Tom Dorsey and John Lewis on AdvisorShares AlphaCall

March 21, 2017

Click here for a replay of their recent conversation on our International strategy, available as AADR and as an SMA.

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Relative Strength Spread

March 21, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 3/20/17:

rs spread

The RS Spread has declined for most of the past 12 months as the RS laggards have performed better than the RS leaders, but that dynamic appears to be changing.  The RS Spread has now moved above its 50 day moving average, a potentially positive development for relative strength strategies.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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False Sense of Security with Passive?

March 14, 2017

Peter Chiappinelli in Advisor Perspectives sheds some interesting light on the active versus passive debate as it relates to fixed income exposure.  See below for a few excerpts of his recent article.

The trends are clear. 2016 was the year in which the investment community warmly embraced passive portfolios. Our worry, however, is that investors are feeling a false sense of security, particularly with passive bond portfolios–namely those funds and Exchange Traded Funds (ETFs) linked to a common benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index (the Agg). There is nothing passive about this index, and we would argue it is aggressively taking on more risk at the worst possible time. There are three main reasons for our concern: the simple math of bond duration; the changing composition of the index; and the very logical financing behavior of corporate borrowers.

Bond math and duration

Without doing a rehash of intricate bond math, duration is an important calculation of bond risk. Though it has many variants, at its root duration measures the sensitivity of a bond’s price to a shift in yields. For example, a bond (or a bond portfolio) with a duration of 5 years means that for every 1% shift upwards in yields, there is a 5% drop in the price of the bond. Duration is measured in years because it is a function of the timing and magnitude of a bond’s cash flows (coupons and principal repayment): the more distant the cash flows, the higher the sensitivity (i.e., higher risk) to a change in interest rates, all else held equal. The cleanest example of this is the 30-year zero-coupon bond, which pays a single massive cash flow 30 years down the road, and therefore this bond has a duration of exactly 30 years. There are no coupon payments along the way that would dampen its sensitivity to a change in yields. Generally speaking, the smaller the coupon, the higher the duration (and vice versa); the longer the maturity, the higher the duration (and vice versa). That’s just how the math of bond risk works.

Unfortunately for investors in passive bond portfolios or ETFs tied to the Agg, bond math is making this “safer” bond portfolio much riskier than it was even a few years ago. It is now much more sensitive to a possible rise in bond yields (as we saw in November) due simply to a lower “cushion” of coupons. As shown in the chart below, coupons have dropped dramatically since the Financial Crisis of 2008 and the introduction of Quantitative Easing by the Federal Reserve (Fed). For many years leading up to 2008, the Agg happily paid its investors a healthy coupon of over 5%, but today it is a measly 3%, a number that is among some of the lowest ever recorded. This is problem number one.

coupons

Changing composition of the Agg

Problem number two is that the Agg has dramatically changed its stripes since the Financial Crisis. Eight years ago, the largest bond sector was securitized loans (e.g., asset-backed securities, mortgage-backed securities), and most of these types of securities have shorter maturities and duration. Today, longer-dated Treasuries are now the dominant sector of the Agg, while securitized bonds have dropped off significantly. This, again, has shifted both the maturity and duration of the Agg upward.

Click here for the rest of Chiappinelli’s article, but following paragraph is a nice conclusion to his analysis:

The bond math of lower coupons, the changing composition of the Agg, and the issuance of longer-maturity bonds by corporate America all conspired to increase risk, at possibly the worst time. By any reasonable fiduciary standard, this was a time to be reducing duration, yet the Agg, and the passive bond portfolios and ETFs tied to it, has seen a 62% increase in duration over the past 8 years. There is nothing passive about the Agg–it has actually become more aggressive! Be careful.

Contrary to popular belief, passive does not necessarily mean static.  The composition of the Aggregate Bond Index has changed dramatically over time and this has important implications for its investors.  Part of the reason that we introduced our Tactical Fixed Income portfolio (available as a separately managed account) in 2013 is that we thought that we were likely  entering a period of time where active could be increasingly important in the fixed income space.  See below for the FAQ on this strategy:

Why is there a need for Tactical Fixed Income?

Bond buyers face a dilemma. Yields are very, very low. If interest rates stay low this low, bondholders are facing minimal returns, all the while having those returns eaten away by inflation. If interest rates rise, bondholders are facing potentially significant capital losses. Both outcomes, obviously, are problematic. This situation demands a tactical solution that can manage through either outcome.

At Dorsey Wright, we have taken our time-tested relative strength tools and have applied them in a unique way to the fixed income markets. This solution is now available as a separately managed account. We think it will be welcome news for bond holders and prospective bond buyers who are grappling with the current bond market dilemma. Equally important, we think it will be a robust solution in the future across a broad range of possible interest rate environments.

What is the investment universe for the Tactical Fixed Income strategy?

The Tactical Fixed Income strategy can invest in short-term and long-term U.S. Treasurys, inflation-protected bonds, corporate, convertible, high yield, and international bonds. This is a broad universe of fixed income types that have varying yields and volatility characteristics.

How is the risk managed in the Tactical Fixed Income portfolio?

The Tactical Fixed Income model structures the portfolio in a way that balances risk and reward. Certain types of fixed income behave better in “risk-on” environments, while other fixed income categories are more defensive. Our model is built to ensure that the portfolio remains diversified. It’s very important to understand that this is designed as core fixed income exposure. We’re trying to generate good fixed income returns, without creating equity-like volatility.

Our model compares the relative strength of all of the ETFs in the investment universe. Those fixed income sectors exhibiting the strongest trends will be represented in the portfolio.

How does the strategy handle a rising rate environment?

Although the general trend of interest rates has been down over the past three decades, there have been periods where rates have generally risen. The period of mid-2003 to mid-2007 was generally a period of rising interest rates, while the period of mid-2007 to late 2016 was generally been a period of declining interest rates. Sectors like long term government bonds tend to perform much better in a declining interest rate environment while sectors like convertible bonds tend to perform much better during rising rate environments.

Our Tactical Fixed Income strategy is designed to be adaptive and seeks to add value in both environments.

Will the strategy invest in inverse bond ETFs?

We do not use inverse bond ETFs in the portfolio due to the cost of carrying the short positions, which includes the management fees of the ETFs as well as paying out the interest payments while you own these funds. However, a rising rate environment typically is accompanied by a strong economy. We do have ample ability to have exposure to sectors of the fixed income market, like high yield, international, and convertible bonds, that may perform well during these environments.

How has the strategy performed since it was introduced in March 2013?

We have been pleased with the performance of this strategy.  As shown below, it has outperformed the Barclays Aggregate Bond Total Return Index since inception:

TFI performance

As of 2/28/17

To receive the fact sheet for this portfolio please e-mail andyh@dorseymm.com or call 626-535-0630.

Net performance shown is total return net of management fees for all Dorsey, Wright & Associates accounts, managed for each complete quarter for each objective. The advisory fees are described in Part II of the adviser’s Form ADV. All returns since inception of actual Accounts are compared against the Barclays Aggregate Bond Index. 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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International Climbs the Ranks

March 6, 2017

While the bull market in U.S. equities is capturing plenty of headlines, perhaps less well understood is the strength taking place in International equities. Dorsey Wright’s main asset allocation tool, Dynamic Asset Level Investing (DALI), ranks six asset classes based on their relative strength. As shown below, U.S. equities remain firmly in first place, but International equities currently finds itself in the number two spot.

The whole point of a tool like DALI is to be able to identify asset classes that are in favor as well as asset classes that are out of favor so an investor’s portfolio can be positioned to capitalize on those trends.

dali

Source: Dorsey Wright, 3/2/17

The chart below shows the historical rank of International equities in DALI. As shown below, it wasn’t all that long ago that International equities was ranked dead last. Over the last year, this asset class has made a powerful move higher.

int'l_dali

Source: Dorsey Wright, 3/2/17, based on monthly tally ranks

Chances are good that your clients have a healthy allocation to U.S. equities, but are they currently light on exposure to International equities? If so, we have a suggestion for how you go about getting that exposure for your clients.

On March 31, 2006 we launched our Systematic Relative Strength International Portfolio that was designed to start with an investment universe of ADRs from developed and emerging markets, small, mid, and large cap stocks and then to evaluate that universe based on our relative strength model. Our model seeks to overweight strong sectors and to underweight weak sectors. It also makes its buy and sell decisions by relative strength rank. Stocks are bought from the top quartile of our ranks and they are sold when they fall out of the top half of our ranks. It is a disciplined trend following approach to international equity exposure. The results have been something that we have been very proud of. See below for details:

intl 1

intl 2

As of 2/28/17.

This portfolio is available on a large and growing number of SMA and UMA platforms. To receive the fact sheet for this portfolio, please call 626-535-0630 or e-mail andyh@dorseymm.com.

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, 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. 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 NASDAQ Global ex US Index. The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq. 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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Relative Strength Spread

March 2, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 3/1/2017:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

February 27, 2017

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 (2/20/17 – 2/24/17) is as follows:

ranks

Good week for the RS laggards last week.

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

February 23, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 2/22/17:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

February 21, 2017

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 (2/13/17 – 2/17/17) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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High RS Diffusion Index

February 15, 2017

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 2/14/17.

diffusion 02.15.17

The 10-day moving average of this indicator is 69% and the one-day reading is 81%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

February 14, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 2/13/17:

spread 02.14.17

After declining for much of the past year, the RS Spread is now on the cusp of moving above its 50 day moving average—a potentially positive development for relative strength strategies.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Traditional vs. Systematic Portfolio Management – What’s the Difference?

February 9, 2017

Click here for a replay of my 2/8/17 webinar.

trad_syst

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Systematic Relative Strength Portfolios (SMA/UMA Platforms)

January 20, 2017

Picture1

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).

Picture2

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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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

pdp

DWAS: PowerShares DWA Small Cap Momentum ETF

dwas

DWAQ: PowerShares DWA NASDAQ Momentum ETF

dwaq

PIZ: PowerShares DWA Developed Markets Momentum ETF

piz

PIE: PowerShares DWA Emerging Markets Momentum ETF

pie

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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Momentum Demystified

December 28, 2016

It has been stated by no less than Eugene Fama, the 2014 co-recipient of the Nobel Prize in Economics that “The premier anomaly is momentum.” [1]  This idea that past winners tend to be future winners, while past losers tend to be future losers, has been vetted and established through hundreds of academic white papers on the topic.

Yet, momentum (aka relative strength) continues to be a misunderstood approach to investing.  Why is momentum a strong investment factor that gives investors the potential to outperform over time?  How exactly can momentum be exploited?

I think Tom Dorsey explained the concept of momentum best in a recent interview:

tom-dorsey

If I gave you a list of the 100 best golfers worldwide and asked you to pick who you thought would be in the top 10 at the end of the next quarter, who would you pick? My guess is you would pick the current top ten to be in the top three months from now. Even if I asked you to pick the ones who would be in the top ten after one year, you would probably pick the current top ten.

At the end of the contest some would have fallen out and some would have moved up, but the majority would still be in the top ten. This is outperformance. It relates to Newton’s Law of motion, which suggests that objects that are in motion tend to stay in motion until an external force acts upon them. So, in my world this means that stocks that have good fundamentals, in a market that in general is supporting higher prices, and the chart pattern clearly shows that demand is in control of the stock, tend to continue to do well. Golfers who have good fundamentals, are in good shape, and at the top of their game, tend to continue to do well.

Buy the winners.

[1] Fama, E. and K. French, 2008, Dissecting Anomalies, The Journal of Finance, 63, pg. 1653-1678.

To the Data

For a simple illustration of the power of momentum, consider the following study completed by Nasdaq Dorsey Wright’s Senior Portfolio Manager, John Lewis, CMT, who has done extensive research and published numerous whitepapers on the topic of momentum investing.

Study

Out of an investment universe of the largest 1,000 U.S. stocks by market capitalization, we backtested a strategy that selected the top 100 stocks based on trailing 12 month total return.  The portfolio was rebalanced on a monthly basis.  Each of the 100 stocks in the portfolio was equal-weighted each month.

As shown below, this simple momentum strategy outperformed the Russell 1000 Total Return Index by a meaningful margin during this test period covering 12/31/1989 – 9/30/2016.

momentum-model

Additional data points:

  • Annualized return of the momentum model was 13.45% compared to 9.49% for the Russell 1000 Total Return Index over this period of time.
  • The momentum model outperformed the Russell 1000 Total Return Index in 67 percent of rolling 3 year periods and 70 percent of rolling 5 year periods.

There are a variety of ways to construct and implement a momentum strategy and this is by no means meant to be held out the only or the best method.  Rather, the purpose of this study is to demonstrate that a very simple momentum model has significant performance potential over time.  The bottom line is that any investor who seeks to employ an active investment strategy that strives to generate performance above that of a passive index over time should give strong consideration to making momentum a key component of their portfolios.

Source: FactSet.  Hypothetical Back-test Period: 12/31/1989 – 09/30/2016.  Performance information for the Momentum Model is the result of a strategy back-test on an index that is not available for direct investment.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period.  The hypothetical returns have been developed and tested by DWA, but have not been verified by any third party and are unaudited.  Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.  Model performance data (both back-tested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Returns include dividends, but do not include fees or transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

Accessing Momentum through Managed Accounts

Hopefully, at this point you are starting to wonder how you can put this powerful investment factor to work for your clients.  We have a suggestion: Take a look at our family of Systematic Relative Strength Portfolios, which are available on a large and growing number of separately managed account (SMA) and unified managed account (UMA) platforms.

First, a little history.  Since 1987, Dorsey Wright & Associates has been an advisor to financial professionals on Wall Street and investment managers worldwide, providing technical research and investment solutions.  In 2002, John Lewis joined the portfolio management team at Dorsey Wright and was instrumental in leading an extensive period of research that led to the introduction of our family of Systematic Relative Strength portfolios.  These portfolios have two major objectives:

  1. Systematize the investment management process to remove as much of the element of human emotion as possible.
  2. Focus the investment strategy around the most powerful return factor we could identify: momentum (aka relative strength).

This family of accounts now consists of seven different strategies:

sma-names

Four of the seven strategies now have 10+ year track records.  There are 3 key reasons to consider making these strategies part of your client’s portfolios:

  1. We believe that momentum is the premier investment factor and has the potential to provide meaningful investment performance for your clients.
  2. Momentum can be relatively uncorrelated to other investment strategies, such as value.
  3. Dorsey Wright, a Nasdaq Company, is committed to providing financial advisors with the highest level of investment research, tools, and investment solutions in the industry to help you succeed in serving your clients.

Where Are These Strategies Available

These portfolios are available on over 20 different platforms, including on most major wirehouses, regionals, discount brokerages, and Turnkey Asset Management Programs (TAMPs).

To find out about availability at your firm and to receive the fact sheets on these strategies, please contact Andy Hyer at andyh@dorseymm.com or by calling him at 626-535-0630.

Dorsey, Wright & Associates, a Nasdaq Company, is a registered investment advisory firm. Neither the information 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 document does not purport to be complete description of the investment strategies to which reference is made.  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. Each investor should carefully consider the investment objectives, risks, and expenses of the strategies discussed above prior to investing.  Advice from a financial professional is strongly advised. 

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Relative Strength Spread

November 29, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 11/28/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Knowing When to Stand Still

November 28, 2016

There has been an enormous amount of commentary following the November 8th presidential election about exactly what a Trump administration will mean for the financial markets, both domestic and international.  Trump’s victory is being called one of the biggest political upsets in modern U.S. history.  I think it is fair to say that the markets were probably expecting a Clinton victory, which may account, to some degree, for the wild swings in the performance of many relative strength strategies in the days following the election.  For example, see below for the performance of our Systematic RS International model compared to its benchmark, the Nasdaq Global ex US TR Index.  In the immediate aftermath of the election, many of our Latin American holdings took it on the chin, perhaps in fears of the perceived protectionists policies that might be associated with a Trump administration.  However, you’ll notice that within a couple of days the performance of the model snapped back.

intl-perf

*Performance of the Systematic RS International model is non-inclusive of dividends or transaction costs.  The performance of the Nasdaq Global ex US Index is inclusive of dividends, but does not include transaction costs.  Period 11/8/16 – 11/22/16.

We received a number of panicked phone calls during the few days following the election when we were experiencing some sharp underperformance.  “Is the model responding too slowly?”  “Wouldn’t it make sense to get out of all Latin American stocks now?”  Those were some of the types of questions we were receiving.  Our response was that we didn’t know if the underperformance would continue or if we would see those positions snap back, but that we would stick with our relative strength discipline.  Positions that deteriorated sufficiently would be removed from the model and replaced with stronger names.  In other words, we were not overriding the model.

This does remind me of a NYT article I read a number of years ago on a related topic:

The soccer field has turned out to be a popular laboratory among economists, with penalty kicks a particular favorite.

Awarded after certain kinds of fouls, or sometimes to decide a championship match, a penalty kick pits one player against the goalkeeper. (Mano a pie instead of mano a mano, though, since the goalie is allowed to use his hands.)

Standing just 36 feet away, the kicker sends the ball hurtling at the goal at 60 to 80 m.p.h., giving the goalie just 0.2 to 0.3 second to respond. Given the speed, the goalkeeper has to decide what to do even before observing the direction of the kick. Stopping a penalty kick is considered one of the most difficult challenges in sports. Not surprisingly, 80 percent of all penalty kicks score.

For their study, Mr. Azar, along with Michael Bar-Eli, a sports psychologist; Ilana Ritov, a psychologist; and two graduate students, scanned the top leagues in the world, collecting data on 311 penalty kicks. Then they computed the probability of stopping different kicks (to the left, the right or center) with different actions (jumping left, right, or staying put) to see which one “maximizes his chance of stopping the ball.”

According to their calculations, staying in the center gives the goalkeeper the best shot at halting a penalty kick — 33.3 percent, instead of 14.2 percent on the left and 12.6 percent on the right.

Yet when the group analyzed how the goalkeepers had actually reacted to these penalty kicks, they discovered the goalies remained in the center just 6.3 percent of the time.

The reason, Mr. Azar contends, is rooted in how the players feel after failing to block the ball.

01kick_600

Source: New York Times

When it comes to soccer and investing, when choosing what to do, sometimes the best thing is nothing.  Overriding models may or may not work out in the short-run.  In the long-run, adherence to disciplined and adaptive models makes all the difference.

Over the last 10+ years the we have been managing the Systematic RS International portfolio, it has certainly had periods of underperformance, but over the last 10 years it has outperformed its benchmark by 6.4 percent annually, net of all fees.

intl-long-term-perf

As of 10/31/16

To receive the brochure on our Systematic RS Portfolios (which are available on a large number of SMA and UMA platforms), please e-mail andyh@dorseymm.com or call 626-535-0630.

This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

The performance shown above is based on monthly performance of the Systematic Relative Strength International Model.  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.  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 NASDAQ Global ex US Index.  The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq.  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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Weekly RS Recap

November 28, 2016

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 (11/21/16 – 11/25/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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How Momentum Based ETFs Work in Portfolio Construction

November 21, 2016

ETF Trends publisher/editor Tom Lydon spoke with Andy Hyer, Client Porfolio Manager, Dorsey, Wright & Associates, a Nasdaq Company, at the Schwab Impact Conference in San Diego that ran Oct. 24-27, 2016.

Hyer discussed how its innovative momentum based ETFs work in portfolio construction.

Neither the information 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 document and presentation do not purport to be complete descriptions of the securities or commodities, markets or developments to which reference is made.  Past performance is not indicative of future results.  Potential for Profits is accompanied by possibility of loss. 

 

Some performance information presented is the result of back-tested performance.  Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the discussed strategy during a specific period.  

 

Back-tested performance results have certain limitations.  Such results do not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Back-testing performance also differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.  Dorsey, Wright & Associates believes the data used in the testing to be from credible, reliable sources, however; Dorsey, Wright & Associates, LLC (collectively with its affiliates and parent company, “DWA”) makes no representation or warranties of any kind as to the accuracy of such data. 

 

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.

 

Unless otherwise stated, the returns of the strategies do not include dividends for stocks or ETFs but do account for distributions in mutual funds.  Returns of the strategies do not include any transaction costs. Investors should have long-term financial objectives. 

 

The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs.  Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.  Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”).  However, such information has not been verified by DWA or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.  DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded).  Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. 

 

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. The risk of loss in trading commodities and futures can be substantial. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. You should therefore carefully consider whether such trading in ETFs is suitable for you in light of your financial condition.  Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETF’s may result in the layering of fees as ETF’s impose their own advisory and other fees. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).

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Relative Strength Spread

November 21, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 11/18/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

November 21, 2016

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 (11/14/16 – 11/18/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

November 7, 2016

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 (10/31/16 – 11/4/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Point and Figure RS With Micro Caps

November 2, 2016

We have written quite a bit over the years about using point and figure relative strength for stock selection.  One of the whitepapers that discusses the basics of using RS can be found here.  In a lot of the research (including the whitepaper in the link) we use a universe of large capitalization stocks.  There really isn’t a good reason for the use of that universe.  Generally speaking, it is easier to deal with large caps because the information tends to be cleaner, and people are usually more interested in hearing about companies they know and recognize.

Point and figure relative strength works just as well or better on universes of small capitalization stocks.  The small cap universe is incredibly dynamic, and each year there are plenty of big winners and plenty of companies that wind up going out of business.  The dispersion of returns is very high, which is very good for a momentum strategy.  The micro capitalization universe has stocks in it that are even smaller than the small cap universe.  Micro caps are truly the wild, wild west.  The other characteristic with micro caps that make it a good universe for relative strength analysis is there is very little analyst coverage on these companies because they are so small.  That makes it easier to find undiscovered gems than it is in a larger capitalization universes.

To define a micro cap universe, we took the all of the stocks trading on US exchanges at the end of each calendar year and included everything ranked every company by market capitalization.  Stocks ranked from number 2000 through 3500 were included in the universe.  That universe essentially includes the bottom half (in terms of market cap) of the Russell 2000 and then another 500 stocks that don’t even qualify for inclusion in the Russell 2000 Index.  At each month we ranked every stock in the universe by relative strength versus a micro cap benchmark.  If you are unfamiliar with how a point and figure relative strength ranking works you can find an explanation in the paper linked to above.  Stocks were placed into one of four baskets at each month end based on point and figure relative strength chart configuration (signals and columns).  Each month the baskets were refreshed and all of the stocks in each basket were equally weighted.  Equally weighting each stock on a monthly basis would prove to be difficult in actual portfolio management, but we are just trying to get an idea about the power of relative strength in this universe.

microeqmicroret

(Click To Enlarge)

The Universe return listed above is the monthly equal weighted return of all the stocks in the universe.  We have included this because most broad market benchmarks are capitalization weighted and do not get the benefit of getting reweighted each month at no cost.  The returns of the universe are the best apples-to-apples comparison of how the universe was constructed.  The Benchmark return is a blended return of two different indexes: Russell 2000 Total Return and Russell Microcap Total Return.  The data on the Russell Microcap index doesn’t go back to the beginning of our test.  Before the microcap index was available we used the Russell 2000, and then linked that index performance to the microcap index when the data became available.

The stocks on a point and figure buy signal and in a column of X’s are the strongest stocks.  That basket of stocks performs remarkably well with very good volatility characteristics.  One thing that appears to be the case in the microcap universe is that relative strength helps find quality companies.  There are so many microcap companies that are, for lack of a better term, a hot mess.  Quality is extremely important when dealing with such small firms.  Most large cap companies are large because they have multiple products, experienced management teams, and defined processes and controls.  Sure, large cap companies make mistakes and their stock prices can go down quite a bit, but it is nothing like what goes on in the microcap space.  Momentum is very important when looking at very small stocks, and it also helps filter out a lot of the companies with poor quality characteristics.

Momentum works in a number of different markets and across markets.  In a universe of very small companies it is no different.  Using point and figure relative strength as a filter to focus on the strongest stocks in the universe is a great way to increase your odds of success.

Performance data is the result of hypothetical back-testing.  Investors cannot invest directly in an index.  Indexes have no fees.  Back-tested performance results have certain limitations.  Back-testing performance differs from actual performance because it is achieved through retroactive application of an investment methodology designed with the benefit of hindsight.  Back-tested performance do not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.  Neither the information 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 document does not purport to be complete description of the securities, markets or developments to which reference is made.  Performance is inclusive of dividends, but does not include any transaction costs.

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Weekly RS Recap

October 31, 2016

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 (10/24/16 – 10/28/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

October 24, 2016

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 (10/17/16 – 10/21/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

October 18, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 10/17/16:

rs-spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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