Systematic Relative Strength

Three Dorsey Wright ETFs have now been in existence for over 5 years. So, how have they done?

PDP (PowerShares DWA Momentum ETF), PIZ (PowerShares DWA Developed Markets Momentum ETF), and PIE (PowerShares DWA Emerging Markets Momentum ETF) are all the top performing strategies in their Morningstar category over the past 5 years. PDP and PIZ are also the top performing strategy in their category over the last 3 years, and PIE is in the top quintile.

Source: Morningstar, a/o 11/4/14

Part of the reason that it is so encouraging to see these types of results is because it confirms the thesis that Point and Figure can be effectively employed to generate alpha over time. Before we first partnered with PowerShares on these ETFs, there was extensive testing completed that gave us reason to be very optimistic about the types of returns that we might be able to achieve. But that was just testing (as important as testing is). These are live results and show how we stack up against a universe of our peers and against our benchmarks. There have been periods of outperformance and periods of underperfomance, just like there are likely to be in the future, but the process is clearly demonstrating its value.

This year, we have published much of our very best research that provides valuable insights into our investment process. These white papers can be found by clicking here, here, and here. The concluding paragraph from one of these white papers summarizes our findings:

Momentum is an investment factor that has worked very well for over a century. The momentum factor has been through bull markets, bear markets, and sideways markets and still continues to deliver oupterformance versus broad market benchmarks. Plotting a ratio of a security versus a benchmark on a point and figure chart is one way to objectively classify securities in to groups based on their intermediate and long-term relative strength characteristics.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Dorsey Wright is the index provider for the suite of PowerShares DWA Momentum ETFs. Past performance is not indicative of future results.

The broad market moved to new all-time highs at the end of October as this bull market powers on. Three of our portfolios outperformed their benchmarks for the month (International, Growth, and Global Macro). Detailed performance is shown below.

To receive the brochure for these portfolios, please e-mail [email protected] or call 626-535-0630. Click here to see the list of platforms where these separately managed accounts are currently available.

Total account performance shown is total return net of management fees for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. Information is from sources believed to be reliable, but no guarantee is made to its accuracy. This should not be considered a solicitation to buy or sell any security. Past performance should not be considered indicative of future results. The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s. The Barclays Aggregate Bond Index is a broad base index, maintained by Barclays Capital, and is used to represent investment grade bonds being traded in the United States. The 60/40 benchmark is 60% S&P 500 Total Return Index and 40% Barclays Aggregate Bond Index. The MSCI EAFE Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada and is maintained by MSCI Barra. The Dow Jones Moderate Portfolio Index is a global asset allocation benchmark. 60% of the benchmark is represented equally with nine Dow Jones equity indexes. 40% of the benchmark is represented with five Barclays Capital fixed income indexes. Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETFs may result in the layering of fees as ETFs impose their own advisory and other fees. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov). There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 11/3/14:

After consolidating for most of the year, the RS Spread is rising and remains above its 50 day moving average.

This example is presented for illustrative purposes only and does not represent a past recommendation. The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.