First Quarter Review for our Systematic RS Portfolios:
Reuters reports that the $35 trillion global pension fund industry continues its move into “Smart Beta” ETFs:
Frustrated by little or no extra gains from costly active investing, many are now looking at more passive, cheaper and simpler strategies.
Often called “Smart Beta”, one approach aims to follow certain benchmark indices passively but allow investors to tilt weightings themselves based on their preferences such as volatility or momentum, allowing them outperform the main index.
Smart beta is half way between active and passive investing. For example, an investor can take the S&P 500 index <.SPX> but overweight stocks with lower volatility to create a new smart index. Investing in this has potential to outperform the original benchmark index and is cheaper than paying an active manager to trade S&P stocks.
Our own PowerShares DWA Technical Leaders ETF (PDP), was among the first relative strength (momentum) ETFs available—began trading on March 1, 2007. Three additional Technical Leaders ETFs have since been made available (PIE, PIZ, and DWAS) and combined they now have over $1.5 billion in assets under management and licensing.
Whether it is large pension funds or individual investors, the appeal of Smart Beta is on the rise.
See www.powershares.com for more information.
Posted by: Andy Hyer
The Arrow DWA Balanced Fund (DWAFX)
At the end of March, the fund had approximately 46% 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 February. Our biggest overweight continues to be U.S. equities. Within the U.S. equity sleeve, we have exposure to Healthcare, Financial, and Consumer Services sector funds. These three sectors have maintained fairly stable leadership for some time now. We also have exposure to U.S. small and mid-cap value funds. Value has generally had much better relative strength than Growth style funds.
DWAFX gained 2.52% in March and is up 6.34% through 3/31/13. Although our best performing holdings in March came from our exposure to U.S. equities, we also had some strong performance from International equities—Mexico in particular. Fixed income was relatively flat in March. Our exposure to fixed income can range from 25-65 percent of the fund, but for now the exposure is at the lower end of its band.
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 March, the fund had approximately 63% in U.S. Equities, 27% in International Equities, and 9% in Real Estate. As part of our U.S. equity exposure, we own Healthcare, Financial, and Consumer Services sector funds. These three funds have maintained fairly stable market leadership. We also have exposure to U.S. small and mid-cap value funds. Value has generally had much better relative strength than Growth style funds.
DWTFX was up 3.07% in March and has gained 6.98% through 3/31/13. Much of the best performance for the month came from our exposure to domestic equities and real estate, while our exposure to International equities was relatively flat 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.
See www.arrowfunds.com for more details.
Posted by: Andy Hyer
The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return. Those at the top of the ranks are those stocks which have the best intermediate-term relative strength. Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.
Last week’s performance (4/1/13 – 4/5/13) is as follows:
Posted by: Andy Hyer