9/30/2013
The Arrow DWA Balanced Fund (DWAFX)
At the end of August, the fund had approximately 46% in U.S. Equities, 26% in Fixed Income, 17% in International Equities, and 11% in Alternatives. Our best performing holdings in September were international equities. The Eurozone economy continues to recover. While unemployment is still excruciatingly high in many parts of Europe, there are signs of growth, and the borrowing costs for many of the countries who were most at risk just a few years ago have declined. The U.S. equity markets also added to their gains for the year. Our small and mid-cap exposure performed especially well in September. U.S. equities continue to be our biggest overweight. Our fixed income exposure remains near the lower end of its constraints, yet bond prices did rise in September as interest rates declined. The Federal Reserve continues its quantitative easing program of buying $85 billion worth of bonds each month. Although, there was speculation that the Fed would begin to taper its monetary stimulus, that appears to now be on hold.
We did make one change to the holdings in September. We removed our position in real estate and added a position in a bearish dollar fund. Real-estate investment trusts posted negative returns in the third quarter and continue to trail the broader stock market. Although interest rates pulled back in September, the overall trend of interest rates remains higher. REITs, which pay little or no corporate income tax and usually pay steep dividends, are sensitive to rising interest rates because they depend on borrowed money to expand their business. The U.S. dollar has declined relative to many other currencies since the middle of the year, perhaps partly as a result of the continued aggressive monetary policy.
DWAFX rose 3.68% in September, and is up 9.51% through 9/30/13.
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 September, the fund had approximately 90% in U.S. Equities and 9% in International equities. This largely unconstrained tactical asset allocation strategy tends to perform best when there are stable trends and 2013 has provided plenty of such trends. Sectors like Consumer Cyclical and Healthcare came into the year strong and have remained strong. Our international equity holdings, benefiting in part from weak dollar, generated our strongest gains in September. Our U.S. small and mid-cap exposure also performed well, outpacing large-caps. There are no shortages of headline risks, such as Syria or the government shutdown, but the U.S. equity markets continue their impressive performance.
Although this strategy has the ability to invest in many different asset classes, including commodities, real estate, currencies, and fixed income, the fund has been focused on equities this year as that is where the dominant relative strength has been. Commodities, particularly precious metals, have been weak for the last couple of years. Real estate, which generated strong gains for most of the last several years, appears to have run out of steam for the time being. Fixed income has generally produced modest gains over the last couple of years, but most sectors of fixed income are negative this year as the trend in interest rates has generally been higher.
DWTFX was up 4.42% in September, and has gained 15.54% through 9/30/13.
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.
See www.arrowfunds.com for more information.
