The Role of Cash in Systematic RS Growth

A fully-invested equity strategy or an equity strategy that has the ability to raise cash—which is better?  Which is better will depend on the time frame and the risk tolerance of the individual client, but I would suggest that there may be a place for both in a client’s asset allocation.  A fully-invested equity strategy will likely be more volatile, have deeper drawdowns, but may also perform better in certain time periods than a strategy that has the ability to raise cash.  A strategy that has the ability to raise cash can offer clients greater staying power because of knowledge that risk management is a key objective of the strategy.  In our family of Systematic RS portfolios, we have some fully invested portfolios and some that raise cash.

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.

expected return_risk

Our Systematic RS Growth portfolio is a portfolio that has the ability to hold up to 50% cash if necessary.  See below for some frequently asked questions about how this ability to hold cash works:

Question: How do you determine when to raise cash in the portfolio?

Answer: We employ a trend following equity guideline that keeps the portfolio fully-invested when equity markets are trending higher.  However, when broad equity markets move into a declining trend, the guideline will start increasing the amount of cash to be held in the portfolio.  The further that the market moves from its highs, the more cash will be called for in the portfolio.  However, there is one twist to this process.  We raise cash in the portfolio if two things happen: 1) the model calls for increasing the cash position and 2) one or more of our current holdings has deteriorated sufficiently from a trend and relative strength perspective to be sold.  Basically, if a stock moves out of the top half of our ranks, moves below 3 technical attributes, or moves into a negative trend on a PnF chart, the stock will be sold.  See below for the historical cash allocation in the Growth portfolio:

cash_growth

Source: Dorsey Wright.  As of 4/30/16.  Estimate based on monthly cash values of a sample Growth portfolio.

Question: How do you determine when to reinvest the cash?

Answer: The trend following equity guideline will call for reinvesting the cash when the broad market moves off its lows.  The further it moves from its lows, the less cash will be called for in the portfolio until the point when the account is once again fully invested.

Question: How has this portfolio performed over time?

Answer: Since inception of 12/31/2006 through 4/30/2016, the Systematic RS portfolio has outperformed the S&P 500 Total Return Index 7.89% to 6.36% net of all fees.

mountain_growth

detailed perf_growth

As of 4/30/2016. 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.  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.  

Question: How can I access the Systematic RS Growth portfolio for my clients?

Answer: The Systematic RS Growth portfolio is available on the Envestnet UMA platform, Kovack UMA platform, Stifel Opportunity Platform, RBC MAP platform, UBS MAC platform, and for RIAs at Schwab, Fidelity, and TD Ameritrade.  If you would like to see it added to a SMA or UMA platform at your firm, please have your managed accounts department contact Andy Hyer at 626-535-0630 or andyh@dorseymm.com

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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