Dorsey Wright’s main asset allocation tool, Dynamic Asset Level Investing (DALI), currently has International Equities ranked dead last from a relative strength perspective:
As of 3/23/16
Another way to get a sense for how poor International equities have done is to look at the PnF chart of MSCI EAFE (EFA):
As of 3/23/16
This ETF remains well below its early 2014 highs, even with the rally of the last couple of weeks.
From an asset allocation perspective, this type of weak performance from an asset class can cause an investor to question how International equity exposure should be handled. Should International equity be reduced? eliminated? actively managed?
A strong argument for the latter (actively managed) would be our Systematic RS International Portfolio. While International equities have been weak for some time, our Systematic RS International portfolio has been able to create significant separation from its benchmark, as shown below:
See performance disclosures below (1). As of 2/29/16. Inception 3/31/2006.
As shown above, Systematic RS International has performed well versus the MSCI EAFE over the time periods shown (YTD, 1 year, 3 years, 5 years, and since inception).
One of the keys to this performance is that Systematic RS International is a fairly concentrated portfolio of ADRs. Our starting universe includes about 500 small, mid, and large cap ADRs from both developed and emerging international market. From that broad investment universe of ADRs, our model narrows it down to 30-40 stocks that will go into the portfolio. We rank that universe of stocks by relative strength, buy stocks out of the top quartile of our ranks, and sell them when they fall out of the top half of our ranks.
Source: Dorsey Wright. Performance over period 3/22/2013 – 3/22/2016. Performance is price only, not inclusive of dividends or transaction costs.
When you look at the cumulative 3-year performance for the stocks in the investment universe for our Systematic RS International portfolio, you will notice that the returns range from -100% to 775%. A large percentage of the stocks in the investment universe performed quite poorly over this period of time. However, you’ll also notice that a sub-set of the securities performed quite well. In fact, there were over 50 stocks in this investment universe that were up over 50 percent over this 3-year period of time. Certainly a relative strength strategy does NOT guarantee that you’ll capture all those winners. However, it has the potential to increase the odds that you’ll capture a bunch of them. Also, what you don’t own is every bit as important as what you do own. Seeking to avoid the losers can have a meaningful impact on returns as well.
When an asset class is out of favor, investors have some choices to make. Should they reduce exposure, eliminate exposure, or actively manage that exposure. We believe that our Systematic RS International portfolio is a good argument for the latter.
If you would like to see the Systematic RS International portfolio added to a UMA platform at your firm, please have your managed accounts department contact Andy Hyer at [email protected] or 626-535-0630.
(1)The performance represented in this article is based on monthly performance of the Systematic Relative Strength International 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. The advisory fees are described in Part 2A 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 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. A list of all holdings over the past 12 months is available upon request. 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.
