The Arrow DWA Balanced Fund (DWAFX)
At the end of December, the fund had approximately 46% in U.S. Equities, 25% in Fixed Income, 17% in International Equities, and 12% in Alternatives.
DWAFX rose 1.39% in December, and finished 2013 up 15.53%.
The fund produced positive returns in 10 out of 12 months in 2013, a year characterized by relatively low volatility. Asset class leadership remained fairly steady throughout the year with domestic equities remaining the asset class with the best relative strength and is the area where we continue to have the most exposure. However, we are seeing some relative strength improvement in the international equity sleeve. Germany and the Netherlands were among our best performing holdings in December and the overall exposure of the fund to international equities has increased in recent months.
Interest rates rose in December and our position in the iShares Barclays 7-10 year Treasury Bond ETF was among our worst performers. Our other fixed income position is the Vanguard Short-Term Bond ETF and that position was flat for the month. Our fixed income exposure is at the lower end of its exposure constraint.
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 December, the fund had approximately 90% in U.S. equities and 9% in International equities.
DWTFX was up 2.38% in December, and finished 2013 up 25.83%.
All of our holdings produced gains in December, led by our Industrial sector position, U.S. Mid Caps, and our European equity position. According to Morningstar, DWTFX outperformed 95% of its peers in the Tactical Allocation category in 2013. Although, this fund also has the flexibility to invest in asset classes like commodities and fixed income, those areas remain weak from a relative strength perspective.
Although the financial media spend much of 2013 hyperventilating about the fiscal cliff, the sequester, a partial government shutdown, a debt ceiling debate, tapering, and Obamacare, the equity markets largely seemed unfazed and marched higher throughout the year. Relative strength did an excellent job of keeping us on the right side of that trend.
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.
A list of all holdings for the trailing 12 months is available upon request. See www.arrowfunds.com for more information.