Systematic Relative Strength

Systematic Relative Strength Portfolios. A little over 10 years ago, this is the name that we decided to use for this family of separately managed accounts. Managing money in this systematic way was a departure from the way that we had been previously managing money. To be sure, in the years before launching our Systematic RS portfolios, we had moved closer and closer to a systematized method of managing money. Extensive research had been completed on the technical attributes (relative strength and trend-based ranking system for stocks), favored sector work, and different methods of implementing risk management. However, on March 31, 2005, we introduced our Systematic RS Portfolios. Initially, there were just two portfolios: Aggressive and Core. Now, there are a total of 7 portfolios. This move to systematic meant that the buy and sell criteria for each of these portfolios would remain consistent. It was our belief that if we could remove the human emotion from the investment process that the results could be improved. This move to systematic also meant a singular focus on relative strength. Yes, there are many other aspects of technical analysis. However, our testing had indicated relative strength was by far the most robust factor.

Ten years on, there are 3 primary lessons that we have learned:

1. We are on the right path. The results are encouraging and suggest that we are employing an investment approach that is likely to stand the test of time.
2. There is a greater sense of confidence that comes as a result of adhering to a truly systematic investment process. Tinkering is fun, but we’ll leave that that to our projects around the house on the weekend. When it comes to portfolio management, tinkering means inconsistency and inconsistency generally leads to poor investment results. That greater confidence is manifested both in the demeanor of our portfolio managers and in the demeanor of our clients as they come to understand our process.
3. It’s not perfect. Nothing is. However, we believe it is a viable method of preserving and building wealth over time. In the realm of portfolio management, it is only prudent on the part of investors to be skeptical. Active management has well-earned its reputation as risky given the high percentage of active managers who fail miserably. The more experience I have in this industry, the more I believe that our Systematic RS portfolios are positioned to stand apart from the competition over time.

Some quick facts about each of the 7 Systematic RS portfolios that we offer as UMA/SMA accounts:

Systematic RS Aggressive

• Inception: March 31, 2005
• Has outperformed the S&P 500 Total Return Index on a gross basis since inception (slightly lagging on a net basis)
• Invests in 20-25 U.S. Mid and Large-Cap stocks. Stocks are purchased out of the top decile of our ranks and sold when they fall out of the top quartile of our ranks
• Fully invested at all times

Systematic RS Core

• Inceptions: March 31, 2005
• Has outperformed the S&P 500 Total Return Index on a gross basis since inception (slightly lagging on a net basis)
• Invests in 20-25 U.S. Mid and Large-Cap stocks. Stocks are purchased out of the top quartile of our ranks and sold when they fall out of the top half of our ranks.
• Fully invested at all times

Systematic RS Balanced

• Inception: June 30, 2005
• 60-70 percent of the portfolio will be invested in 20-25 U.S. Mid and Large-Cap stocks. 30-40% of the portfolio will be invested in U.S. Treasurys
• Has outperformed a 60/40 benchmark on a gross basis since inception (slightly lagging on a net basis)

Systematic RS Growth

• Inception: 12/31/2006
• Invests in 20-25 U.S. Mid and Large-Cap stocks
• Has outperformed the S&P 500 Total Return Index on a gross and net basis since inception
• Has had lower standard deviation than the benchmark and has had a beta of 0.79
• Can raise up to 50% cash to help mitigate some of the downside in major bear markets

Systematic RS International

• Inception: 3/31/2006
• Invests in 30-40 ADRs. Stocks are purchased out of the top quartile of our ranks and sold when they fall out of the top half of our ranks.
• Has outperformed the MSCI EAFE Total Return Index on a gross and net basis since inception
• Fully invested at all times

Systematic RS Global Macro

• Inception: 3/31/2009
• Invests in 10 ETFs from a broad universe of ETFs from U.S. equities, International equities, Currencies, Commodities, Real Estate, and Fixed Income
• Up to 30% of the portfolio can be invested in inverse equities
• Has no minimum investment requirement in any asset class, and therefore has a great deal of flexibility
• The Arrow DWA Tactical Fund (DWTFX) adopted this strategy in August 2009. Per Morningstar, DWTFX has outperformed 77 of its peers in the Tactical Allocation category over the past 5 years, a/o 4/10/15. Also, available as The Arrow DWA Tactical ETF (DWAT).

Systematic RS Tactical Fixed Income

• Inception: 3/31/2013
• Invests in ETFs from a broad range of sectors of Fixed Income, including U.S. Treasurys, Corporate Bonds, High Yield Bonds, Inflation-Protected Bonds, Emerging Market Bonds, and Convertible Bonds
• Has outperformed the Barclays Aggregate Bond Index on a gross and net basis since inception

We continue to have these portfolios added to new UMA/SMA platforms. If you have any questions about their availability at your firm, please call Andy at 626-535-0630 or e-mail him at [email protected]. Click here for a brochure on our Systematic RS portfolios.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of clients of Dorsey, Wright & Associates, LLC. This article does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this article, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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 (4/6/15 - 4/10/15) is as follows:

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.

As of the close, 4/10/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

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. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

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 4/7/15.

The 10-day moving average of this indicator is 79% and the one-day reading is 75%.

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.

As of the close, 4/7/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

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. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

It was over a year ago now that we took our Technical Leaders Indexing methodology—used to build the suite of PowerShares DWA Momentum ETFs—down to the sector level. On February 19, 2014 Dorsey Wright became the index provider for the following 9 sector ETFs:

Quick facts about these Momentum Sector ETFs:

• PnF relative strength is used to select the holdings for these ETFs (click here for a white paper on PnF RS best practices)
• These ETFs can hold Small, Mid, and Large Cap U.S. stocks
• The number of holdings can range from 30-75. When Small and Mid caps have favorable relative strength, the number of holdings will tend to expand
• The indexes are rebalanced on a quarterly basis
• The members of the index are weighted by momentum so that the stocks with the best relative strength receive the most weight

With that background, we wanted to provide three ideas for how you might consider using these ETFs in your business.

1. Invest in these PowerShares DWA Sector Momentum ETFs in the context of the Dorsey Wright Power 4 Model. This is a guided ETF model where we rank all the sectors on a monthly basis and buy the top 4 ranked ETFs. Right now, this model currently owns Consumer Discretionary (PEZ), Industrials (PRN), Consumer Staples (PSL), and Healthcare (PTH). This model is unique in that it also has the ability to invest in cash in increments of 25%, 50%, 75%, or even 100% if cash becomes relatively highly ranked in our monthly ranking. Click here for more details of the Power 4 Model. Trade signals for this model can be received by subscribing to Dorsey Wright research (see www.dorseywright.com) or by being on the Monday PowerShares distribution list for current model holdings.
2. For those portfolio managers running their own sector rotation strategies, consider adding these 9 Momentum Sector ETFs to your existing universe. There are many subscribers to Dorsey Wright research who use our Matrix service to rank a universe of ETFs. Such a universe could include Cap-Weighted sectors as well as Momentum-Weighted sectors. Then, relative strength could be used to determine with which top 4-7 ETFs should be held and subsequently sold when they fall out of the top half/quartile of the ranks. An example is given below of taking the line-up of Vanguard sector ETFs and adding the PowerShares DWA Momentum Sectors.This example is presented for illustrative purposes only, and does not represent a past or present recommendation. Matrix as of 4/7/15.
3. Another way to consider using these sector ETFs is to technically evaluate them on a case-by-case basis. Current PnF charts are shown below for each of the PowerShares DWA Momentum Sector ETFs:

While the idea of sector rotation has been around for a very long time, the concept of doing that sector rotation with anything other than capitalization-weighted sectors is relatively new. We believe that incorporating Momentum sectors into the mix can open up new and effective ways to add value for your clients. It also provides a way for a financial advisor / portoflio manager to distinguish themselves from the competition.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Prior to Dorsey Wright becoming the index provider for this suite of sector ETFs on 2/19/14, the ETFs were managed using a different indexing methodology. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of clients of Dorsey, Wright & Associates, LLC. This article does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this article, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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 4/2/2015:

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.

As of the close, 4/6/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

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. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

Current holdings of the DWA PowerShares Sector 4 Model are shown below:

Click here for model details.

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. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. 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 or commodities, markets or developments to which reference is made.

The PowerShares DWA Sector Portfolios are calculated by NYSE Euronext or its affiliates (NYSE Euronext). The PowerShares DWA Sector Momentum ETFs, which are based on Dorsey Wright indexes, are not issued, endorsed, sold, or promoted by NYSE Euronext, and NYSE Euronext makes no representation regarding the advisability of investing in such product.

NYSE EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE DORSEY WRIGHT INDEXES OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

As of the close, 4/2/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

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. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

While the broad market was relatively flat in Q1, our Systematic RS portfolios generally did a good job of identifying the areas of market leadership. Sectors like Healthcare and Consumer Cyclicals led the way, while sectors like Energy and Utilities lagged. Our International portfolio once again outpaced its benchmark for the quarter. Detailed performance is shown below:

To receive the brochure for these portfolios, please e-mail [email protected] or call 626-535-0630. Click here to see the list of platforms where these separately managed accounts are currently available.

Total account 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. Information is from sources believed to be reliable, but no guarantee is made to its accuracy. This should not be considered a solicitation to buy or sell any security. Past performance should not be considered indicative of future results.

The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s. The Barclays Aggregate Bond Index is a broad base index, maintained by Barclays Capital, and is used to represent investment grade bonds being traded in the United States. The 60/40 benchmark is 60% S&P 500 Total Return Index and 40% Barclays Aggregate Bond 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. The Dow Jones Moderate Portfolio Index is a global asset allocation benchmark. 60% of the benchmark is represented equally with nine Dow Jones equity indexes. 40% of the benchmark is represented with five Barclays Capital fixed income indexes.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETFs may result in the layering of fees as ETFs 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)

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.

As of the close, 4/1/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

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. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

A little over 8 years ago, we teamed up with PowerShares to bring the first Momentum ETF to market. Today, we hit $2 billion! A huge thank you to all to have made this ETF a part of your portfolio.

Performance of PDP is shown below:

Source: Yahoo! Finance! Updated through 3/31/15. Inception to date (ITD*) is 3/1/07 – 3/31/15. Performance is inclusive of dividends, but does not include all transaction costs. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss. Dorsey Wright is the index provider for PDP. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.

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

Click here for a list of Q2 holdings for PDP.

DWAS: PowerShares DWA Small Cap Momentum ETF

Click here for a list of Q2 holdings for DWAS.

DWAQ: PowerShares DWA NASDAQ Momentum ETF

Click here for a list of Q2 holdings for DWAQ.

PIZ: PowerShares DWA Developed Markets Momentum ETF

Click here for a list of Q2 holdings for PIZ.

PIE: PowerShares DWA Emerging Markets Momentum ETF

Click here for a list of Q2 holdings for 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:

Click here for a list of Q2 holdings for these sector momentum indexes.

See www.powershares.com for more information.

The Dorsey Wright SmallCap Momentum Index is calculated by Dow Jones, the marketing name and a licensed trademark of CME Group Index Services LLC (“CME Indexes”). “Dow Jones Indexes” is a service mark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Products based on the Dorsey Wright SmallCap Momentum IndexSM, are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s). A list of all holding for the trailing 12 months is available upon request. This example is presented for illustrative purposes only and does not represent a past recommendation. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. Dorsey Wright is the index provider for the suite of momentum ETFs with PowerShares.

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 3/31/15.

The 10-day moving average of this indicator is 84% and the one-day reading is 80%.

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.

As of the close, 3/31/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

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. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.