Dorsey, Wright Money Management has completed work on a new portfolio management product, which we plan to use for separate accounts only. It combines a concentrated portfolio of high relative strength stocks with a collar hedging algorithm that responds to even very small declines. The net effect is that the portfolio will capture all of the upside gains, while avoiding the downside entirely. In testing, the product has been able to outperform and generate absolute returns every quarter, whether the market is up or down. The new account minimum will be our standard $200,000. If you would like marketing material on the new Absolute Return Portfolio product, please call our marketing director, Andy Hyer, at 626-535-0630.
Because the performance is so remarkable, we’ve spared no expense with the glossy, full-color marketing material we have prepared for the launch. We think your clients will be impressed with the material and amazed with the equity curve that can be generated. Losing money is a thing of the past.
Wouldn’t that be nice? It would be great if there were a fund that could capture all of the up and none of the down, but it’s just not going to happen. It’s unfortunate that some brokers and clients keep looking for a manager with those characteristics. I mean, c’mon! If such a fund existed, how hard do you think you would have to look for it? It would be plastered on every bus bench, billboard, and magazine cover! Do you think the manager would keep it a secret, so you actually had to search for it? Yet brokers and clients must believe they exist, because managers who can’t do the impossible consistently get terminated by clients who think they should be able to. [I'm sure it's apparent to you by now that this blog post is an April Fool's Day joke.]
Get real! There are no portfolios that generate market-beating returns consistently. In the Wall Street Journal’s Mutual Fund Monthly Review (March 5, 2007), they searched the Morningstar database for stock funds that finished in the top quartile for each of the past ten years. Although our mythical Absolute Return Portfolio might have made the cut, in real life zero funds did. It just doesn’t happen.
In fact, that’s not how good returns are generated. To get the highest returns requires volatility. Morningstar also screened for funds that had the highest ten-year returns—the average annual return, not the year-by-year returns. The top returning funds for the decade all had a standard deviation in the top quartile. In other words, the volatility goes along with the return. You can’t separate them.
Now, volatility is not the same thing as risk. Volatility just means you have an E-ticket ride, but the underlying slope may be powerfully positive. That’s how our Systematic Relative Strength separate accounts are designed to work. They are somewhat more volatile than the market, but much of the volatility over time should be to the upside.
Frankly, we like it that way. Equities aren’t for cupcakes. If your client can’t take the heat, buy CDs. We want to deliver the best performance to clients over the long term. If your client stays for the long term—and by that, we mean five years or ten years-we like our chances. After all, the only way you can get hurt on a roller coaster is if you jump out. And we are confident that the returns generated by high RS stocks will continue to be there because only a select number of clients will ever take advantage of them. Clients that are too scared to get on the ride at all, or clients that jump out early will have to watch from the sidelines.
Obviously, investing in stocks with high RS is not for everyone. Only an aggressive investor would make the Systematic Relative Strength strategy the bulk of their portfolio. But if your client has other, less volatile, assets in the portfolio, there is no reason that Systematic Relative Strength couldn’t be part—or even a big part—of their growth allocation.
Click here and here for disclosures. Past performance is no guarantee of future returns.
—-this article originally appeared in 2007, also as an April Fool’s Day prank. I regret to confess we got a number of calls from individuals who were very excited about the product!
