there to capture it.  These also tend to be concentrated portfolios so the disciplined sell process we use is very important.  We take high conviction positions and if you don’t manage those properly the entire portfolio can quickly get away from you.

Q: What are you most proud of as you look back at the past 12 years of running these portfolios?

A: The performance of the strategies has been very solid over a time period that hasn’t always been the best for the momentum factor.  But more importantly, we are very proud of the fact that the original design of the strategies has been robust enough to handle a number of wildly different markets we have had over the last 12 years.  We shy away from constant tweaking of our models.  That is something we feel is actually detrimental to performance because you are constantly fighting the last battle.  Doing so much research up front has given us tremendous confidence in the strategies going forward, and being able to stick with them through all types of conditions has been one of the big reasons for their success over the years.

Q: The Aggressive portfolio has come on very strong in the last couple of years.  What do you think is going on with that strategy?

A: The aggressive strategy is designed to be a more aggressive application of the momentum factor.  We are taking the highest rated stocks in our rankings and kicking them out quickly if the fail to perform.  When the momentum factor is performing well, the aggressive strategy tends to outperform the other strategies.  We have had a good environment for the quick rotation over the last year or so.  That isn’t always the case.  Also, since the aggressive strategy is very concentrated (20-25 positions) stock picking can play a larger role than in some of our index based strategies.  We have had some very good performance out of a few of our holdings over the last year, and that has really been a key driver of performance.

Q: Why does the Core portfolio tend to have a little lower volatility and a little lower turnover than some of our other portfolios?

A: The Core strategy is also a concentrated strategy (20-25 names), but we don’t kick stocks out as fast as they fall in our ranks.  This allows the portfolio to be more diversified over time, and it also allows for positions to recover in choppy markets where they might get sold our of the Aggressive strategy.  When the momentum factor isn’t in favor the Core strategy tends to perform better than the Aggressive strategy.  That is what we say over a 3 to 5 year period that ended about a year or so ago.   The market (in terms of momentum stocks) was rather choppy, and the Core strategy was able to weather that better than a strategy like Aggressive that rotates more rapidly.

Q: The Growth portfolio has a unique capacity to raise cash in certain types of markets.  Describe what can cause that portfolio to raise cash?

A: The Growth strategy will raise cash in bear markets.  We have a market filter that moves the portfolio from a fully invested mode to a sell and don’t replace mode.  We don’t automatically sell positions when the market filter turns negative.  There are a lot of times when the market filter has a negative reading and out holdings continue to perform just fine.  In that case we won’t sell anything.  If we do need to sell something we wait until it breaks trend or drops to our sell level.  So the cash tends to build slowly as the market drops.  It is designed to be like an insurance policy.  We would rather not use the insurance, but it is comforting for investors in the Growth strategy to know it is there.  We use the same market filter to get back in to the market.  If we raise cash and the market reverses we just go through our disciplined buy process and bring the portfolio back to a fully invested stance.  This actually happens more often than the portfolio getting to very high cash levels.  In strongly trending up markets raising cash tends to hurt performance, but it works very well to protect capital in bear markets.

Q: While the rules of these models might not change over the years, the investment universe can.  How has the investment universe for the Global Macro portfolio changed over time?

A: The Global Macro strategy is a little different because it invests exclusively in ETF’s that represent different asset classes.  It is a tactical asset allocation strategy that can go anywhere we can efficiently find exposure.  We have a predefined investment universe that covers everything from domestic equities, to fixed income, to commodities, to international investments.  There are all ranked unemotionally by our momentum ranking process and we are constantly driving the strategy to where the strength is.  Over the years, the ETF landscape has expanded a great deal.  As new products come to market they are evaluated and if there is a hole in our current lineup we will consider adding new ETF’s to broaden our opportunity set.  In a go anywhere strategy like Global Macro, the more varied exposures we can add to the universe the better.

Q: The International portfolios has been among the best performing strategies in this family of accounts.  From a portfolio construction perspective, how do you think our approach differs from the competition?

A: The SRS International strategy has a few unique features.  First, it is comprised entirely of ADR’s and foreign equities listed on US exchanges.  That means we can get exposure to foreign equities without having to buy the shares on local exchanges, do currency conversions, etc…  It makes it an ideal way to get international exposure through a retail SMA.  We also don’t have minimums or maximums on our developed versus emerging markets exposure.  This has served us well over the last ten years as different markets have come in and out of favor.  Our job is to buy the best momentum securities from the ADR universe so we don’t constrain ourselves to countries or regions.  Wherever the strength is is where the portfolio will be overweighted.  Since the process is very disciplined we are very comfortable that when markets change our models will pick that up and we can change the portfolio accordingly.

Q: A passive approach to fixed income has worked pretty well for the last 35 years, arguably until recent years.  Why do you think there will be a need for Tactical Fixed Income in the years to come?

A: Tactical Fixed Income is one of our newer strategies, and it has also performed very well since inception.  Our process is very much a risk on, risk off approach to fixed income markets.  If rates begin to rise significantly we are able to rapidly rotate into defensive positions and preserve gains made during better times.  Since we use ETF’s in this strategy it is very easy for us to move quickly between different areas of the bond market.  We believe having an allocation to a tactical fixed income strategy will be a great way to diversify your bond holdings in a different interest rate environment.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if neces­sary, seek professional advice.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

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Weekly RS Recap

February 27, 2017

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 (2/20/17 – 2/24/17) is as follows:

ranks

Good week for the RS laggards last week.

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

February 23, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 2/22/17:

spread

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

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Politics and Investing

February 21, 2017

Last week Bloomberg reported that Americans recently broke the American Psychological Association’s anxiety meter for a record level of stress.  You read that right.  No, this is not from late 2008.  This is from January 2017.

“The results of the January 2017 poll show a statistically significant increase in stress for the first time since the survey was first conducted in 2007,” the APA said on Wednesday in a report on the survey of 1,019 adults living in the U.S., conducted from Jan. 5 to Jan. 19 by Harris Poll.

Americans’ stress levels in January were worse than in August, in the middle of the angriest, most personal campaign in recent memory, when some believed the anxiety would abate after the election. At 57 percent, more than half of respondents said the current political climate was a very or somewhat significant source of stress. Stressors for everyone, including Republicans, were the fast pace of unfolding events and especially the uncertainty of the current political climate, said Vaile Wright, director of research and special projects at the APA.

What is it that has everyone so worked up?  Politics.  How many of your clients invest their politics?  When the resident of the Oval office is of their same political party, do they tend to be more bullish and when the opposite is true, do they tend to be more bearish?

When I read that article I couldn’t help but think back to something that The Motley Fool wrote last year as it relates to the problem of conflating politics and investing:

Economics is a close cousin of politics, which is dangerous because politics is a close cousin of emotional decisions detached from reality.

Not only do most of us have emotional opinions about who should/shouldn’t run the country, but we unfailingly overestimate how much influence presidents have over the economy and stock market. When presidents do impact the economy, good luck guessing how markets will respond. Lots of smart people predicted that Barack Obama’s spending plans meant surging interest rates and a collapsing dollar.

Growing the economy means getting everyone to win, whereas politics by definition means getting the opposing party to lose. Rationality melts when you set up this kind of my-team-versus-yours dilemma. Psychologist Geoffrey Cohen showed that Democratic voters supported Republican proposals when they were attributed to fellow Democrats more than they supported Democratic proposals attributed to Republicans, and vice versa. Imagine the same part of your brain analyzing investments. It’s a disaster.

I like politics, and I love investing. But I run from anything conflating the two.

Thus, the power of an emotionless method of investing.  The chart just reflects what is, not what we fear might be.  And what does that chart—using the S&P 500 as a proxy for the market—look like right now?

spx

As of 2/16/17

Well it doesn’t look bearish…  Invest accordingly.

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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Weekly RS Recap

February 21, 2017

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 (2/13/17 – 2/17/17) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

February 16, 2017

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 2/15/2017.

sector

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

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High RS Diffusion Index

February 15, 2017

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 2/14/17.

diffusion 02.15.17

The 10-day moving average of this indicator is 69% and the one-day reading is 81%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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A Whole New World for International Investing

February 14, 2017

2016 was a lackluster year for GDP growth in the US, early estimates put 4th quarter estimates at 1.9% with a full year estimate at 1.6%. This is significantly lower than the 4% growth rate the president has targeted for 2017 and is much closer to estimates of an approximately 2.0-2.2% GDP growth rate in 2017 by several international groups.

USGDP Q416

 

2017GDP Est 2.9.17
Sources: www. knoema.com/qhswwkc/us-gdp-growth-forecast-2015-2019-and-up-to-2060-data-and-charts, www.whitehouse.gov/bringing-back-jobs-and-growth

That is not to say the major infrastructure spending that is being proposed, the possibility of corporate tax reform and repatriation of billions in overseas cash will not have an impact on short term growth rates. The questions are how long is it sustainable and what are the risks to the market if we see GDP slow?

For many investors, international markets have a more appealing long term growth story when faced with 2% growth. The IMF has a 1.9% growth projection for the Advanced Economies (Including the US) and a 4.5% growth projection for emerging and developing (frontier) markets.  An accelerated growth rate and a large young population of people striving for a better life are several points investors continue champion when making allocations to emerging markets. Our D.A.L.I. model currently has international equities in the number two position behind US equities with the emerging markets, specifically Latin America showing stronger indicators than the majority developed regions.

DALI INT 2.9.17

 

 

 

 

The problem that many face when making international allocations is do they stick to the less volatile developed markets or do they dip their toe into riskier emerging and frontier market countries that have the potential for higher returns? It is our opinion that an either or philosophy will not be a winning strategy, if you bind yourself to only developed or emerging markets you are leaving returns on the table.  Below is a relative strength chart of emerging markets (EEM) vs. developed markets (EFA) over that past 10 years.  Each market experienced different period of strength. By widening your investment universe you can rotate markets as the trend shifts over time allowing for the opportunity of a better risk adjusted return.

EEMEFA RS CHART

 

 

 

 

 

 

 

 

 

The added portfolio diversification achieved by including emerging alongside developed markets is notable. When looking at asset correlations between 1/1/2009 to 12/31/2016 shifting from developed only (EFA) to global ex US (ACWX) which has a 16% allocation to emerging markets reduced correlation by almost 5% against US large cap equities (SPY) and US small cap equities (IWM) by 2.5%. Holding just emerging markets (EEM) for your international allocation is the best tool for diversification in this example, with only a 0.57 correlation to large and small cap equities. However this over exposes you to a high volatility asset that some investors would not be comfortable in for long periods of time.

Correlation of Asset Classes

Int Corr 2.9.2017

 

 

 

 

In our SRS International strategy we have chosen to widen our investable universe to include the global ex US market. The wider universe allows for the ability to select from more securities that have higher technical attributes. Over the past 10 years we have used Relative Strength as a main factor to find the best performing securities agnostic to developed and emerging markets.

SRS INT EMDM Allocation

 

As shown above, nearly 70% of our Systematic RS International strategy is currently allocated to emerging markets. This however was not the case in 2012 when emerging markets only held 30% of the portfolio. Flexibility, especially when it comes to international equity exposure can make a big difference in investment returns if you are willing to expand your investable universe.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if neces­sary, seek professional advice.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.   Past performance is no guarantee of future returns.

 

 

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Relative Strength Spread

February 14, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 2/13/17:

spread 02.14.17

After declining for much of the past year, the RS Spread is now on the cusp of moving above its 50 day moving average—a potentially positive development for relative strength strategies.

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

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Traditional vs. Systematic Portfolio Management – What’s the Difference?

February 9, 2017

Click here for a replay of my 2/8/17 webinar.

trad_syst

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Diversification and Asset Class Rotation

February 7, 2017

Diversification is the cornerstone of Modern Portfolio Theory (MPT), introduced by Harry Markowitz in 1952, with the goal of achieving higher risk-adjusted returns overtime.  The problem with diversification is that it works great until the markets are dominated by one asset class for multi-year stretches. This is what we have seen for the past four years as the S&P 500 Index SPX has climbed to new highs and has continued to extend our current bull run. If your portfolios have diversified away from US equities during this time, you have more than likely under performed on a total return basis. This often raises the question from clients of “What have you done for me lately that I cannot do myself with SPY?” What many investors tend to forget is that market cycles change and so too does leadership.

The chart below is a take on the classic Callan chart with 11 asset class returns over a 16 year period. In this chart we compare 10 asset classes to large cap equities (S&P 500), which is held in a static position on the chart.

 

2017-01-27_12-42-09

(performance data in the image above from FactSet from 12/31/99 – 12/31/16)

For the last four years, US equities have been the best place to invest. In the prior 12 years, however, you would have been well-served incorporating other asset classes. In fact, during the 2000-2001 and 2008-2009 downturns you would have been better off owning almost anything other than Large Cap equities. Going forward, is Large Cap equity domination going to continue, or are we going to see markets revert back to pre-2013 distribution of returns?  One of the tools that can help you in evaluating both current leadership and potential opportunities is the Dynamic Asset Level Investing (D.A.L.I) ® tool. On a high level, D.A.L.I uses relative strength to rank six asset classes, and then allows you to delve into sub-asset class opportunities for each. The result is an unbiased, objective view of the markets that is adaptive to change.

Our Systematic Relative Strength Global Macro Portfolio is another solution that is easy to utilize at numerous custodians and trading platforms. The Portfolio provides broad diversification across markets, sectors, styles, Fixed Income, Currencies, Commodities as well as inverse domestic and international equities. The Portfolio is positioned to efficiently take advantage of risk capital globally where leadership trends are compelling. For the past four years we have seen a large allocation to US equity markets, although this has not always been the case.

GM Allocation

If you would like more information on the Dorsey Wright SMA or would like a handout copy of the charts in this presentation please contact Andy Hyer at andyh@dorseymm.com.

The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative strength is a measure of price momentum based on historical activity.  Relative strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

 

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No Second Chances with Retirement Savings

January 23, 2017

For a financial advisor, providing the right mix of investment strategies to their clients is a critical component of their value proposition.  We all know that each client has unique needs and risk tolerances, but clients can be largely grouped into two major categories, depending on whether they are in the accumulation phase or the distribution phase of their lives.  A recent article by James B. Sandidge, JD, in The Journal of Investment Consulting provides some powerful insights:

There are no second chances with retirement savings.  When saving for retirement, time provides a safety net against short-term risk.  But retirees cannot count on time, so it’s critical to get the risk allocation right.  Figure 3 shows year-by-year account values for a portfolio allocated 70/30 beginning in 2000.  The black line shows that an investor who was accumulating wealth was able to recover from two of the worst stock markets in the past seventy-five years (2000-2002 and 2008-2009) to finish the fourteenth year with 153 percent of the original investment.

With time as a safety net, “focus long-term” or “sit tight” have been effective risk-management strategies for those accumulating wealth.  Conversely, the bars show that if the same investor employed the same portfolio to distribute wealth with a 5-percent initial withdrawal and a 3-percent annual increases, the account value never recovers from the early market losses and finishes the fourteenth year with only 26 percent of the original investment, a pace of principal erosion that could deplete the account in five more years.

Accumulating investors only have to worry about how long it would take to recover from losses.  Retirees must worry about losses triggering accelerated principal erosion and cash-flow risk, and the lack of a safety net exaggerates the importance of even small adjustments to risk.

time

Sandidge, James B. 2016. Adaptive Distribution Theory. Journal of Investment Consulting 17, no. 2: 13–33.

This distinction between the distribution phase and the accumulation phase is critical to determining the appropriate types of investment strategies that should be implemented for different clients.  The bottom line is that investors in the distribution phase no longer have time on their side.  Risk management is of paramount importance in this phase of their lives.

Among the 7 strategies that are part of our family of Systematic Relative Strength Portfolios, Global Macro is among those that would be most appropriate for clients who are in the distribution phase of their lives.  In fact, I believe that this strategy is ideally suited to fit the needs of these clients who are want and need a focus on risk management.  See below for information about this strategy.

Systematic RS Global Macro Strategy

Frequently Asked Questions

What is the investment objective of the strategy?  The strategy seeks to achieve meaningful risk diversification and investment returns.  The historical correlation of this strategy to every major asset class has been relatively low over time.  Our global macro strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.

What asset classes are represented in the strategy?  The strategy is designed to invest in the following asset classes:  Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through ETFs.

How are the investments selected?  The strategy holds approximately ten ETFs that demonstrate powerful relative strength characteristics.  The strategy is constructed pursuant to Dorsey Wright’s proprietary basket ranking and rotation methodology.

How is this different from strategic asset-allocation?  We do not approach the asset allocation from a strategic standpoint. Instead, we implement a tactical approach. Our tactical overlay is designed to own the areas of the market exhibiting the greatest relative performance and avoid or use inverse funds for the weakest areas. You can expect the weightings to change over time!  When, for example, domestic equities are performing poorly our tactical process will avoid or use inverse funds in these areas or favor an area with better relative performance, like fixed income.  We make changes to the investment mix as markets and leadership change. The portfolio is designed to be quite responsive to emerging strength.

How do all these processes come together?  The investment strategy is 100% systematic. We have designed our processes to remove the portfolio managers’ emotions and biases, which are detrimental to superior long-term performance.

How is risk managed in the portfolio?  Our investment process is designed to systematically rotate the portfolio into the strongest asset classes and individual alternatives within those asset classes. If an asset class is performing poorly the tactical asset allocation overlay will avoid or use inverse funds in that area and buy an asset class with better relative strength.  There is a stop, based on the relative strength ranking, on each holding. The asset classes used in the portfolio are not typically highly correlated, so that our investment guidelines provide enough latitude to deliver solid returns in a variety of market conditions.

Will the portfolio ever go to cash?  Our investment universe includes ETFs that represent the shorter-term sector of the United States Treasury market.  So, yes, we can effectively allocate a portion of the account to cash if that is where the best relative strength is found.

Will you be investing in all of the ETFs?  We have a rigorous process to determine what ETFs we will evaluate for our portfolios. There are many ETFs that are duplicative or not suitable for the investment strategy we are using in this portfolio, and we do not consider these for purchase in the fund. As new ETFs come to market we are committed to evaluating their investment merits and the effect they might have on our investment strategy. Any new ETFs will need to meet the same stringent criteria as existing ETFs for consideration in the portfolio.

How can investors access the Global Macro strategy?  There are three different ways that investors can access this strategy.  It is available as a managed account on a large and growing number of SMA and UMA platforms.  It is also the model used for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).

For more information about this strategy, please e-mail andyh@dorseymm.com or call 626-535-0630.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if neces­sary, seek professional advice.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.  Dorsey Wright is a research provider for the Arrow DWA Tactical Fund and Arrow DWA Tactical ETF.

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Systematic Relative Strength Portfolios (SMA/UMA Platforms)

January 20, 2017

Picture1

Our Systematic Relative Strength Portfolios are available as managed accounts at a large and growing number of firms.

  • Wells Fargo Advisors (Global Macro available on the Masters/DMA Platforms)
  • Morgan Stanley (IMS Platform)
  • TD Ameritrade Institutional
  • UBS Financial Services (MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel (Opportunity Platform)
  • Kovack Securities (Growth and Global Macro approved on the UMA Platform)
  • Charles Schwab Institutional (Marketplace Platform)
  • Envestnet
  • Fidelity Institutional
  • Adhesion Wealth
  • FolioDynamix

Different Portfolios for Different Objectives: Descriptions of our seven managed accounts strategies are shown below.  All managed accounts use relative strength as the primary investment selection factor.

Aggressive:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  It invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.

Core:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This strategy tends to have lower turnover and higher tax efficiency than our Aggressive strategy.

Growth:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation with some degree of risk mitigation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This portfolio also has an equity exposure overlay that, when activated, allows the account to hold up to 50% cash if necessary.

International: This All-Cap International equity strategy seeks to achieve long-term capital appreciation through a portfolio of international companies in both developed and emerging markets.  This portfolio invests in those securities with powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  Exposure to international markets is achieved through American Depository Receipts (ADRs).

Global Macro: This global tactical asset allocation strategy seeks to achieve meaningful risk diversification and investment returns.  The strategy invests across multiple asset classes: Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Balanced: This strategy includes equities from our Core strategy (see above) and high-quality U.S. fixed income in approximately a 60% equity / 40% fixed income mix.  This strategy seeks to provide long-term capital appreciation and income with moderate volatility.

Tactical Fixed Income: This strategy seeks to provide current income and strong risk-adjusted fixed income returns.   The strategy invests across multiple sectors of the fixed income market:  U.S. government bonds, investment grade corporate bonds, high yield bonds, Treasury inflation protected securities (TIPS), convertible bonds, and international bonds.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Picture2

To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andyh@dorseymm.com or call 626-535-0630.  Past performance is no guarantee of future returns.  An investor should carefully review our brochure and consult with their financial advisor before making any investments.

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ALPS Dorsey Wright Sector Momentum (SWIN) Introduced

January 12, 2017

We are happy to announce the launch of SWIN, the ALPS Dorsey Wright Sector Momentum ETF.  From Yahoo:

ALPS, a subsidiary of DST Systems, Inc. (DST) providing products and services to the financial services industry, today announced a strategic alliance with Dorsey, Wright & Associates, a Nasdaq Company (DWA) to launch a new factor exchange-traded fund (ETF), which is designed to capture momentum investing at both the sector and stock level.

The ALPS Dorsey Wright Sector Momentum ETF (Nasdaq Ticker: SWIN) leverages Dorsey Wright’s proprietary Point and Figure Relative Strength charting to create a high conviction portfolio of 50 stocks. The Fund seeks to track, before fees and expenses, the Dorsey Wright US Sector Momentum Index (DWUSSR), an equally weighted index consisting of 50 large and midcap stocks listed in the US.

“We are excited to collaborate with such a prestigious company,” says Tom Carter, President of ALPS Advisors Inc., “The combination of Dorsey Wright’s research and our focus on product innovation has created a new strategy for enhancing portfolio construction.”

Historically, momentum strategies tend to perform best when clear leadership is established and sustained for a meaningful period; they often lag during time when there is no clear leadership among sectors. “SWIN is the first Momentum ETF to combine both macro (sector) and micro (stock) level screens,” says Mike Akins, SVP & Head of ETFs for ALPS, “We believe its unique two-screen construct creates opportunity for outperformance in strong sector momentum cycles, while simultaneously maintaining a diversification cushion to help weather periods where no clear sector leadership is present.”

Although SWIN is concentrated on the top performing momentum sectors, it maintains an equal-weighted strategy at the stock level. “At ALPS we strive to help investors and advisors build better portfolios,” says Akins, “ALPS Sector Dividend Dog ETF (SDOG), which employs an equal-weight sector and stock strategy with a tilt toward equity income, and SWIN are complementary strategies that provide diversified exposure to both value and momentum.”

Continue reading here.

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Q4 Manager Insights

January 6, 2017

The stock market had a solid end to the year and finished up the year strong. U.S. equities, as represented by the S&P 500 Total Return, were up 3.8% for the quarter and 12.0% for the year. Many people had predicted a poor year for U.S. equities so these strong returns caught a lot of investors off guard. The returns for other asset classes were mixed during the fourth quarter, but on a year-to-date basis most of the broad asset class benchmarks finished in positive territory. One standout was small cap U.S. equities. The Russell 2000 Total Return Index was up 8.8% in the last three months of the year and 21.3% for the year. Bonds lagged equities, but did end the year with positive returns. Another big story was commodities, which had seen dreadful returns for the past couple of years. The rally in energy propelled the S&P GSCI Commodity Index to a gain of 11.4% in 2016.

The biggest story during the fourth quarter had to be Trump winning the election. Very few people predicted that outcome, and even fewer predicted what the market’s reaction would be with a Trump victory! Once again, we learned how difficult it is to mix politics with investing. We have always focused on price and left things like political forecasting to the people that need material for their television appearance. Initially, the market had a huge selloff when it became clear Trump was going to win. But before the dust even settled the market turned right around and shot higher as confused investors looked on. A Trump presidency will no doubt be filled with a lot of uncertainty. However, there are a few themes that have emerged since the election that have affected our portfolios. Financials (specifically Banks) have rallied on the hopes of looser government regulation. Whether or not that is good for Americans as a whole is not really for us to decide, but it should make it easier and cheaper for banks to do business going forward and the market recognized that very quickly. We saw our exposure to Financials increase after the election as a result of the sector’s relative strength. Trump’s plans for improving infrastructure also helped Industrials rally in to the end of the year. Again, we have seen that strength flow through to our momentum models, and we have large allocations to that sector in most of our strategies.

Lost in the shuffle of the fourth quarter was the Federal Reserve raising rates for the first time in a year. The move was largely expected, but that didn’t prevent bonds from having a rough quarter. The positive return from bonds for 2016 was largely earned in the first part of the year. The Barclays US Aggregate Index was down –3.0% for the quarter so the fear of rising rates among investors is real. Our Tactical Fixed Income strategy navigated the choppy waters very nicely in 2016. We were able to post nice gains at the beginning of the year by being in long maturity bonds as well as areas that do well in a strong bond market (High Yield, Emerging Markets, Corporates). As the probability of a rate hike grew and bonds began to falter we were able to switch the portfolio out of the “risk-on” bonds and into short term U.S. Treasuries to preserve those gains.

The two major events discussed above caused quite a bit of change in our models. That was really the theme all year. While the market posted impressive gains as a whole, there were a lot of crosscurrents under the surface. All year long, old trends died, and new ones emerged. At the beginning of the year, investors were favoring Low Volatility stocks and equities with high dividend yields. As the year wore on that leadership began to fall apart and investors began favoring more “risk on” investments like small caps that are more volatile and don’t provide as much current income. Gold was also a theme that came and went during the year. There were many themes like that over the course of 2016 and that led to us making a lot of changes in the portfolios throughout the year. Trading activity was much higher than normal as our models continued to adapt to emerging themes and get rid of old ones. It was definitely a transition year, but it looks like we are well positioned heading in to the new year. The crosscurrents under the surface will eventually subside. When they do, we should be well positioned to capture the trends in the new leadership.

This information is from sources believed to be reliable, but no guarantee is made to its accuracy.  This should not be considered a solicitation to buy or sell any security.  Unless otherwise stated, performance numbers are not inclusive of dividends or fees.  Investors cannot invest directly in an Index.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss

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To constrain or not constrain?

January 4, 2017

Fixed income allocations continue to be a major question in client portfolios. Do you continue to hold traditional long term bonds that will price deteriorate as rates rise with the hopes that clients will be able to hold them to maturity, or do you layer in differentiating bond funds that generate returns through multiple asset classes? Bloomberg wrote:

Donald Trump’s election has reignited the prospects for inflation and growth both in the U.S. and abroad, which will likely lead to higher interest rates and spell the end of the bond market’s three-decade Bull Run.

And that will favor funds that can go wherever the highest returns are — without constraints on maturity, geography or even credit quality.

The buy and hold methodology gives you reliable income flows with the possibility of price deterioration as rates rise. While the multi asset class funds give you more ways to protect your downside and generate upside, which comes with higher volatility and ever-changing sector allocations.

It is our belief that the ability to move between sector allocations will be key moving forward into 2017 as the world continues to change. Unlike most unconstrained bond funds however that shy away from long term bonds, we believe that long Treasuries, at times, are a valuable holding.  Our Tactical Fixed Income strategy can hold up to 40% in long term government exposure, along with the ability to hold convertible bonds, short-term Treasuries, emerging market debt, TIPs, high yield and Investment grade Corporates.

If you would like more information on our fixed income strategy please reach out to Andyh@dorseymm.com.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm.  Neither the information within this article, 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 article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.  Past performance, hypothetical or actual, 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.  Advice from a financial professional is strongly advised.

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Q1 2017 PowerShares DWA Momentum ETFs

January 3, 2017

The PowerShares DWA Momentum Indexes are reconstituted on a quarterly basis.  These indexes are designed to evaluate their respective investment universes and build an index of stocks with superior relative strength characteristics.   This quarter’s allocations are shown below.

PDP: PowerShares DWA Momentum ETF

pdp

DWAS: PowerShares DWA Small Cap Momentum ETF

dwas

DWAQ: PowerShares DWA NASDAQ Momentum ETF

dwaq

PIZ: PowerShares DWA Developed Markets Momentum ETF

piz

PIE: PowerShares DWA Emerging Markets Momentum ETF

pie

Source: Dorsey Wright, MSCI, Standard & Poor’s, and NASDAQ, Allocations subject to change

We also apply this momentum-indexing methodology on a sector level:

sector-momentum

See www.powershares.com for more information.  

The 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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Looking to 2017

December 30, 2016

As we close out 2017 the final week of the year the markets have not been as cooperative as investors would have liked.  The markets have pulled back from historic highs and the Dow was not able to hit the elusive 20,000 mark. Looking forward to 2017 here are several issues that may impact clients and markets.

Political

New President: President elect Trump takes the oath of office on Friday January 20th in Washington, D.C.  The US markets have reacted mostly positive to the Trump election based on promises of lower taxes, faster growth and more US based jobs. Here is a link if you would like more information on the inauguration.

Tensions with Russia?: Obama announced sanctions against Russia yesterday afternoon and expelled 35 Russian official in response to the allegations of Russian cyber-attacks during the election. Russia has not yet retaliated but Russian Foreign Minister Sergei Lavrov “We of course cannot leave these stunts unanswered. Reciprocity is the law in diplomacy and international relations.”

Social Security

Tax cap increase: Workers and employers each pay in 6.2% of wages into the Social Security system until the salary cap of $118,500. In 2017 the tax rate will stay the same but the cap is being raised to $127,200 to adjust for higher wages in the US.

Payments increase: The cost of living adjustment for 2017 will be a modest 0.3% or about $5 per month. This increase is in line with 2016  which did not see any raise. Increases to Social security are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers.

Earning Limits: The earnings limit for people  65 and younger will increase from $15,720 in 2016 to $16,920 in 2017. While those who turn 66 in 2017 the limit increases by $3,000 to $44,880.

For a full list of changes, here is the 2017 Social Security Changes Fact Sheet.

Currency

China: China is trying to reduce the impact of the Dollar on the Yuan as the Yuan trades at an eight year low. They are introducing 11 more countries into its currency basket.

Euro: The Financial Times polled 28 economists and over 60% believe that the Euro and dollar will hit parity next year for the first time in 14 years. Rising interest rates in the US and continued QE in Europe are thought to be two of the main factors in the shift.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm

 Neither the information within this article, 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 article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

Past performance, hypothetical or actual, 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.  Advice from a financial professional is strongly advised.

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