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.
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 email@example.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.