Dueling Strategists

August 11, 2009

CNBC’s website today had adjacent links to stories about the market. One strategist was forecasting a higher target and felt the market would stay overbought, and the other strategist felt the S&P; could correct 15-20%. I might feel marginally better if either strategist had statistical evidence that one outcome was more likely than the other, but nothing at all was offered. They are simply opinions. A less formal term would be “guess.”

This is the problem with forecasting—people take it seriously and base investment decisions or asset allocations on guesses. I fail to see how this is going to help anybody invest in the long run. Sure, you might have a lucky guess here or there; after all, one of these two forecasters is going to be right about this situation since they have opposite opinions.

Relative strength is not based on guessing. It is based on math. That doesn’t mean it is never wrong; in fact, it can be out of synch for extended periods. It is just that historically there has been a long-term tendency for markets to follow strength. If we identify the relative strength mathematically and keep rotating to it, we hope to benefit from that long-term tendency of markets.

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More Evidence of Decoupling?

August 11, 2009

In contrast to U.S. automakers, Brazil’s car manufacturers are thriving. In the U.S., we tend to think of the auto business as a mature industry that will grow only as fast as demographics allow, and domestically that may be true. But overseas is a completely different story. U.S. investors may be missing the boat by not figuring out how to selectively get international exposure into their portfolios.

Using relative strength in a systematic way allows the asset classes with the strongest performance to move to the forefront. I could not have told you anything about the Brazilian auto industry before reading this article, but, as an example, it turns out that our Systematic RS International portfolio currently has more than 30% exposure to Latin America. It’s not because we made a brilliant economic forecast that Latin America would bounce back faster than Europe—it’s simply because the markets in Latin America have been relatively stronger than those in Europe. By using relative strength to tactically allocate to the strongest markets, we often end up in the right place at the right time.

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Aristotle’s Maxim: Seek moderation in all things.

August 11, 2009

Following Aristotle’s Maxim would likely lead investors to a nice mix of momentum and value strategies. Mark Hulbert wrote on the topic of mixing momentum and value strategies in this article in the New York Times last year.

HT to BR for bringing this article to my attention.

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James Montier and the Dead Parrot of Finance

August 11, 2009

In a 7/22/09 post titled Failure to Adapt, I made reference to a piece by James Montier about the Efficient Markets Hypothesis and Modern Portfolio Theory. It looks like John Mauldin has now picked up on it, so here is the link to the complete article. The article is clever and very insightful—it points out that many problems in the industry are caused by investors’ belief that they must forecast to be successful. As you know, we take the opposite view. We believe that forecasting is not fruitful and that the best returns will be earned by using an adaptive approach that will continue to adjust to market conditions no matter what they may be. Montier’s discussion of ongoing bubbles supports our thesis that trends to follow will be plentiful in the future.

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DWAFX Ranks Highly at 3-Year Mark

August 11, 2009

The Arrow DWA Balanced Fund (DWAFX) is one of the top mutual funds in its class. It has finished in the 9th percentile in the Morningstar Moderate Allocation Category (better than 91 percent of the 924 funds in this category) over the last three years.

(Click to Enlarge)

DWAFX is the first Dorsey Wright managed mutual fund and we are very pleased with its success. Furthermore, we are very appreciative of the warm reception that it has received in the marketplace – thank you! We developed this strategy because of the following philosophy:

  • The standard 60/40 policy portfolio is too narrow. Broader diversification, with special emphasis on alternative investments, is helpful to returns and risk management.
  • Endowment managers, like David Swenson at Yale, have been generating superior results for years by creating allocations with significant exposure to alternative asset classes. Now that ETFs provide access to most all of the asset classes that have been used in the endowment models, such a broadly diversified approach has been made available to the public through DWAFX.
  • The tactical asset allocation approach, driven by our systematic relative strength process, allows us to be extremely adaptive. This unique process seeks to do an excellent job of protecting on the downside as well as capitalizing on bull market moves in a wide variety of asset classes.

Click here to access the fact sheet for the Arrow DWA Balanced Fund.

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