The fourth annual ETF.com Awards was held last Thursday night in New York City to honor products, people and companies that made a difference in the ETF industry in 2016. Dorsey Wright and PowerShares were honored to receive the award for Best New Asset Allocation ETF with the PowerShares DWA Tactical Multi-Asset Income Portfolio (DWIN).
From Yahoo! Finance:
PowerShares has an entire line of ETFs that incorporate the Dorsey Wright relative strength model into various segments of the stock market. But in 2016, for the first time, it applied the model to an asset allocation ETF. The “fund of exchange-traded funds” usually holds five ETFs chosen based on yield and price momentum. Those ETFs can be from any asset class, including equities, bonds, REITs, preferred stocks and more. Since its inception in March 2016, DWIN has garnered a strong following, and already has $117 million in assets. It’s a modestly priced fund with an expense ratio of 0.69%, which is in line with other Dorsey Wright ETFs.
We wanted to check in with John Lewis, Senior Portfolio Manager at Dorsey Wright, for his reaction and some additional insights into this strategy.
Q: Can you provide some background on what led to the development of this strategy?
A: PowerShares has a very diverse lineup of funds with good yields. They were looking for a solution that would allow investors to leverage their lineup while getting away from the issue that has plagued many multi asset income funds. What you normally see with these types of funds are static sleeves or allocations to certain income producing areas of the markets such as high yield bonds, MLP’s, or REIT’s. As we have seen over the years, there are times when these asset classes are in favor and times when they aren’t. Our discussions with PowerShares centered around the premise that we could use DWA tools to time entry and exit into these high income producing asset classes. The result was something that was very different than what we had done with PowerShares before. We came up with a multi factor approach that we felt would be extremely robust over time, and, as it turns out, got the attention of many industry watchers as well.
Q: The need for income is ever-present in this industry. In what ways do you think this strategy addresses investor’s income needs?
A: DWIN remains invested in the highest income producing areas provided they are performing well. So in risk-on type markets it can throw off a lot of interest income. But we don’t chase yield for yield’s sake. Someone once said, “More money has been lost chasing yield than at the end of a gun.” We think this statement is very true! There are times when certain high yielding areas have very poor performance so we shift into safer holdings during those times. So the investor’s income from the product will be variable over time. We think that approach will be beneficial over time because protecting capital is as (or more) important as generating the income.
Q: Risk management seems to be a key objective with this strategy. Can you walk us through how DWIN seeks to manage risk?
A: We run a matrix with everything in our universe. To qualify for the portfolio each month holdings need to be in the top half of our matrix ranks. From the top half of the ranks we select the five securities with the highest current yields. When markets are performing well we wind up with a lot of high yielding securities. When markets get into trouble these high yielding securities usually fall quickly down the ranks and high quality securities tend to move to the top of the ranks. These high quality securities are usually US Government Bonds that perform well as investors seek safety. In these times, we may hold large positions in US Treasuries. These types of securities generally have much lower yields than other things in our universe. So during times of stress, we may have a much lower yield in the portfolio because it is positioned for safety rather than appreciation.
Q: What is the potential problem with income strategies that seek for the highest possible yield with few if any other considerations?
A: Reaching for yield can be very dangerous. High yield investments have always been very enticing for investors because everyone wants more income! But they have high yields for a reason. There is risk in them. You are receiving a high current yield to compensate you for the added risk you are taking. That is great when things are going well. But when the economy turns, for example, high yield bonds can come under pressure because many companies have problems making their debt payments. Another example is what happens to MLP’s when energy prices fall. While an investor is still receiving a high current yield, a lot of the total return is lost as the prices of those assets go down. So we think it is prudent to look at the bigger picture with high yielding investments rather than just the current yield an investor will (is supposed) to receive.
Q: What asset classes are included in the investment universe for DWIN?
A: It is a very diverse group of assets. We use PowerShares ETF’s to get our exposures so it is very efficient for us to move the money around to different areas as momentum shifts. We can invest in all sorts of fixed income including US Treasuries, High Yield Bonds, Global Bonds, Munis, and more niche areas like Build America Bonds. We can also move in to equity income areas (both domestic and international) if that is where the strength is. There are also a few areas like MLP’s and REIT’s that are more narrowly focused but very high yielding that we include in our universe.
Q: How is the strategy currently allocated? What parts of the investment universe have been gaining strength in recent months?
A: We are allocated in MLP’s and REIT’s, which are a big driver of yield for us right now. We also own Short Term Global High Yield bonds and Emerging Markets debt. Finally, we have a position in Preferred Stocks that has performed well in the model.
Q: Do you have any suggestions for how DWIN could fit in a client’s asset allocation?
A: We think DWIN can be used in many ways and by a number of different types of investors. The obvious choice is for clients looking for current income that also want some sort of risk management built in to the strategy. But this strategy can also be considered for a more aggressive portion of a fixed income allocation. As interest rates rise, investors are looking for alternative ways to allocate to high yielding and fixed income instruments. DWIN uses a momentum overlay to shift to areas that may perform better than traditional fixed income in a rising rate environment. If it turns out traditional fixed income performs well, then DWIN has the ability to allocate there too. That flexibility comes at a price. We can’t guarantee any sort of minimum yield over time. However, we think the ability to adapt to changing markets is more important over time than remaining in asset classes that aren’t performing well.
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 email does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. DWA provides strategies, models, or indexes for the investment products discussed above and receives licensing fees from the products’ sponsors. 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.