One of the unfortunate effects of this industry’s adoption of style-box investing has been “the homogenization of fund managers.” Samuel Lee of Morningstar explains:
A more insidious consequence of the rise of the style box is the homogenization of fund managers. Since they’ve been forced to be much more conscious of their style benchmarks and peers, many diversify away their active bets and effectively hug their benchmarks. So while fund fees have come down over the past decade, active bets have arguably gone down just as fast-if not faster. Finance researcher Antti Petajisto documents that closet indexing rose markedly in the late 1990s and has stayed there since.
This is bad; more-selective managers tend to outperform. Petajisto found that stock-picking managers who deviated from their benchmarks subsequently tended to outperform closet indexers, before and after fees. Finance professor Russ Wermers found that managers who picked stocks as if they were unconcerned with style drift tended to have superior future stock-picking performance.
This has certainly been true in the case of our Systematic RS International portfolio. This portfolio which holds 30-40 ADRs is the definition of style drift! We simply start with a broad universe of ADRs that includes all capitalizations and all styles. We place no constraints on how the portfolio can be allocated from a style-box perspective. We include ADRs from both developed and emerging international markets. All stocks in the investment universe are ranked daily from a relative strength perspective. We buy stocks out of the top quartile of our ranks and sell them when they fall out of the top half of our ranks. Simple trend following.
As shown below, our capitalization exposure changes over time.
Source: Dorsey Wright, FactSet.
We are singularly focused on whether or not the stock has strong relative strength. All of the other ways to classify a stock are meaningless for the purposes of this portfolio.
The results of this unconstrained approach to investing speak for themselves:
As of 6/30/15. Portfolio inception 3/31/06.
It’s time for investors to be unshackled from the constraints of the style box.
To receive the fact sheet for this portfolio, please e-mail [email protected] or call 626-535-0630.
Performance is based on monthly performance of the Systematic Relative Strength International Model. Net 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. The advisory fees are described in Part II of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the MSCI EAFE Total Return Index. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. 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. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.
