Systematic Relative Strength

3/31/14

The Arrow DWA Balanced Fund (DWAFX)

At the end of March, the fund had approximately 45% in U.S. Equities, 25% in Fixed Income, 18% in International Equities, and 12% in Alternatives.

We had a number of changes to this fund over the last month. In our Style sleeve, we replaced Mid-Cap Value and Small-Cap Value with Large-Cap Growth and Small-Cap Growth. In our Sector sleeve, we sold Financials and bought Technology. Finally, in our International sleeve, we sold Japan and bought Spain. From an overall asset allocation perspective, we slightly reduced our U.S. equity exposure and increased our International equity exposure. Much of the U.S. equity leadership in the first two months of the year pulled back in March. For example, positions like Healthcare and Small-Cap Growth which were among the leaders in January and February were among the laggards in March. However, International equity leadership was more stable in March.

DWAFX lost 1.01% in March, but is up 0.55% YTD through 3/31/14.

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 90% in U.S. equities and 9% in International equities.

There were no changes in holdings to this fund in March. Leadership generally took a breather and underperformed in March, yet longer-term relative strength continues to favor U.S. equities. One area to keep an eye on is Commodities. This asset class has been a laggard for the last couple of years, but is showing some strong signs of life. A number of commodity ETFs are rising in our relative strength ranks, and if that continues, may find their way to into the fund.

DWTFX lost 0.57% in March, but is up 1.16% YTD through 3/31/14. This fund has outperformed 97% of its peers in the Morningstar Tactical Allocation category over the past year.

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. Past performance is no guarantee of future returns. See www.arrowfunds.com for a prospectus.

This entry was posted on Tuesday, April 8th, 2014 at 9:22 am and is filed under Tactical Asset Alloc. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.