Systematic Relative Strength

9/30/14

The Arrow DWA Balanced Fund (DWAFX)

At the end of September, the fund had approximately 41% in U.S. equities, 27% in Fixed Income, 21% in International equities, and 11% in Alternatives.

We did have one trade in September—sold Belgium and bought China in our International sleeve. The broad equity markets pulled back in September, with International equities pulling back more than U.S. However, our Healthcare position held up well, as did our fixed income holdings. Much of our fixed income exposure is fairly short duration and that helped us this month. One of the trends that has been unfolding in recent months is the improvement in Emerging markets compared to Developed International markets. However, it was the Emerging markets that pulled back the most in September. Real Estate is another area that has generally been strong this year, but pulled back sharply for the month.

DWAFX fell 3.12% in September, and is down 0.89% YTD through 9/30/14.

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 / DWAT)

At the end of September, the fund had approximately 90% in U.S. equities and 8% in Real Estate.

There were no changes in the holdings in September. Our sector exposure generally helped us in September as Healthcare and Technology held up better than the market. However, our Real Estate and Mid Cap U.S. equity exposure pulled back sharply for the month. We remain invested in those asset classes (U.S. equities and Real Estate) that have the best relative strength. While U.S. equities have been the most highly ranked asset class in our investment universe for years now, the specific styles and sectors that are leading have seen quite a few changes this year. Periods with above average turnover, like we have seen the last six months or so, are often followed by periods of below average turnover and environments that are more favorable for the strategy.

DWTFX lost 2.35% in September, but is up 0.78% YTD through 9/30/14.

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. These relative strength strategies are NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.arrowfunds.com for a prospectus.

This entry was posted on Wednesday, October 8th, 2014 at 6:24 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.