Rebirth of Separately Managed Accounts

August 18, 2014

InvestmentNews on the strong growth of separately managed accounts:

A class of products that have been around for a long time are undergoing a rebirth: separately managed accounts, or SMAs.

The recent sales figures have been impressive. SMA market assets have bounced back to levels last seen before the financial crisis — more than $762 billion at year-end 2013, according to Cerulli Associates Inc., with one-year growth of 23.1%. Cerulli Associates projects growth rates in separate accounts of 11.3% to 12.2% in each of the next four years.

The success of SMAs lies in their advantages: customization, transparency, tax efficiency and professional management. They can also offer flexibility in fees and a high value perception for clients attracted by the cachet of owning a professionally managed strategy in a more exclusive wrapper.

The concept is easy to explain, one reason that SMAs are gaining traction with clients. They fill the needs of retail investors wealthy enough to invest $100,000, and in some cases as little as $50,000, who want to move beyond pooled vehicles like mutual funds into portfolios with individual security ownership that are actively managed by professional asset managers.

Customization is a key differentiator in the marketplace. SMAs can help financial advisers demonstrate they are listening to the individual needs of their clients. Each SMA can be tailored to meet specific needs and goals. When investing in SMAs, advisers and clients can express preferences or restrictions concerning strategies or individual stocks, which can give them a greater sense of control.

For this reason, they are particularly attractive to clients with specific investment guidelines, and those who require additional hand-holding from their adviser. Increased demand for environmental, social and governance portfolios is fueling momentum in SMA strategies that apply sustainability-focused ESG integration. A shift away from traditional style box investing to outcome-oriented solutions is also fueling the movement to SMAs, as investors express greater desire for products addressing income, longevity and volatility risk.

In the wake of the financial crisis, transparency has become even more important to clients. With SMAs, advisers and clients see their actual holdings. They also receive full details on fees. This level of transparency lets high-quality asset managers prove their worth.

SMAs also provide excellent vehicles to assess and balance tax liabilities. The run-up of the equity markets has created considerable tax implications for many investors. The fiscal condition of public budgets indicates that taxes are likely to increase, not decrease, and many investors are seeking tax advantages mutual funds do not offer. Within an SMA there are no unearned gains and often trades can be balanced to address tax loss and gain harvesting. That can be highly attractive to investors who have large taxable assets and want access to particular portfolio managers or investment strategies. SMAs can also help those who want to create benefits for charitable giving.

All of the points that are made in this article ring true to my experience as well.  Click here to see where our SMAs are currently available.

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Buffett’s Drawdowns

August 15, 2014

Drawdowns of perhaps the world’s greatest investor, Warren Buffett:

Yesterday Warren Buffett’s Berkshire Hathaway stock price broke $200,000. Buffett’s performance over the years is an amazing feat.

Since 1980, when the price was in the $200-300 range, the stock has compounded at an annual rate of 21% per year. That’s good enough to double your money every three-and-a-half years.

But those returns didn’t always come easy to Buffett or his investors. There were times when his patient style of value investing was out of favor and the stock experienced large losses. Here are the biggest losses in Berkshire Hathaway stock since 1980:

buffett Buffetts Drawdowns

No way to earn the types of returns he has generated without taking some lumps along the way.

Source: Ben Carlson

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Sector Performance

August 15, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/14/14.

sector 08.15.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Sector Performance

August 8, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/7/2014.

sector 08.08.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Sector Performance

August 1, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/31/14.

sector 08.01.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Reality Check for Forecasting

July 28, 2014

I’d say this is a pretty compelling argument for trend following.  As shown below, the average strategist forecast for the S&P 500 is routinely way off.

forecasts Reality Check for Forecasting

Source: WSJ

Rather than even attempt to forecast the unknowable, trend followers simply stay with the trend, until it is time to move on.  See here, here, and here.

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Sector Performance

July 25, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/24/14.

sector 7.25.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Cullen Roche on Michael Covel’s Podcast

July 18, 2014

Listen to the 12:45 – 15:20 mark in this interview.  Cullen Roche has some key comments on pragmatism (something that we discuss regularly at DWA and a concept that separates winning investors from the rest).

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DWA Q3 2014 Update Webinar

July 18, 2014

Click here for our quarterly DWA webinar with Tom Dorsey, Tammy DeRosier, and John Lewis.

DWA Webinar DWA Q3 2014 Update Webinar

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Reconciling S&P 500 with US Economy

July 14, 2014

Interesting insights from Cullen Roche in Pragmatic Capitalism for those who have been having great difficulty trying to reconcile the strong performance of the S&P 500 in recent years with the less strong US economy.

The S&P 500 is no longer a US index.  It is becoming a global index, and understanding its constituents requires a global big-picture understanding as never before.  The big picture matters to market participants because US stock markets are becoming increasingly dependent on a stream of foreign revenues as they tap into foreign markets for business expansion.

Since 1990 S&P 500 companies have grown from generating 22 percent of their revenue from abroad to 30 percent.

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Sector Performance

July 11, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/10/14.

s c 07.11.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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The Virtues of Pragmatism

July 10, 2014

Aren’t you glad you are a trend follower?  Leaving aside the potential performance advantages of trend following  for a moment, it is just less drama.  Case in point, as a trend follower you can avoid getting caught up in the endless debate about whether or not the market is overvalued.  Consider the following analysis from Barry Ritholtz:

It has become commonly accepted that stocks are very expensive, overbought and perhaps even in a bubble.

JPMorgan Chase & Co.’s latest quarterly chart book (you can download it here) takes issue with those conventions.

ii19S2zDTQng The Virtues of Pragmatism

As you can see from the chart above, U.S. equity prices closely match their long-term average price-to-earnings ratio of 15.5. That’s precisely at fair value if you are comparing it to the Standard & Poor’s 500 Index earnings-per-share average of analyst estimates for the next 12 months.

That is one of the most common ways to value companies, but there are plenty of other approaches that show stocks either over or undervalued.

It is commonly stated by those immersed is the valuation debate that valuations may not matter in the short-run, but they absolutely matter in the long-run.  That may be true, but when it comes to your experience as an advisor with your clients, what are the practical implications of getting out the of the market 3 years (as an example) before the bull market ends?  That’s right, you get fired.

The principle of keeping it simple, has served Dorsey Wright very well for almost three decades now.  What is a trend follower’s interpretation of the following chart of the S&P 500?  A positive trend with no signs of deterioration at this point.

SP 500 The Virtues of Pragmatism

Source: Dorsey Wright, as of 7/10/14

This is no way negates the need for prudent financial planning and asset allocation.  Nor does this make us perma-bulls.  It does, however, make us pragmatic.  As to whether or not trend following “works” I would recommend reading the following white papers by John Lewis:

This example is presented for illustrative purposes only and does not represent a past recommendation.  A 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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Path of Least Resistance

June 27, 2014

Encouraging chart, courtesy of Craig Johnson, CFA, CMT of Piper Jaffray:

pj sp 500 Path of Least Resistance

(Click to enlarge)

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.

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Sector Performance

June 27, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 6/26/2014.

sector 06.27.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Relative Strength Spread

June 24, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 6/23/14:

spread 06.24.14 Relative Strength Spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Weekly RS Recap

June 15, 2014

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (6/9/14 – 6/13/14) is as follows:

ranks 06.15.14 Weekly RS Recap

 

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Fund Flows

June 5, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 06.05.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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The Case for Tactical Asset Allocation

June 4, 2014

One of the realities for a typical investor preparing for retirement is that they do not have an unlimited time for their investments to work out.  Take, for example, a 55 year old client with $1.5 million in investable assets.  Whether this investor earns a return of 4% or 8% on their portfolio over the next several decades is going to dramatically change their standard of living.  Yet, I think few clients have an appreciation for just how much variability there can be in returns to different asset classes that commonly make up a diversified portfolio.  For example, consider the variation in returns over the last couple of decades in U.S. stocks, commodities, bonds, and real estate as shown in the table below.

asset class 06.04.14 The Case for Tactical Asset Allocation

Source: Global Financial Markets and FactSet.  *Data through 5/28/14.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on total returns, inclusive of dividends, but does not include all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

The column in green highlights the dispersion between the best and worst performing decade for that asset class.  There really is no such thing as stability in the financial markets!  Think about the implications that this might have on different approaches to building an asset allocation.  One approach to dealing with the amount of variability in asset class returns could be to simply equal weight exposure to a broad range of asset classes.  That may work out okay over time, but I think is susceptible the behavioral weaknesses of most investors, as pointed out in the quote below.

The problem with the person who thinks he’s a long-term investor and impervious to short-term gyrations is that the emotion of fear and pain will eventually make him sell badly. –Robert Wibbelsman

A tactical approach to asset allocation, driven by a relative strength, has a number of potential performance and client management advantages over many alternative approaches to asset allocation.  As shown in the images below, a trend following approach to asset allocation seeks to identify and overweight those asset classes that are in favor and to underweight those asset classes that are out of favor.

arrow trend following The Case for Tactical Asset Allocation

Source: Arrow Funds

One of the developments over the past decade that has made a tactical approach to asset allocation even more accessible to individual investors is the expansion of the ETF universe to include a broad range of asset classes like U.S. equities, international equities, currencies, commodities, real estate, and fixed income.

To learn more about our “Global Macro” approach to asset allocation, please click here.

A 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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High RS Diffusion Index

June 4, 2014

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 6/3/2014.

diffusion 06.04.14 High RS Diffusion Index

High RS stocks have rebounded sharply since mid-April.  The 10-day moving average of this indicator is 72% and the one-day reading is 85%.

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Relative Strength Spread

June 3, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 6/2/14:

spread 06.03.14 Relative Strength Spread

The RS Spread has moved above its 50 day moving average after spending a couple months below.

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Weekly RS Recap

May 31, 2014

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (5/27/14 – 5/30/14) is as follows:

perf 05.31.14 Weekly RS Recap

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Relative Strength Spread

May 30, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 5/29/14:

spread 05.30.14 Relative Strength Spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Sector Performance

May 30, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s). Performance updated through 5/29/14.

s c 5.30.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Systematic RS International Portfolio

May 22, 2014

International equities continue to rank just behind U.S. equities in Dorsey Wright’s Dynamic Asset Level Investing (DALI) tool, reflecting this asset class’s favorable relative strength.  DALI, one of the most widely used tools on Dorsey Wright’s research database, provides a clear way for investors to identify leadership from an asset class perspective.  While most investors are likely to have some portion of their overall asset allocation always exposed to International equities, those advisors who look to provide a tactical overlay may seek to overweight those asset classes with the best longer-term relative strength and to underweight those with the weakest relative strength.

dali 05.22.14 Systematic RS International Portfolio

Source: Dorsey Wright.  This example is presented for illustrative purposes only and does not represent a past recommendation.

One way that advisors may consider gaining exposure to International equities is through our Systematic RS International portfolio (available as a separately managed account).  We have been managing this strategy since March 31, 2006 and it is an area where we have been able to generate some meaningful outperformance over time.

Intl perf Systematic RS International Portfolio

Source: Dorsey Wright, March 31, 2006 – April 30, 2014.  The performance above is based on total returns, inclusive of dividends and transaction costs.  Investors cannot invest directly in an index.  Indexes have no fees. 

As shown above, this strategy has outperformed its benchmark by 4.19% annually on a net basis since its inception, over eight years ago.  A description of the strategy is found below:

The Dorsey Wright Systematic RS International strategy seeks to provide long-term capital appreciation through exposure to international equities, primarily using American Depository Receipts (ADRs).

The strategy holds approximately 30-40 equities that demonstrate, in our opinion, favorable relative strength characteristics.  The strategy is constructed pursuant to Dorsey Wright’s proprietary macroeconomic sector ranking and individual stock rotation methodology.

This strategy is uniquely positioned from an investment opportunity perspective because it is not limited by style (value or growth), investment capitalization (small, mid or large), or even classification of international market (emerging or developed).  Rather, the Systematic Relative Strength International strategy is allowed the flexibility to seek out strong trends wherever they may be found within our universe of International equities.

The allocation of this portfolio is currently tilted towards developed international markets, as shown below:

Intl alloc 05.22.141 Systematic RS International Portfolio

Source: Dorsey Wright

Relative strength works all over the world!  We certainly aren’t experts in analyzing the financials of foreign companies, but price is universal.  With a relative strength strategy, you can succeed in many different markets and asset classes without specialized knowledge of the fundamentals of each country.  Click here to see where this separately managed account is currently available.  E-mail andy@dorseywright.com or call 626-535-0630 to receive the brochure for this portfolio.

The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model.  Net performance shown is total return net of management fees 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 II 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.

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Fund Flows

May 22, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 05.22.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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