Asset allocation plays a key role in performance in the investment world today. As new products and ETF’s continue to be developed, investors now have access to almost any asset class or market around the globe at the touch of a button. Whether it be traditional asset classes such as equities and fixed income, or alternative asset classes such as commodities and currencies, investing in the strongest asset class is now more important than ever.
At Dorsey Wright, the Dynamic Asset Level Investing (D.A.L.I.) model is designed to help accomplish this task. The 6 main asset classes it analyzes are as follows: Domestic Equity, International Equity, Commodities, Foreign Currency, Fixed Income, and Cash. The model’s main task is to assess the overall trend strength of each asset class. This is done by analyzing different factors of relative strength which contribute to the overall trend picture of the market. This then gives investors a game plan for allocating capital across various asset classes. It should be noted that there are different variations of the D.A.L.I. model which can be used. Subscribing clients have full access to this, which can be found at (http://dorseywright.com/).
Just for reference, let’s take a look at a recent example. In a surprise move earlier this morning, the European Central Bank cut interest rates and also announced a quantitative easing plan that will involve the purchase Asset Backed Securities. Further details are to be revealed next month. This sent the EUR/USD exchange rate to a new 14 month low of $1.2920.
Although this may have been surprising economic news too many, the Dorsey Wright D.A.L.I. models have been showing these developments for quite a while and helps confirm there are times when fundamental news has already being reflected in the market. We can see below the D.A.L.I. model allocation to foreign currency is just 11.4%. On the flip side of this discussion, quantitative easing by central banks around the globe has propelled equity markets around the world to new all-time highs. Note the D.A.L.I. graphic below, which has its highest allocation toward domestic equity at 32%, followed by international equity at 22.7%. This again helps display the advantages of using of relative strength models in forming efficient asset allocation methods.
New investment products are being developed every day. This has given investors the benefit of having the ability to put money to work across asset classes that were once much more difficult to gain access to. The Dorsey Wright D.A.L.I. model is designed to help investors find the strongest trending markets and strip out the markets with lackluster trending characteristics, thus helping achieve more effective portfolio management.
**This example is presented for illustrative purposes only and does not represent a past recommendation. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.
