Separating the Wheat from the Chaff

Vincent McCarthy, CFA makes the case for employing tactical asset allocation strategies:

In the active management world, increased volatility can actually create opportunities for active managers to outperform. Research by Standard & Poor’s has shown that during periods of high dispersion — measured as the average difference between the return of an index and the return of each of the index’s components — there is a wider spread of active manager returns. In other words, increased dispersion separates the wheat from the chaff…

…We do not live in a static world. Even the most sophisticated economic and financial models have their limitations. We are all part of the very world we try to model, and despite the assumptions of many of the models we use, we are not always rational. As investors, if we can accept that a significant amount of what actually happens is outside our control, we can better design portfolios that are more adaptive to the circumstances of the environment that prevails.

From the lows of 2009, the world’s major central banks have helped orchestrate a situation whereby any reasonable strategic asset allocation delivered exceptional returns. But as we get deeper into this bull market and as central banks begin to move in opposite directions, we are likely to see the divergence theme play out more across asset class returns, warranting a more dynamic approach to asset allocation that incorporates tactical decisions.

Of course, the vantage from which to assess this changing environment is firm specific, based on available resources, which will dictate how well positioned one is to make tactical asset allocation calls. For most investors, I believe a prudent approach is to allocate capital to an investment manager with a strong track record of dynamically allocating across and within asset classes, allowing the manager sufficient flexibility around the allocation parameters and the use of portfolio insurance.

I believe McCarthy’s description of “an investment manager with a strong track record of dynamically allocating across and within asset classes” would apply very well to the Arrow DWA Tactical Fund (DWTFX).  Over the past five years, the fund has outperformed 88% of its peers in the Morningstar Moderate Target Risk category:


Source: Morningstar, a/o 5/22/15

See for more information.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  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 signal provider for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).  See for a prospectus.

Comments are closed.