Systematic Relative Strength Portfolios. A little over 10 years ago, this is the name that we decided to use for this family of separately managed accounts. Managing money in this systematic way was a departure from the way that we had been previously managing money. To be sure, in the years before launching our Systematic RS portfolios, we had moved closer and closer to a systematized method of managing money. Extensive research had been completed on the technical attributes (relative strength and trend-based ranking system for stocks), favored sector work, and different methods of implementing risk management. However, on March 31, 2005, we introduced our Systematic RS Portfolios. Initially, there were just two portfolios: Aggressive and Core. Now, there are a total of 7 portfolios. This move to systematic meant that the buy and sell criteria for each of these portfolios would remain consistent. It was our belief that if we could remove the human emotion from the investment process that the results could be improved. This move to systematic also meant a singular focus on relative strength. Yes, there are many other aspects of technical analysis. However, our testing had indicated relative strength was by far the most robust factor.
Ten years on, there are 3 primary lessons that we have learned:
- We are on the right path. The results are encouraging and suggest that we are employing an investment approach that is likely to stand the test of time.
- There is a greater sense of confidence that comes as a result of adhering to a truly systematic investment process. Tinkering is fun, but we’ll leave that that to our projects around the house on the weekend. When it comes to portfolio management, tinkering means inconsistency and inconsistency generally leads to poor investment results. That greater confidence is manifested both in the demeanor of our portfolio managers and in the demeanor of our clients as they come to understand our process.
- It’s not perfect. Nothing is. However, we believe it is a viable method of preserving and building wealth over time. In the realm of portfolio management, it is only prudent on the part of investors to be skeptical. Active management has well-earned its reputation as risky given the high percentage of active managers who fail miserably. The more experience I have in this industry, the more I believe that our Systematic RS portfolios are positioned to stand apart from the competition over time.
Some quick facts about each of the 7 Systematic RS portfolios that we offer as UMA/SMA accounts:
Systematic RS Aggressive
- Inception: March 31, 2005
- Has outperformed the S&P 500 Total Return Index on a gross basis since inception (slightly lagging on a net basis)
- Invests in 20-25 U.S. Mid and Large-Cap stocks. Stocks are purchased out of the top decile of our ranks and sold when they fall out of the top quartile of our ranks
- Fully invested at all times
Systematic RS Core
- Inceptions: March 31, 2005
- Has outperformed the S&P 500 Total Return Index on a gross basis since inception (slightly lagging on a net basis)
- Invests in 20-25 U.S. Mid and Large-Cap stocks. Stocks are purchased out of the top quartile of our ranks and sold when they fall out of the top half of our ranks.
- Fully invested at all times
Systematic RS Balanced
- Inception: June 30, 2005
- 60-70 percent of the portfolio will be invested in 20-25 U.S. Mid and Large-Cap stocks. 30-40% of the portfolio will be invested in U.S. Treasurys
- Has outperformed a 60/40 benchmark on a gross basis since inception (slightly lagging on a net basis)
Systematic RS Growth
- Inception: 12/31/2006
- Invests in 20-25 U.S. Mid and Large-Cap stocks
- Has outperformed the S&P 500 Total Return Index on a gross and net basis since inception
- Has had lower standard deviation than the benchmark and has had a beta of 0.79
- Can raise up to 50% cash to help mitigate some of the downside in major bear markets
Systematic RS International
- Inception: 3/31/2006
- Invests in 30-40 ADRs. Stocks are purchased out of the top quartile of our ranks and sold when they fall out of the top half of our ranks.
- Has outperformed the MSCI EAFE Total Return Index on a gross and net basis since inception
- Fully invested at all times
Systematic RS Global Macro
- Inception: 3/31/2009
- Invests in 10 ETFs from a broad universe of ETFs from U.S. equities, International equities, Currencies, Commodities, Real Estate, and Fixed Income
- Up to 30% of the portfolio can be invested in inverse equities
- Has no minimum investment requirement in any asset class, and therefore has a great deal of flexibility
- The Arrow DWA Tactical Fund (DWTFX) adopted this strategy in August 2009. Per Morningstar, DWTFX has outperformed 77 of its peers in the Tactical Allocation category over the past 5 years, a/o 4/10/15. Also, available as The Arrow DWA Tactical ETF (DWAT).
Systematic RS Tactical Fixed Income
- Inception: 3/31/2013
- Invests in ETFs from a broad range of sectors of Fixed Income, including U.S. Treasurys, Corporate Bonds, High Yield Bonds, Inflation-Protected Bonds, Emerging Market Bonds, and Convertible Bonds
- Has outperformed the Barclays Aggregate Bond Index on a gross and net basis since inception
We continue to have these portfolios added to new UMA/SMA platforms. If you have any questions about their availability at your firm, please call Andy at 626-535-0630 or e-mail him at [email protected]. Click here for a brochure on our Systematic RS portfolios.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of clients of Dorsey, Wright & Associates, LLC. This article does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this article, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.
In 10 more years, we’ll look back and expect that the phrase ‘slightly lagging’ will be removed from ALL the results.