The Goal of Tactical Allocation

What is the ultimate objective of any tactical asset allocation strategy?  It is to adapt, is it not?  Getting “all of the up and none of the down” is a fairy tale, but investors would like to see changes in the allocations in order to seek to capitalize on those asset classes that are in favor and to seek to minimize exposure to those asset classes that are out of favor.  The exact percentage of a client’s overall portfolio that should be allocated to a tactical allocation strategy will be up to each financial advisor and their client, but I would suggest that investors could benefit from making tactical allocation part of the mix.  Whether an advisor uses our Global Macro strategy, one of the other Dorsey Wright tactical allocation strategies, or a tactical allocation strategy of their own making, I believe that there will be some common themes as it relates to communicating the objectives of this type of strategy to clients and prospects.  Our goal with this article is to touch on some of those themes.  See below for a description of our Global Macro portfolio.

Global Macro strategy description:

The Dorsey Wright Systematic RS Global Macro strategy provides broad diversification across markets, sectors, styles, long and inverse domestic and international equities, fixed income, currencies, and commodities using Exchange Traded Fund (ETF) instruments.  The strategy holds approximately ten ETFs that demonstrate, in our opinion, favorable relative strength characteristics.  The strategy is constructed pursuant to Dorsey Wright’s proprietary basket ranking and rotation methodology.  This strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.  This allows for the flexible allocation of investments globally to opportunities where we believe potential returns are particularly compelling. 

As shown below, the Global Macro portfolio can invest in a broad range of asset classes.  The following table highlights the asset class exposure ranges for each asset class in the Global Macro portfolio.  There may be deviations outside the bands based on market fluctuations.

ranges

The allocations to this strategy are driven by relative strength (RS).  Over the nearly 7 years that we have been running this strategy, we have seen a variety of market environments and changes in asset class leadership.  The following chart highlights historical asset allocation exposure for the Global Macro portfolio.

gm_allocations

Period: 3/31/09 – 2/29/16

You will notice that there were times with very little U.S. equity exposure and times where U.S. equities constituted the bulk of the portfolio.  Again, those changes are driven by relative strength.

One of the interesting benefits of an asset class rotation strategy based on relative strength is how it manages volatility.  As investment themes come in and out of favor, an RS strategy rotates to themes that are currently in favor.  When volatile assets, such as stocks, are declining, an RS strategy might rotate into a much less volatile asset class, like bonds or currencies, that is holding up better.  This rotation helps make the portfolio more volatile when volatile asset classes are performing well, and less volatile when risky assets are out of favor.  The chart below shows the trailing-18 month beta of Global Macro and a 60/40 equity bond portfolio compared to the S&P 500.  The beta of the 60/40 strategy remains very stable over time.  The beta of the Global Macro strategy, however, changes dramatically.

changing volatility

Returns are total returns, inclusive of dividends.  Net returns were used for Global Macro.  The 60/40 portfolio is 60% S&P 500 and 40% Barclays Aggregate Bond Index.

More recently, the beta of the Global Macro strategy has been declining and is now approaching the beta of a 60/40 portfolio.

Current holdings (as of 3/10/16) of the Global Macro portfolio are shown below:

gm 03.10.16

Clients want adaptability in their asset allocation and Dorsey Wright provides the tools and solutions to empower financial advisors to be able to provide this to their clients — and to set them apart from the competition in the process.

Global Macro is available on the Masters and DMA platforms at Wells Fargo as well as on a number of other UMA and SMA platforms.

E-mail andy.hyer@dorseywright.com for more information.

The performance represented is based on monthly performance of the Systematic Relative Strength Global Macro Model.  Net performance shown is total return net of management fees, commissions, and expenses 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.  All returns since inception reflect reinvestment of dividends and other earnings. Returns of Accounts, since inception, are a composite of all Accounts of that style that were managed for the full quarter. All returns since inception are compared against the Dow Jones Moderate Portfolio Index and the S&P 500 total return index.  The volatility of the Models and of actual Accounts may be different than the volatility of the Dow Jones Moderate Portfolio Index and the S&P 500 index.  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.  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 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 U.S. Real Estate Index invests in U.S. real estate stocks and real estate investment trusts (REITs).  The Reuters Commodity Index comprises 17 commodity futures that are continuously rebalanced.  Investors cannot invest directly in an index.  Indexes have no fees.  Dorsey, Wright’s advisory fees are described in Part 2A of its Form ADV.  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.  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. The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.

Leave a Reply

Your email address will not be published. Required fields are marked *