Systematic Relative Strength

February 28, 2013

The Arrow DWA Balanced Fund (DWAFX)

At the end of February, the fund had approximately 44% in U.S. Equities, 25% in Fixed Income, 17% in International Equities, and 12% in Alternatives. This is little changed from the allocations to the different asset classes as of the end of January. However, we did have some changes within the Alternative asset class: Our position in gold was removed and replaced with real estate. The balance of the Alternative exposure is to the currency carry trade. Our biggest overweight continues to be U.S. equities.

DWAFX gained 0.23% in February and is up 3.72% through 2/28/13. Much of the best performance for the month came from our exposure to domestic equities (small and mid caps in particular), while international equities pulled back over the course of the month. Our fixed income exposure also modestly advanced in February. Although interest rates declined in February, the overall trend of rates has been higher since the middle of last year. Our exposure to fixed income can range from approximately 25 to 65 percent and right now it is at its lower limit.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership. When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints. Relative strength provides an effective means of determining the appropriate weights of the strategy.

The Arrow DWA Tactical Fund (DWTFX)

At the end of February, the fund had approximately 62% in U.S. Equities, 28% in International Equities, and 9% in Real Estate. Over the course of February, we added to our U.S. Equity exposure, and reduced our exposure to International Real Estate. When this bull market in U.S. equities began nearly four years ago, there were not many who projected the impressive gains that we have ultimately seen. In fact, without a disciplined approach to following trends, it may have been psychologically difficult to overweight this asset class. However, this continues to be our biggest overweight. Our U.S. equity exposure remains in areas that have shown some fairly stable leadership, such as Consumer Discretionary, Financials, and Healthcare. Stable leadership is very helpful for trend following strategies and Consumer Discretionary stocks have been fairly persistent leaders for the last 5 years. Notably absent from our exposure is commodities, which have been particularly weak for the last couple of years. Commodities were among the best performing asset classes over the past decade, but that strength has not so far carried over to this decade. Again, we see the benefits of being adaptive.

DWTFX was flat in February and is up 3.79% through 2/28/13. Much of the best performance for the month came from our exposure to domestic equities, while our exposure to European equities pulled back over the course of the month.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes. The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income. Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends. Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

Of interest to Wells Fargo Advisors: The Arrow DWA Tactical Fund is currently among the funds on the Wells Fargo Advisors Mutual Fund Recommended List.

Please see www.arrowfunds.com for more information about The Arrow DWA Balanced Fund and The Arrow DWA Tactical Fund. Holding for the trailing 12 months is available upon request. Past performance is no guarantee of future returns.