How Do You Manage Risk?

That is the question that has been top of mind for many investors over the past several weeks as the markets have done their best imitation of the Twisted Colossus at 6-Flags.  As it relates to our family of separately managed accounts, the answer really differs by portfolio.  Here is the overview of the approach to risk management for our 7 Systematic Relative Strength portfolios:

Aggressive

  • Owns 20-25 U.S. mid and large cap stocks
  • Buys stocks out of the top decile of our ranks and sells them when they fall out of the top quartile of our ranks
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Core

  • Owns 20-25 U.S. mid and large cap stocks
  • Buys stocks out of the top quartile of our ranks and sells them whey they fall out of the top half of our ranks
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Growth

  • Owns up to 25 U.S. mid and large cap stocks
  • Buys highly ranked stocks and sells when they fall out of the top half of our ranks or have sufficient trend or technical attribute deterioration
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Can raise up to 50% cash as dictated by market conditions

International

  • Owns 30-40 small, mid, and large cap ADRs from both developed and emerging markets.
  • Buys stocks out of the top quartile of our ranks and sells them when they fall out of the top half of our ranks
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Balanced

  • Owns 20-25 U.S. mid and large cap stocks and U.S. Treasurys in an approximately 60% equities / 40 % fixed income weight
  • Buys stocks out of the top quartile of our ranks and sells them whey they fall out of the top half of our ranks.  Fixed income exposure to intermediate U.S. Treasurys
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Global Macro

  • Owns 10 ETFs from a broad range of asset classes, including U.S. equities, International equities, Inverse equities, Currencies, Commodities, Real Estate, and Fixed Income
  • No minimum constraints in asset class exposure so that if an asset class is weak it is possible for us to have zero exposure to that asset class
  • Strict buy and sell discipline based on relative strength

Tactical Fixed Income

  • Owns 2-6 Fixed Income ETFs from a broad range of sectors of Fixed Income, including U.S. Treasurys, TIPs, Corporate Bonds, Emerging Market Bonds, High Yield, and Convertible Bonds
  • 40% of the portfolio will always remain invested in some form of U.S. Treasurys (Short-Term, Long-Term or TIPs)
  • Strict buy and sell discipline based on relative strength

The chart below is based on Dorsey Wright’s opinion of the likely relationship between volatility and return relationships between each of the different strategies over a long period of time.  Actual results may differ from these expectations.  Greater volatility may result in greater gains and greater losses.

return_volatility

Life is full of trade offs and the financial markets are no different.  Good results are likely to be achieved when a caring financial advisor takes the time to understand their client’s needs and risk tolerance and then to build the right allocation for that client.  For those advisors using our SMA’s as part of that allocation, they will find that these 7 portfolios have very different approaches to risk management.  All of them employ some form of risk management.  Even the fully invested portfolios are managing risk through individual position management (i.e. cutting them back when they become too large a percentage of the portfolio or completely selling them when dictated by relative strength rank) and through sector exposure.  Others, like Growth, can raise up to 50% cash to seek to mitigate some of the downside risk.  Balanced benefits from the time-tested benefits of combining equities and fixed income.  Global Macro is our “go any-where” portfolio that can completely shift away from weak asset classes if needed.

If you would like to receive the brochure for these portfolios, please e-mail andy@dorseywright.com or call 626-535-0630.

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.

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