No Second Chances with Retirement Savings

January 23, 2017

For a financial advisor, providing the right mix of investment strategies to their clients is a critical component of their value proposition.  We all know that each client has unique needs and risk tolerances, but clients can be largely grouped into two major categories, depending on whether they are in the accumulation phase or the distribution phase of their lives.  A recent article by James B. Sandidge, JD, in The Journal of Investment Consulting provides some powerful insights:

There are no second chances with retirement savings.  When saving for retirement, time provides a safety net against short-term risk.  But retirees cannot count on time, so it’s critical to get the risk allocation right.  Figure 3 shows year-by-year account values for a portfolio allocated 70/30 beginning in 2000.  The black line shows that an investor who was accumulating wealth was able to recover from two of the worst stock markets in the past seventy-five years (2000-2002 and 2008-2009) to finish the fourteenth year with 153 percent of the original investment.

With time as a safety net, “focus long-term” or “sit tight” have been effective risk-management strategies for those accumulating wealth.  Conversely, the bars show that if the same investor employed the same portfolio to distribute wealth with a 5-percent initial withdrawal and a 3-percent annual increases, the account value never recovers from the early market losses and finishes the fourteenth year with only 26 percent of the original investment, a pace of principal erosion that could deplete the account in five more years.

Accumulating investors only have to worry about how long it would take to recover from losses.  Retirees must worry about losses triggering accelerated principal erosion and cash-flow risk, and the lack of a safety net exaggerates the importance of even small adjustments to risk.

time

Sandidge, James B. 2016. Adaptive Distribution Theory. Journal of Investment Consulting 17, no. 2: 13–33.

This distinction between the distribution phase and the accumulation phase is critical to determining the appropriate types of investment strategies that should be implemented for different clients.  The bottom line is that investors in the distribution phase no longer have time on their side.  Risk management is of paramount importance in this phase of their lives.

Among the 7 strategies that are part of our family of Systematic Relative Strength Portfolios, Global Macro is among those that would be most appropriate for clients who are in the distribution phase of their lives.  In fact, I believe that this strategy is ideally suited to fit the needs of these clients who are want and need a focus on risk management.  See below for information about this strategy.

Systematic RS Global Macro Strategy

Frequently Asked Questions

What is the investment objective of the strategy?  The strategy seeks to achieve meaningful risk diversification and investment returns.  The historical correlation of this strategy to every major asset class has been relatively low over time.  Our global macro strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.

What asset classes are represented in the strategy?  The strategy is designed to invest in the following asset classes:  Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through ETFs.

How are the investments selected?  The strategy holds approximately ten ETFs that demonstrate powerful relative strength characteristics.  The strategy is constructed pursuant to Dorsey Wright’s proprietary basket ranking and rotation methodology.

How is this different from strategic asset-allocation?  We do not approach the asset allocation from a strategic standpoint. Instead, we implement a tactical approach. Our tactical overlay is designed to own the areas of the market exhibiting the greatest relative performance and avoid or use inverse funds for the weakest areas. You can expect the weightings to change over time!  When, for example, domestic equities are performing poorly our tactical process will avoid or use inverse funds in these areas or favor an area with better relative performance, like fixed income.  We make changes to the investment mix as markets and leadership change. The portfolio is designed to be quite responsive to emerging strength.

How do all these processes come together?  The investment strategy is 100% systematic. We have designed our processes to remove the portfolio managers’ emotions and biases, which are detrimental to superior long-term performance.

How is risk managed in the portfolio?  Our investment process is designed to systematically rotate the portfolio into the strongest asset classes and individual alternatives within those asset classes. If an asset class is performing poorly the tactical asset allocation overlay will avoid or use inverse funds in that area and buy an asset class with better relative strength.  There is a stop, based on the relative strength ranking, on each holding. The asset classes used in the portfolio are not typically highly correlated, so that our investment guidelines provide enough latitude to deliver solid returns in a variety of market conditions.

Will the portfolio ever go to cash?  Our investment universe includes ETFs that represent the shorter-term sector of the United States Treasury market.  So, yes, we can effectively allocate a portion of the account to cash if that is where the best relative strength is found.

Will you be investing in all of the ETFs?  We have a rigorous process to determine what ETFs we will evaluate for our portfolios. There are many ETFs that are duplicative or not suitable for the investment strategy we are using in this portfolio, and we do not consider these for purchase in the fund. As new ETFs come to market we are committed to evaluating their investment merits and the effect they might have on our investment strategy. Any new ETFs will need to meet the same stringent criteria as existing ETFs for consideration in the portfolio.

How can investors access the Global Macro strategy?  There are three different ways that investors can access this strategy.  It is available as a managed account on a large and growing number of SMA and UMA platforms.  It is also the model used for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).

For more information about this strategy, please e-mail andyh@dorseymm.com or call 626-535-0630.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if neces­sary, seek professional advice.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.  Dorsey Wright is a research provider for the Arrow DWA Tactical Fund and Arrow DWA Tactical ETF.

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Systematic Relative Strength Portfolios (SMA/UMA Platforms)

January 20, 2017

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Our Systematic Relative Strength Portfolios are available as managed accounts at a large and growing number of firms.

  • Wells Fargo Advisors (Global Macro available on the Masters/DMA Platforms)
  • Morgan Stanley (IMS Platform)
  • TD Ameritrade Institutional
  • UBS Financial Services (MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel (Opportunity Platform)
  • Kovack Securities (Growth and Global Macro approved on the UMA Platform)
  • Charles Schwab Institutional (Marketplace Platform)
  • Envestnet
  • Fidelity Institutional
  • Adhesion Wealth
  • FolioDynamix

Different Portfolios for Different Objectives: Descriptions of our seven managed accounts strategies are shown below.  All managed accounts use relative strength as the primary investment selection factor.

Aggressive:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  It invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.

Core:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This strategy tends to have lower turnover and higher tax efficiency than our Aggressive strategy.

Growth:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation with some degree of risk mitigation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This portfolio also has an equity exposure overlay that, when activated, allows the account to hold up to 50% cash if necessary.

International: This All-Cap International equity strategy seeks to achieve long-term capital appreciation through a portfolio of international companies in both developed and emerging markets.  This portfolio invests in those securities with powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  Exposure to international markets is achieved through American Depository Receipts (ADRs).

Global Macro: This global tactical asset allocation strategy seeks to achieve meaningful risk diversification and investment returns.  The strategy invests across multiple asset classes: Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Balanced: This strategy includes equities from our Core strategy (see above) and high-quality U.S. fixed income in approximately a 60% equity / 40% fixed income mix.  This strategy seeks to provide long-term capital appreciation and income with moderate volatility.

Tactical Fixed Income: This strategy seeks to provide current income and strong risk-adjusted fixed income returns.   The strategy invests across multiple sectors of the fixed income market:  U.S. government bonds, investment grade corporate bonds, high yield bonds, Treasury inflation protected securities (TIPS), convertible bonds, and international bonds.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

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To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andyh@dorseymm.com or call 626-535-0630.  Past performance is no guarantee of future returns.  An investor should carefully review our brochure and consult with their financial advisor before making any investments.

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ALPS Dorsey Wright Sector Momentum (SWIN) Introduced

January 12, 2017

We are happy to announce the launch of SWIN, the ALPS Dorsey Wright Sector Momentum ETF.  From Yahoo:

ALPS, a subsidiary of DST Systems, Inc. (DST) providing products and services to the financial services industry, today announced a strategic alliance with Dorsey, Wright & Associates, a Nasdaq Company (DWA) to launch a new factor exchange-traded fund (ETF), which is designed to capture momentum investing at both the sector and stock level.

The ALPS Dorsey Wright Sector Momentum ETF (Nasdaq Ticker: SWIN) leverages Dorsey Wright’s proprietary Point and Figure Relative Strength charting to create a high conviction portfolio of 50 stocks. The Fund seeks to track, before fees and expenses, the Dorsey Wright US Sector Momentum Index (DWUSSR), an equally weighted index consisting of 50 large and midcap stocks listed in the US.

“We are excited to collaborate with such a prestigious company,” says Tom Carter, President of ALPS Advisors Inc., “The combination of Dorsey Wright’s research and our focus on product innovation has created a new strategy for enhancing portfolio construction.”

Historically, momentum strategies tend to perform best when clear leadership is established and sustained for a meaningful period; they often lag during time when there is no clear leadership among sectors. “SWIN is the first Momentum ETF to combine both macro (sector) and micro (stock) level screens,” says Mike Akins, SVP & Head of ETFs for ALPS, “We believe its unique two-screen construct creates opportunity for outperformance in strong sector momentum cycles, while simultaneously maintaining a diversification cushion to help weather periods where no clear sector leadership is present.”

Although SWIN is concentrated on the top performing momentum sectors, it maintains an equal-weighted strategy at the stock level. “At ALPS we strive to help investors and advisors build better portfolios,” says Akins, “ALPS Sector Dividend Dog ETF (SDOG), which employs an equal-weight sector and stock strategy with a tilt toward equity income, and SWIN are complementary strategies that provide diversified exposure to both value and momentum.”

Continue reading here.

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Q4 Manager Insights

January 6, 2017

The stock market had a solid end to the year and finished up the year strong. U.S. equities, as represented by the S&P 500 Total Return, were up 3.8% for the quarter and 12.0% for the year. Many people had predicted a poor year for U.S. equities so these strong returns caught a lot of investors off guard. The returns for other asset classes were mixed during the fourth quarter, but on a year-to-date basis most of the broad asset class benchmarks finished in positive territory. One standout was small cap U.S. equities. The Russell 2000 Total Return Index was up 8.8% in the last three months of the year and 21.3% for the year. Bonds lagged equities, but did end the year with positive returns. Another big story was commodities, which had seen dreadful returns for the past couple of years. The rally in energy propelled the S&P GSCI Commodity Index to a gain of 11.4% in 2016.

The biggest story during the fourth quarter had to be Trump winning the election. Very few people predicted that outcome, and even fewer predicted what the market’s reaction would be with a Trump victory! Once again, we learned how difficult it is to mix politics with investing. We have always focused on price and left things like political forecasting to the people that need material for their television appearance. Initially, the market had a huge selloff when it became clear Trump was going to win. But before the dust even settled the market turned right around and shot higher as confused investors looked on. A Trump presidency will no doubt be filled with a lot of uncertainty. However, there are a few themes that have emerged since the election that have affected our portfolios. Financials (specifically Banks) have rallied on the hopes of looser government regulation. Whether or not that is good for Americans as a whole is not really for us to decide, but it should make it easier and cheaper for banks to do business going forward and the market recognized that very quickly. We saw our exposure to Financials increase after the election as a result of the sector’s relative strength. Trump’s plans for improving infrastructure also helped Industrials rally in to the end of the year. Again, we have seen that strength flow through to our momentum models, and we have large allocations to that sector in most of our strategies.

Lost in the shuffle of the fourth quarter was the Federal Reserve raising rates for the first time in a year. The move was largely expected, but that didn’t prevent bonds from having a rough quarter. The positive return from bonds for 2016 was largely earned in the first part of the year. The Barclays US Aggregate Index was down –3.0% for the quarter so the fear of rising rates among investors is real. Our Tactical Fixed Income strategy navigated the choppy waters very nicely in 2016. We were able to post nice gains at the beginning of the year by being in long maturity bonds as well as areas that do well in a strong bond market (High Yield, Emerging Markets, Corporates). As the probability of a rate hike grew and bonds began to falter we were able to switch the portfolio out of the “risk-on” bonds and into short term U.S. Treasuries to preserve those gains.

The two major events discussed above caused quite a bit of change in our models. That was really the theme all year. While the market posted impressive gains as a whole, there were a lot of crosscurrents under the surface. All year long, old trends died, and new ones emerged. At the beginning of the year, investors were favoring Low Volatility stocks and equities with high dividend yields. As the year wore on that leadership began to fall apart and investors began favoring more “risk on” investments like small caps that are more volatile and don’t provide as much current income. Gold was also a theme that came and went during the year. There were many themes like that over the course of 2016 and that led to us making a lot of changes in the portfolios throughout the year. Trading activity was much higher than normal as our models continued to adapt to emerging themes and get rid of old ones. It was definitely a transition year, but it looks like we are well positioned heading in to the new year. The crosscurrents under the surface will eventually subside. When they do, we should be well positioned to capture the trends in the new leadership.

This information is from sources believed to be reliable, but no guarantee is made to its accuracy.  This should not be considered a solicitation to buy or sell any security.  Unless otherwise stated, performance numbers are not inclusive of dividends or fees.  Investors cannot invest directly in an Index.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss

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To constrain or not constrain?

January 4, 2017

Fixed income allocations continue to be a major question in client portfolios. Do you continue to hold traditional long term bonds that will price deteriorate as rates rise with the hopes that clients will be able to hold them to maturity, or do you layer in differentiating bond funds that generate returns through multiple asset classes? Bloomberg wrote:

Donald Trump’s election has reignited the prospects for inflation and growth both in the U.S. and abroad, which will likely lead to higher interest rates and spell the end of the bond market’s three-decade Bull Run.

And that will favor funds that can go wherever the highest returns are — without constraints on maturity, geography or even credit quality.

The buy and hold methodology gives you reliable income flows with the possibility of price deterioration as rates rise. While the multi asset class funds give you more ways to protect your downside and generate upside, which comes with higher volatility and ever-changing sector allocations.

It is our belief that the ability to move between sector allocations will be key moving forward into 2017 as the world continues to change. Unlike most unconstrained bond funds however that shy away from long term bonds, we believe that long Treasuries, at times, are a valuable holding.  Our Tactical Fixed Income strategy can hold up to 40% in long term government exposure, along with the ability to hold convertible bonds, short-term Treasuries, emerging market debt, TIPs, high yield and Investment grade Corporates.

If you would like more information on our fixed income strategy please reach out to Andyh@dorseymm.com.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm.  Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.  Past performance, hypothetical or actual, 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.  Advice from a financial professional is strongly advised.

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Q1 2017 PowerShares DWA Momentum ETFs

January 3, 2017

The PowerShares DWA Momentum Indexes are reconstituted on a quarterly basis.  These indexes are designed to evaluate their respective investment universes and build an index of stocks with superior relative strength characteristics.   This quarter’s allocations are shown below.

PDP: PowerShares DWA Momentum ETF

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DWAS: PowerShares DWA Small Cap Momentum ETF

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DWAQ: PowerShares DWA NASDAQ Momentum ETF

dwaq

PIZ: PowerShares DWA Developed Markets Momentum ETF

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PIE: PowerShares DWA Emerging Markets Momentum ETF

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Source: Dorsey Wright, MSCI, Standard & Poor’s, and NASDAQ, Allocations subject to change

We also apply this momentum-indexing methodology on a sector level:

sector-momentum

See www.powershares.com for more information.  

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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