Witchcraft Pays

June 3, 2011

Bloomberg has a great article on intelligent indexing, specifically on Rob Arnott’s RAFI Index and how well it has done since inception.  Witchcraft enters the conversation only because of a comment by John Bogle:

Arnott debuted in 2005 a new type of indexing that uses fundamental measures such as cash flow to pick stocks — a methodology that the father of indexing would later denounce as “witchcraft” in an interview with Morningstar Inc. (MORN) because of its similarity to active management and higher costs. By 2011, the innovator’s brand of stock indexing had produced better returns than Bogle’s.

The RAFI index intelligently tries to exploit the value return factor, given that its fundamental weighting scheme has a value tilt.  This makes perfect sense to me.  When a known return factor is available, why not exploit it, especially when it can be done rather efficiently and for relatively low cost in an ETF format?

The Technical Leaders Index (PDP), also sponsored by PowerShares, attempts to exploit the relative strength return factor in exactly the same fashion.  In fact, over the time period that both indexes have existed in common, since March 1, 2007, both the RAFI 1000 (PRF) and the Technical Leaders Index (PDP) have had comparable price returns, +3.97% for PRF and +7.63% for PDP.  They are exploiting completely different factors, which may be dominant at very different times, but both have outperformed Vanguard’s S&P 500 fund over that stretch.

There’s certainly no guarantee what will happen over a longer time period—maybe cap weighting is due for a comeback.  But trying intelligently to exploit return factors that are omnipresent in the data makes perfect sense.  It will be a good sign for intelligent indexing if Jack Bogle is eating Rob Arnott’s dust for many years to come.

Jack Bogle, Eat My Dust

Click to enlarge.  Source: stockcharts.com

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Dorsey, Wright Client Sentiment Survey – 6/3/11

June 3, 2011

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll. And today starts a new Dorsey, Wright Polo Shirt raffle! Just follow the instructions after taking the poll, and we’ll enter you in the contest.  Thanks to all our participants from last round.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions!  Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients.  It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good!  It’s painless, we promise.


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The Widowmaker Rides Again

June 3, 2011

Netflix has been one of the real battleground stocks over the last year.  Momentum buyers love the stock.  The shorts think it is way overvalued.  Whitney Tilson even had to throw in the towel on his well-publicized short of NFLX.  NFLX has confounded so many people it was referred to recently as a Widowmaker!

Why is NFLX such a widowmaker for the shorts?  Probably because it has performed very well when the market is down!  If you are shorting any stock you should be relieved to look over at the quote screen and see a sea of red.  But over the past year, that’s not exactly what you get with NFLX.  Below is a chart of NFLX’s performance over the last 12 months when the S&P 500 is down for the day.  NFLX is up substantially over the past year when the S&P is down.  That has to be a killer if you’re short.  Hence, The Widowmaker.

Now look at the performance of NFLX over the past year when the S&P has an up day.  It hasn’t exactly shot the lights out for the longs on up days!

I suppose when you are looking for a good solid defensive name that will hold up in a down market you should put NFLX at the top of the list!  It does look like that relationship is changing over the last couple of months.  But no matter how you cut it, NFLX continues to confound everyone!  Same old story with this stock today.  The market is selling off hard on the anemic jobs number, but NFLX was up in the morning.

Disclosure:  Dorsey Wright Money Management has positions in NFLX.  Past performance is no guarantee of future results.  A list of all holdings for this portfolio over the past 12 months is available upon request.

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Funds With Maximum Flexibility

June 3, 2011

Today’s WSJ takes a look at investors’ growing appetite for “Go-Anywhere Funds”:

Since the end of March 2009, $146 billion has flooded into go-anywhere funds, bringing the total in assets to $415 billion, according to Strategic Insight. The allure: Broad flexibility gives managers the opportunity to look for the best investments instead of pigeon-holing them in a part of the market with limited prospects.

The article also profiled some of the best performing funds in that category.  As shown below, our own global allocation funds, The Arrow DWA Tactical Fund (DWTFX) and The Arrow DWA Balanced Fund (DWAFX), stack up favorably to those highlighted by the WSJ:

I don’t think demand for these types of strategies is going away any time soon (if ever) as investors become increasingly aware of the fact that the nature of the global financial markets means that there is no reason to limit your investment universe to just a few options, like US stocks and bonds.

To obtain a fact sheet and prospectus for the Arrow DWA Tactical Fund (DWTFX) or the Arrow DWA Balanced Fund (DWAFX), click here.

Click here for disclosures.  Past performance is no guarantee of future results.

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Sector and Capitalization Performance

June 3, 2011

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s).  Performance updated through 6/2/2011.

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