Financial advisors will often categorize their book of business in order to be able to more efficiently structure their business efforts. It is common practice for financial advisors to categorize their book into “A,” “B,” and “C” clients. The A clients are generally those with the largest assets and tend to be the best source of referrals. The B clients have potential and may one day turn into A clients. Finally, the C clients make up that portion of an advisor’s book of business that may have smaller account balances (often in the range of $50,000 - $250,000 of liquid assets.) The A clients tend to get the most specialized attention and the C clients tend to get the least. However, just because the C clients tend to get the least amount of specialized attention from the financial advisor does not mean that they are not personally important to the advisor. Furthermore, the C clients can represent both a current and future meaningful piece of business for the advisor. I would suggest that many C clients throughout the industry feel neglected by their financial advisor and I would also suggest that the quality of financial advice and portfolio execution is often not up to par with that which is provided to the A clients. This need not be so.
Several years ago, we brought a strategy to the market that I believe is an ideal solution for this portion of an advisor’s book of business: The Arrow DWA Balanced Fund (DWAFX.) This global tactical asset allocation strategy invests in U.S. equities, international equities, fixed income, and alternative investments. The allocations are driven by a systematic relative strength process that seeks to overweight the portfolio in those asset classes with the best relative strength. However, this strategy will always maintain a minimum amount of exposure in each of the asset classes in order to buffer the volatility and as a way to mitigate the amount of underperformance experienced during major changes in asset class leadership. The ranges of exposure in the strategy are shown in the table below:
(Click to Enlarge)
There are 4 reasons why this is the ideal solution for the C clients.
- Within one portfolio an investor is able to achieve broad diversification across multiple asset classes.
- The strategy is designed to benefit from shifting exposure to those asset classes with the best relative strength. However, it always maintains at least some exposure in each of the asset classes at all time in order to buffer the volatility and to mitigate the underperformance during major changes in asset class leadership. As a result, there tends to be less hand-holding required by the financial advisor.
- There is no need for the financial advisor and the client to meet periodically in order to “re-balance” the portfolio. All re-balancing is done on an ongoing basis and is driven in a disciplined fashion by relative strength.
- It is likely to be an easy sell, given the excellent performance of the strategy since its inception in August of 2006. As can be seen in the table below, the fund is outperforming 97% of its peers YTD, it is outperforming 79% of its peers MTD, it is outperforming 67% of its peers over the last twelve months, and it is outperforming 90% of its peers over the last three years.
Source: Morningstar, updated through 6/16/10
To get a feel for how this fund adapts over time, see the charts below which show the allocations to each of the different asset classes from December of 1998 to date. (Data before the fund’s inception of 8/9/06 is based on hypothetical returns.) You can click the images to enlarge them.
The Sector rotation portion of the strategy can invest in the following sectors: Basic Materials, Consumer Goods, Consumer Services, Energy, Financial Services, Healthcare, Industrials, Technology, Telecom, and Utilities.
The Style rotation portion of the strategy can invest in the following styles: Large Cap Growth, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, and Small Cap Value.
The International rotation portion of the strategy can invest in the following countries: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Israel, Italy, Japan, Malaysia, Mexico, Netherlands, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, and the U.K.
The Fixed Income rotation portion of the strategy can invest in the following: Aggregate Bonds, Corporate Debt: Short Term, Intermediate, and Long Term, Govt. Agencies, U.S. Treasurys: T-Bills, Notes, and Govt. Bonds.
The Alternative rotation portion of the strategy can invest in the following: Commodities: Aggregated, Agriculture, Energy, Industrial Metals, Precious Metals, Softs, Currencies, REITs, and TIPs.
To obtain a fact sheet and prospectus for the Arrow DWA Balanced Fund (DWAFX), click here or call Jake Griffith at 301-260-0163.
Click here for disclosures. Past performance is no guarantee of future results.
Posted by Andy Hyer 
