Systematic Relative Strength

7/31/2013

The Arrow DWA Balanced Fund (DWAFX)

At the end of July, the fund had approximately 46% in U.S. Equities, 26% in Fixed Income, 16% in International Equities, and 11% in Alternatives. U.S. equities, our biggest overweight, had a very strong July after pulling back slightly in June. Among our best performing holdings were our positions in Healthcare and Small-Cap Value for the month of July. U.S. equities continue to be the dominant asset class from a relative strength perspective. Developed international equities continued their trend of outperforming Emerging Markets in July. European Central Bank President Mario Draghi sought to dispel doubts about the strength of the central bank’s recent guidance on interest rates by recently reaffirming its commitment to keep borrowing costs low for as long as Europe struggles to recover. The European equity markets responded favorably to those statements. We saw strong performance from our positions in Belgium and Germany in July. Reflecting the superior relative strength of Developed International Markets versus Emerging Markets, all five of our current international equity holdings are from Developed International Markets. After spiking higher in June on fears of Fed tapering of its quantitative easing program, interest rates were fairly stable in July. Our Fixed Income holdings remain near their lower constraint as this asset classes has been among the biggest laggards so far in 2013. Our Alternative holdings of real estate and a currency carry trade were fairly flat in July.

DWAFX gained 3.38% in July and is up 8.95% through 7/31/13.

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 July, the fund had approximately 90% in U.S. Equities and 9% in International Equities. The U.S. equity markets again broke out to a new all-time high in July. It has been more than 10 years since we have seen this kind of superior relative strength of U.S. equities compared to fixed income, international markets, real estate, and commodities. The nature of this strategy is to be flexible enough to adapt to new market environments and the market environment that we are seeing now has little in common with what we have seen for over a decade. For the year, small and mid-cap equities have had better relative strength than large caps and we have a number of small and mid-cap positions in the fund. We have seen fairly stable sector leadership this year with Healthcare, Consumer Discretionary, and Financials. According to Morningstar, this fund is currently outperforming 99% of its peers in the World Allocation category YTD. As trend followers, we benefit from environments with stable leadership and we are seeing that now.

DWTFX was up 5.03% in July and has gained 14.93% through 7/31/13.

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.

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s). Performance updated through 8/8/2013.

Numbers shown are price returns only and are not inclusive of transaction costs. Source: iShares