Five Likely Prospects for Global Macro

October 31, 2014

With the recent launch of the Arrow DWA Tactical ETF (DWAT), which tracks our Global Macro strategy, we wanted to provide some ideas for some types of clients that are likely to be good prospects for the strategy.  (Global Macro is now available as an ETF (DWAT), a mutual fund (DWTFX), as a SMA, and as a UMA (Wells Fargo Masters and DMA platforms).

“I love my Pie…Until I don’t” Guy

Strategic asset allocation seemed like such a prudent way to invest for this client.  That is, until he noticed that his allocations to the different asset classes didn’t change much.  Yes, he had exposure to U.S. Large, Mid, and Small equities, Developed and Emerging Market Equities, Fixed Income, and a sliver of Commodities.  Yet, the exposure remained approximately the same in 1999, 2000, 2001, 2002….  And, yes, it remained approximately the same during the financial crisis of 2008-2009.  This client has become increasingly aware of the fact that asset classes go through bull and bear markets and has asked you about what options there may be to be more flexible.

“Small Account with Big Expectations” Guy

You took the client on, even though he only had $100,000.  Normally, your target client has $1 million or more in investable assets, but this client was a friend of one of your best clients.  No way to turn this one down.  However, this smaller client is well aware of the level of service that you provide your clients.  He is aware of your commitment to being a craftsman in the Dorsey Wright methodology and he expects the same level of service that he has heard so much about.  It is also in your DNA to do the very best job that you can for every one of your clients.  While this small account might not be big enough to justify the time that you provide your bigger clients, DWAT will allow you to employ a methodology that you are comfortable with and that resembles the methodology that you use with all of your clients.  Furthermore, when you speak to this smaller client it will be natural for you to explain the current exposure in the ETF and what types of asset class leadership you are currently seeing in the market.

“I love hedge funds, but not 2/20” Guy

This guy loves the concept of flexibility.  He loves the idea of active management.  He loves the idea of risk diversification.  However, he doesn’t like lock-up periods, high minimums, high fees, and no transparency.  Global Macro, aka the Arrow DWA Tactical ETF (DWAT), provides a welcomed alternative.  DWAT offers transparency, intra-day liquidity, and much lower fees.

“Shell-Shocked” Guy

This guy makes the Dalbar numbers what they are.  He buys high and he sells low.  After the financial crisis he moved the bulk of his assets into bonds.  He hasn’t lost money, but he has sure missed out on the spectacular gains in the equity markets.  However, he is afraid he is about to repeat his old mistakes.  He looks at the current holdings of DWAT and sees the heavy overweight to U.S. equities.  He has been expecting “the other shoe to drop” for years now and is afraid of another major bear market.  However, this client is thrilled when he learns of the adaptive nature of relative strength.  Frankly, he is tired of trying to forecast the markets.  He finds comfort that in learning that DWAT is a trend following strategy that has the ability to get very defensive in major bear markets.  He is also now aware that part of risk management is participating in good equity markets and he likes the idea that this strategy will force him into asset classes that may not feel good to him, but that are favored from a relative strength perspective.

“Value Investor” Guy

This client is all about value.  His favorite store is Wal-Mart and he only buys his suits on clearance.   And he loves his value managers.  In fact, the bulk of his portfolio is invested in strategies where the managers scour the globe for opportunities “where the market price is below intrinsic value.”  However, he is not fond of the extended periods of time when value can be out of favor.  He gets a rush off the first leg of new bull markets when his value managers tend to rocket off the bottom, but during the trend continuation phase of the market he gets antsy.  When you explain to him that there is something called relative strength that tends to have a low correlation to value, he shows interest.  With the addition of DWAT to his portfolio, he feels a much greater sense of diversification…even if he is still a value guy.

Click here for a prospectus.  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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What scares you the most financially?

October 22, 2014

With Halloween right around the corner, we’re going to get financially spooky.  What scares you the most financially?  From the conversations I have  had with both financial advisors and individual investors, here are the top concerns that I hear:

  1. How would my portfolio handle another 2008?
  2. How long can this bull market go?  Is it time to reduce my equity exposure?
  3. Will I have enough money in retirement?

While the imaginary ghosts and goblins of Halloween are all in good fun and contribute to the celebration, the very real fears of the financial markets are based on experience.  This generation of investors is never going to forget the pain (financial and emotional) that they suffered in the last two major bear markets.  Those experiences will inform their investment decisions for the rest of their lives.  Does that mean that they will always choose the most conservative (and potentially the lowest-returning) investments?  No, but I do think that risk management will be top on their priority list for a very long time.

That creates an enormous opportunity for the financial advisor who is capable of building a well-designed asset allocation that places a priority on risk management.  Advisors who employ Dorsey Wright research have a number of tools to help them with that task, including D.A.L.I. (Dynamic Asset Level Investing).  For those advisors looking for a turn-key Tactical Asset Allocation solution, our Global Macro strategy is a good option.  This continues to be the Dorsey Wright strategy with the most assets under management and which continues to generate the most interest.  A brief primer of the strategy is given below:

The Dorsey Wright Systematic RS Global Macro strategy provides broad diversification across markets, sectors, styles, long and inverse domestic and international equities, fixed income, currencies, and commodities using Exchange Traded Fund (ETF) instruments.The strategy holds approximately ten ETFs that demonstrate, in our opinion, favorable relative strength characteristics.  This strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market. This allows for the efficient allocation of money globally to opportunities where we believe potential returns are particularly compelling.

The exposure to different asset classes in Global Macro is designed to be flexible, as shown in the following diagram:

bw093014 assetrange What scares you the most financially?

A sample aggressive allocation of the strategy might be as follows:

Sample Aggressive1 What scares you the most financially?

While a sample conservative allocation of the strategy might be as follows:

Sample Conservative1 What scares you the most financially?

There are many more potential allocations of the Global Macro strategy than are shown in those two samples, but it should give you an idea of how the portfolio has the flexibility to adapt to different environments.

This same Global Macro strategy can be accessed in a number of different ways:

  • Separately Managed Account: Global Macro is available on over 20 different platforms
  • Unified Managed Account: This strategy is available on the Wells Fargo Masters and DMA platforms
  • Mutual Fund: Since August 2009, this strategy has been the underlying model used to manage The Arrow DWA Tactical Fund(DWTFX)
  • Exchange Traded Fund: Investors can also now access the Arrow DWA Tactical strategy in an ETF (DWAT)

Being able to provide guidance to fearful investors is a key element of being a successful financial advisor.  With Dorsey Wright research and managed portfolios, like Global Macro, advisors can be well-prepared to offer solutions to their clients.  Investors want flexibility, risk management, and diversification. They want to make money, but they want to do it in a prudent way. This strategy is designed to be that solution.

For questions about this portfolio, please e-mail andy@dorseywright.com or call 626-535-0630.

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

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Dorsey Wright Separately Managed Accounts

October 21, 2014

Picture1 Dorsey Wright Separately Managed Accounts

Our Systematic Relative Strength portfolios are available as separately 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 Nicolaus (Opportunity Platform)
  • Kovack Securities
  • Deutsche Bank
  • Charles Schwab Institutional (Marketplace Platform)
  • Sterne Agee
  • Scott & Stringfellow
  • Envestnet UMA
  • Placemark
  • Scottrade Institutional
  • Janney Montgomery Scott
  • Robert W. Baird
  • Prospera
  • Oppenheimer (Star Platform)
  • SunTrust
  • Lockwood

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 Dorsey Wright Separately Managed Accounts

To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andy@dorseywright.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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September Arrow DWA Funds Review

October 8, 2014

9/30/14

The Arrow DWA Balanced Fund (DWAFX)

At the end of September, the fund had approximately 41% in U.S. equities, 27% in Fixed Income, 21% in International equities, and 11% in Alternatives.

We did have one trade in September—sold Belgium and bought China in our International sleeve.  The broad equity markets pulled back in September, with International equities pulling back more than U.S.  However, our Healthcare position held up well, as did our fixed income holdings.  Much of our fixed income exposure is fairly short duration and that helped us this month.  One of the trends that has been unfolding in recent months is the improvement in Emerging markets compared to Developed International markets.  However, it was the Emerging markets that pulled back the most in September.  Real Estate is another area that has generally been strong this year, but pulled back sharply for the month.

DWAFX fell 3.12% in September, and is down 0.89% YTD through 9/30/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx September Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX / DWAT)

At the end of September, the fund had approximately 90% in U.S. equities and 8% in Real Estate.

There were no changes in the holdings in September.  Our sector exposure generally helped us in September as Healthcare and Technology held up better than the market.  However, our Real Estate and Mid Cap U.S. equity exposure pulled back sharply for the month.  We remain invested in those asset classes (U.S. equities and Real Estate) that have the best relative strength.  While U.S. equities have been the most highly ranked asset class in our investment universe for years now, the specific styles and sectors that are leading have seen quite a few changes this year.  Periods with above average turnover, like we have seen the last six months or so, are often followed by periods of below average turnover and environments that are more favorable for the strategy.

DWTFX lost 2.35% in September, but is up 0.78% YTD through 9/30/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

dwtfx September Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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Introducing the Arrow DWA Tactical ETF

September 30, 2014

With each passing year, global financial markets offer more and more choices to investors. More choice can be good, if investors have a logical framework to analyze this broad universe of securities. The Arrow DWA Tactical ETF (DWAT), which is expected to begin trading on October 1, 2014, provides a logical framework for analyzing a broad universe of investment categories and investing in those asset classes that are in favor. This fund is designed to make available a strategy that many of you use within your business already, but within a structure that was not previously available.

This new Tactical ETF can invest in the following macro asset classes:

  • U.S. Equities
  • International Equities
  • Inverse Equities
  • Currencies
  • Commodities
  • Real Estate
  • Fixed Income

Why We Believe This ETF is Timely

While we believe this ETF is built on an investment process that will stand the test of time, we also believe it is particularly timely for investor’s needs now. After the last decade, this generation of investors has a much greater appreciation for how much variability there can be in returns of different asset classes that commonly make up a diversified portfolio. Today’s investors first ask a prospective advisor about their plan for risk management. Only if that is answered satisfactorily will they move on to other questions. Yes, they want to earn good returns, but they want to do it in a way that gives them a process for dealing with bear markets. 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%, 8%, or 12% on their portfolio over the next several decades is going to dramatically change their standard of living.

See: DWA Tactical Asset Class Study Whitepaper

How DWAT Manages Risk

All asset classes go through secular bull and bear markets. For example, Commodities as measured by the Goldman Sachs Commodity Index (GSCI) had an annualized return of 21% in the 1970s, but just over 3% in the 1990’s; U.S. equities as measured by the S&P 500 had an annualized return of 18% in the 1990s, but -1% in the 2000s. Bonds have also had wide fluctuations in returns from one decade to the next. Flexibility in an asset allocation strategy is key to keeping clients invested in the markets and working towards achieving their financial goals.

This ETF holds approximately 10 ETFs that demonstrate favorable relative strength characteristics. We do not approach the asset allocation from a strategic standpoint. Instead, we implement a tactical approach. Our tactical overlay is designed to own the areas of the market exhibiting the greatest relative performance and avoid or use inverse funds for the weakest areas. You can expect the weightings to change over time! When, for example, domestic equities are performing poorly, our tactical process will avoid or use inverse funds in these areas or favor an area with better relative performance, like fixed income. We make changes to the investment mix as markets and leadership change. The portfolio is designed to be quite responsive to emerging strength.

The investment strategy is 100% systematic. We have designed our processes to remove the portfolio managers’ emotions and biases, which are detrimental to superior long-term performance. Our investment process can be summarized in the diagram below. First, we categorize a broad investment universe into asset class baskets so that we can identify which asset classes we want to own.

Then, we rank all the individual ETFs in our universe. That ranking determines what we buy and when we will sell a current holding. Holdings will only remain in the ETF as long as they remain sufficiently highly ranked in our model. In short, we let the winners run and we cut the losers out so that they can be replaced with stronger options.

Just How Flexible is the Strategy?

Exposure to the different asset classes can vary within the following bands:

12 Introducing the Arrow DWA Tactical ETF

Exposure may have minor fluctuations outside those bands based on market appreciation.

Currently, DWAT is heavily weighted towards US Equity, followed by Real Estate. Roughly, 91% of the fund is allocated to US Equity at this time with exposure to US sectors as well as size and style themes. The three largest holdings are currently US Sectors; Healthcare (XLV), Materials (XLB), and Technology (XLK). Outside of US Equity, Real Estate has a 8.5% position in the fund at this time, through the SPDR DJ Wilshire REIT (RWR).

2 Introducing the Arrow DWA Tactical ETF

3 Introducing the Arrow DWA Tactical ETF

Legacy of This Strategy:

While being able to access this strategy in an ETF wrapper is new, the strategy itself is not. High demand for this strategy is what has driven us to the point where we have made it available in a number of different investment vehicles. This strategy can now be employed in the following:

  • Mutual Fund: Since August 2009, this strategy has been the underlying model used to manage The Arrow DWA Tactical Fund (DWTFX)
  • Separately Managed Account: Under the name of Global Macro, this strategy is available on over 20 different platforms
  • Unified Managed Account: Also under the name of Global Macro, this strategy is available on the Wells Fargo Masters and DMA platforms
  • Exchange Traded Fund: Now, investors can easily access the Arrow DWA Tactical strategy in an ETF (DWAT).

Experience has demonstrated that this strategy resonates with investors. Investors want flexibility, risk management, and diversification. They want to make money, but they want to do it in a prudent way. This strategy is designed to be that solution.

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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Tactical Fixed Income: Point & Figure Technical Developments

September 17, 2014

In keeping with our macro based theme in a blog post earlier this week, we thought it would be interesting to dive deeper into the fixed income market and take a look at a few other ETF products (other than the TLT) available for exposure within the Tactical Fixed income strategy here at Dorsey Wright.     As we stated in a recent post, due to the large size of the fixed income markets,  major technical developments in this asset class should not be overlooked  as it can have an effect on asset allocation shifts during heavy re-balancing periods such as quarter end.

Recall previously how we noted the residing strength of the US Dollar over the last 5 weeks, which in turn has seemed to help contribute to the lackluster performance in commodities   We also noted the TLT (iShares Barclays 20+ Year Treasury Bond Fund) attempting to hold a longer term uptrend line near the 113.00  level.   In diving a bit deeper into the fixed income realm, we will now take a look at the updated point and figure charts for both the iShares Barclays TIPS bond fund (TIP) and the Barclays SPDR Convertible Bond ETF (CWB) to see if any technical developments worth noting are being displayed.   Clients of Dorsey Wright can gain exposure to both of these products through the Tactical Fixed Income product, should there relative strength ratings be satisfactory for holding.

iShares Barclays TIPS Bond Fund ETF (Point & Figure)

The first product we will take a look at is the iShares Barclays TIPS Bond Fund ETF (TIP).  For those of you not familiar with this product,  TIPS stand for Treasury Inflated Protective Security.   In other words, unlike traditional fixed income products that typically lose value during periods of  rising inflation, the principal on a TIPS product will rise and fall with CPI (consumer price index) readings.

tip 300x186 Tactical Fixed Income:  Point & Figure Technical Developments

From a technical perspective, the uptrend line which was intact on the point and figure chart of TIP was recently broken to the downside.  Furthermore , a double bottom break was also confirmed which has a measured move target of $109.50.    It appears (at least for the time being) the stronger US Dollar and lower commodity prices  have seemed to tame the markets expectations of seeing higher inflation in the near future.   We thought it would be worth pointing out that the labor department released the most recent CPI reading earlier this morning which came in at -0.2%, marking the first decrease since April 2013.   Given the technical developments we discussed on the TIP point and figure chart, it appears the price action of the market had been reflecting this decline.

DORSEY Wright currently has no position in TIPS

SPDR Convertible Bond ETF (CWB)

The final product we will take a look at is the SPDR Convertible Bond ETF (CWB).  This post will not dive into the details of the convertible bond market, but for a brief introduction a convertible bond is a ‘hybrid’ product of both debt and equity.   A convertible bond is typically issued at a discount to the current stock price of a company with a specific conversion price that will allow investors to exchange it for common stock if certain conditions are met.  Once the share price climbs above the conversion price, it allows for the exchange to be done.  We can see below, the current point & figure set up of this product looks quite different from the TIPS chart we analyzed earlier.   The relative strength of this product continues to remain strong in comparison to most others  in its space. The CWB is currently a component of  the tactical fixed income strategy.

cwb 273x300 Tactical Fixed Income:  Point & Figure Technical Developments

 

Conclusion:

This note serves as a brief follow up to our previous write up about using point and figure charts to monitor market rotation.   In going into further analysis of the fixed income market, we can see how relative strength strategies have certainly served the Tactical Fixed Income fund well by staying allocated towards the CWB and minimizing exposure to TIP.  As with any other asset class, markets cycles in fixed income will change at some point.   However, investors can gain exposure to both products through Dorsey Wright in order to help diversify their fixed income holdings based on the current market environment.  Furthermore, point and figure charts can also be used to observe different metrics of the economy (in this case, inflation expectations) when being applied to ETF products such as TIPS.   The Dorsey Wright Tactical Fixed income model currently has no allocation towards this product, but does have the ability to gain exposure should inflation expectations start to rise along with the relative strength ranking of the product itself.

***The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The information found on Dorsey, Wright & Associates’ Web Pages 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 report 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. However, such information has not been verified by Dorsey, Wright and Associates, LLC (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.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

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.  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).     

A list of all holdings for the past 12 months is available upon request.

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Point & Figure Charts: Analyzing patterns for market rotation

September 15, 2014

In today’s ever changing market environment, keeping a strict rules-based investment focus is essential in helping asset manages achieve favorable returns.  As stated in numerous relative strength-based white papers published by Dorsey Wright, we have found momentum  to be an effective return factor over time.  Our advantage in doing so, we believe, is allowing us to find strongly performing markets which have strong possibilities of exhibiting trending moves.  This process starts at the asset class level and then  is broken down to sectors, sub sectors, and individual equities and or commodities.

In reviewing 3 major macro-related charts this past weekend, we noticed some interesting developments in the US Dollar Index (DX/Y), Greenhaven Continuous Commodities Index ETF (GCC), and iShares 20+  Year Treasury Bond ETF (TLT).   Remember, in terms of asset allocation, shifts in major macro-related markets like these can play a major impact on money flows into different asset classes during re-balancing periods.

DXY (US Dollar Index)

The US Dollar Index (DXY) has risen sharply higher since the beginning of August.  We can see on the below Point and Figure chart the downtrend line which was broken and  produced a buy signal when price broke out above 83.00.  In terms of technical developments, price is now trading at the upper end of the range just below $85.00.  Note a move through the 85.00 level would confirm a triple  top buy signal with a potential measured  move target of 96.00.  Up until recently, the currency markets had been  primarily range bound.  However,  as we can see below it appears the USD may be on the verge of starting  a major move higher as the Federal Reserve continues to scale back is QE policies.

dxy1 Point & Figure Charts:  Analyzing patterns for market rotation

GCC (Greenhaven Continuous Commodities)

The commodities sector, of course, is the flip side to the US dollar strength.    Due to the fact most commodities are priced in US Dollars, a stronger USD effects the ability of other  countries to import them and will inhibit global demand.  After starting the months of January and February with impressive strength, the sector has suffered some steep losses across the board.  This comes as no surprise with the relative strength rankings for commodities remaining abysmal in recent months.  The GCC ETF (seen below) is now coming into a major support level at 25.50.   A move through 25.00 would confirm a double bottom break and  have a potential price target of 20.00.

gcc1 Point & Figure Charts:  Analyzing patterns for market rotation

TLT  (ishares 20+ year Treasury Bond)

The last Point & Figure chart we are going to take a look at is the TLT.  Another major macro asset class ETF which is resting on an up-trend line that has been intact for quite some time.  The potential measured move target would be 107.00.  Again, this signal has not been confirmed yet but the development should be noted due to the size of the US treasury market and its importance regarding asset allocation and interest rates in general.

tlt1 Point & Figure Charts:  Analyzing patterns for market rotation

Conclusion:

Let’s give a brief recap of what we just discussed above.   Our primary goal in this post is to use basic point and figure charts to help identify any macro related themes which may be starting to take shape.   The reason this is important is that due to size of these asset classes.  Major technical developments may influence money flows and asset allocation going forward.   Will a shift into US Dollars and out of both commodities/fixed income help contribute additional money flow into global equity markets?  Time will tell.   Furthermore, a stronger dollar, lower commodity prices, and higher interest rates all play an effect our daily lives too.

***The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The information found on Dorsey, Wright & Associates’ Web Pages 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 report 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. However, such information has not been verified by Dorsey, Wright and Associates, LLC (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.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

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.  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).     

Dorsey Wright currently has a position in TLT.

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August Arrow DWA Funds Review

September 5, 2014

8/31/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of August, the fund had approximately 41% in U.S. equities, 26% in Fixed Income, 22% in International equities, and 11% in Alternatives.

Our Fixed Income and Alternatives holdings remained the same in August, but we did have some changes in both U.S equities and International equities.  We sold Switzerland and Germany and bought South Africa and Canada in the International sleeve.   Our International sleeve is now split between Developed and Emerging markets after having been concentrated in Developed markets for most of the last couple of years. We also sold Small Cap Value and bought Large Cap Growth in our style sleeve.

For the month, our best performance came from our MLP, Healthcare, and Emerging markets positions.  Fixed income also rose for the month as rates fell.  Our remaining European equity exposure lagged for the month.

DWAFX rose 2.87% in August, and is up 3.15% YTD through 8/31/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx August Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of August, the fund had approximately 90% in U.S. equities and 9% in Real Estate.

We had one change in August—Industrials were sold and replaced with Technology.  Equities bounced back sharply after declining in July.  Our best performing holdings for the month were Mid Caps and Healthcare.  Real Estate still had positive returns for the month, but was not up as much as our other U.S. equity holdings.  Our concentration in U.S. equities reflects the continued superior relative strength of this asset class.  From a trend and relative strength perspective, there are no signs of deterioration at this point.

DWTFX gained 3.91% in August, and is up 3.20% YTD through 8/31/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

dwtfx August Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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Meager State of Bond Yields

September 4, 2014

Staggering statistic about the meager state of yields across the globe.  From Bloomberg:

Forty-five percent of all government bonds yield less than 1 percent, Bank of America Corp. said, as central bankers in JapanEurope and the U.K. decide on how to support their economies.

Not sure if the “old rules” will apply in the decades ahead about how much of your portfolio should be in bonds as you age.  Will this type of yield provide sufficient income to retirees?  Tactical asset allocation strategies that have the flexibility to find income and capital appreciation in other asset classes may prove invaluable in the years ahead.

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The Importance of Asset Allocation

September 4, 2014

Asset allocation plays a key role in performance in the investment world today.  As new products and ETF’s continue to be developed, investors now have access to almost any asset class or market around the globe at the touch of a button.   Whether it be traditional asset classes such as equities and fixed income, or alternative asset classes such as commodities and currencies, investing in the strongest asset class is now more important than ever.

At Dorsey Wright, the Dynamic Asset Level Investing (D.A.L.I.) model  is designed to help accomplish this task.  The 6 main asset classes it analyzes are as follows:  Domestic Equity, International Equity, Commodities, Foreign Currency, Fixed Income, and Cash.   The model’s main task is to assess the overall trend strength of each asset class.  This is done by analyzing different factors of relative strength which contribute to the overall trend picture of the market.  This then gives investors a game plan for allocating capital across various asset classes.  It should be noted that there are different variations of the D.A.L.I. model which can be used.  Subscribing clients have full access to this, which can be found  at  (http://dorseywright.com/).

Just for reference, let’s take a look at a recent example.   In a surprise move earlier this morning, the European Central Bank cut interest rates and also announced a quantitative easing plan that will involve the purchase Asset Backed Securities.  Further details are to be revealed next month.  This sent the EUR/USD exchange rate to a new 14 month low of $1.2920.

Although this may have been surprising economic news too many, the Dorsey Wright D.A.L.I. models have been showing these developments for quite a while and helps confirm there are times when fundamental  news has already being reflected in the market.   We can see below the D.A.L.I. model allocation to foreign currency is just 11.4%.  On the flip side of this discussion, quantitative easing by central banks around the globe has propelled equity markets around the world to new all-time highs.   Note the D.A.L.I. graphic below, which has its highest allocation toward domestic equity at 32%, followed by international equity at 22.7%.    This again helps display the advantages of using of relative strength models in forming efficient asset allocation methods.

1 The Importance of Asset Allocation

New investment products are being developed every day.   This has given investors  the benefit of having the ability to put money to work across asset classes that were once much more difficult to gain access to.  The Dorsey Wright D.A.L.I. model is designed to help investors find the strongest trending markets and strip out the markets with lackluster trending characteristics, thus helping achieve more effective portfolio management.

**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.

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July Arrow DWA Funds Review

August 8, 2014

7/31/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of July, the fund had approximately 40% in U.S. equities, 27% in Fixed Income, 22% in International equities, and 11% in Alternatives.

We had one change in July—replaced a position in Netherlands with Taiwan.  The addition of Taiwan is the first signs of Emerging markets starting to come back into the fund.  Developed international markets have been stronger than Emerging markets for quite some time, but that is showing some signs potentially changing.  For the month, our best performing holdings were Technology, Real Estate, and Healthcare, while much of our exposure to Europe was a drag.  If we continue to see weakness in our International equity holdings, this could be an area where we see more changes in the coming weeks.

DWAFX lost 2.46% in July, and is up 0.27% YTD through 7/31/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx July Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of July, the fund had approximately 89% in U.S. equities and 9% in Real Estate.

We had a couple of trades in July—sold two of our European equity positions and Agricultural Commodities and bought Large Cap Growth, a Dividend fund, and Real Estate.  The declining relative strength of U.S. Small Caps has been one of the key changes in the fund so far this year.  We came into 2014 with 30 percent exposure to U.S. Small Caps, but now have zero.  The purchases this month reflect the continued relative strength improvement of  U.S. Large Caps.  In July, our Healthcare position and a couple of our other Large Cap  positions held up relatively well, while some of our Mid Cap and European equity positions were a drag on the portfolio.

DWTFX lost 3.12% in July, and is down 0.68% YTD through 7/31/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

dwtfx July Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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Unlucky Umberto

July 25, 2014

One reason to invest in our Global Macro portfolio: Decrease the chances that you are “Unlucky Umberto.”  Click here to read more (NYT).

A brief description of our Global Macro portfolio is as follows:

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).

The idea of risk diversification is that by expanding the number of asset classes in the investment universe and by giving yourself the flexibility to overweight and underweight those asset classes based on relative strength an investor can seek to avoid extended periods of time with poor returns, especially in the later decades of an investor’s life.

E-mail andyh@dorseywright.com to request a brochure on our Global Macro portfolio.

A 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 no guarantee of future returns.

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Dorsey Wright Managed Accounts

July 22, 2014

Picture1 Dorsey Wright Managed Accounts

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 (Aggressive and Core are available on the MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel Nicolaus
  • Kovack Securities
  • Deutsche Bank
  • Charles Schwab Institutional (Marketplace Platform)
  • Sterne Agee
  • Scott & Stringfellow
  • Envestnet UMA
  • Placemark
  • Scottrade Institutional
  • Janney Montgomery Scott
  • Robert W. Baird
  • Prospera
  • Oppenheimer (Star Platform)
  • SunTrust
  • Lockwood

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 Dorsey Wright Managed Accounts

To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andy@dorseywright.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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June Arrow DWA Funds Review

July 9, 2014

6/30/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of June, the fund had approximately 40% in U.S. equities, 25% in Fixed Income, 23% in International equities, and 11% in Alternatives.

We had one change in June—sold a currency position and replaced it with real estate.   Our Alternatives sleeve now has exposure to MLPs and real estate, both areas with strong relative strength and attractive yields.  Our U.S. equity exposure performed well in June (this continues to be our biggest overweight), but our exposure to European equities did not fare as well for the month.  After struggling for a couple months, U.S. small caps also had a strong June and outperformed mid and large caps.  Although we have seen some shifts in leadership this year the major trends remain intact. We saw some underperformance in our strategies at the beginning of the second quarter, but after we made shifts in allocations, the portfolios recovered nicely.  While there are always unforeseen events that can derail the market, we are quite optimistic for the second half of the year.

DWAFX gained 1.21% in June, and is up 2.81% YTD through 6/30/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx June Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of June, the fund had approximately 70% in U.S. equities, 19% in International equities, and 10% in Commodities.

We made one change to the fund in June—replaced a small cap value position with large cap value.  U.S. equity markets continued to climb in June.  Equities had some volatility early on in the second quarter (especially in the high relative strength areas we own), but volatility tapered off toward the end of the quarter.  Although we have seen some shifts in leadership this year the major trends remain intact.  This year has been remarkable in the sense that nearly all asset classes have posted strong returns.  Generally, there tends to be greater dispersion in asset class returns and it is quite possible that we will see that in the remainder of the year.  Bond prices have risen in the first half of the year, but rates are showing some signs of moving higher so this is one area where there may be some weakness ahead.

DWTFX gained 1.44% in June, and is up 2.52% YTD through 6/30/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

dwtfx June Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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Trend Toward Professionally Managed 401(k) Portfolios

July 2, 2014

From U.S. News comes some interesting insight for any who might have thought that all a 401(k) participant needs is an roster of index funds with no additional guidance:

Another positive trend noted by Vanguard is the increased use of professionally managed portfolios. At the end of 2013, 40 percent of participants enrolled in Vanguard plans had their entire balance invested in a single target-date fund, balanced fund or managed account advisory service. Vanguard projects that 58 percent of all plan participants and 80 percent of new plan participants will be fully invested in some form of a professionally managed portfolio by 2018.

If one thing is obvious from the sordid history of 401(k) plans, it’s that most participants are incapable of putting together a globally diversified portfolio in a suitable asset allocation on their own, using low management fee index funds. Of course, this assumes that low management fee index funds are even an option. Although they are available in Vanguard plans, these funds are more the exception than the rule in 401(k) plans “advised” by brokers and insurance companies. (my emphasis added)

We are happy to be working with Pat Church of Church Capital on what we believe will be part of the solution to this challenge.  Click here and here to learn more.

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.

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Cyclicality in Practice

June 30, 2014

This post from A Wealth of Common Sense makes a very compelling case for diversification.  It also happens to be a powerful argument for Tactical Asset Allocation.

1 Cyclicality in Practice

 

2 Cyclicality in Practice

Asset class returns are anything but stable.  Consequently, a trend following approach seeks to capitalize on these multi-year swings.  Click here to read a white paper by John Lewis which tests a relative strength-based approach to trend following on an asset class level.

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.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

HT: Abnormal Returns

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Two Sides of Risk Management

June 24, 2014

How did institutional investors handle their equity allocations in the aftermath of the financial crisis?  Just as a student of behavioral finance would have expected.  As reported by the WSJ:

The average college endowment had 16% of its investment portfolio in U.S. stocks as of the end of June 2013, the most recent academic year, according to a poll of 835 schools conducted by Commonfund, an organization that helps invest money for colleges. That is down from 23% in 2008 and 32% a decade ago. The 18% allocation to foreign stocks didn’t change in that period. Schools in the poll, which collectively manage nearly $450 billion, had 53% of their funds in alternative strategies, up from 33% in 2003.

The average allocation of corporate pension funds to stocks was 43% at the end of last year, down from 61% at the end of 2003, according to J.P. Morgan Chase & Co. The average public pension fund had 52% of its portfolio in stocks at the end of 2013, down from 61% at the end of 2003, J.P. Morgan said.

P1 BQ523 PENSIO G 20140623180315 Two Sides of Risk Management

After going through a traumatic event like the financial crisis, it is only natural to want to dial back the risk.  However, now that the S&P 500 Total Return Index has had an annualized returns of 18.39 percent over the past five years, ending 5/31/14, institutional investors are starting to realize just how costly their risk aversion has been.

Meanwhile, U.S. equity exposure in our Global Macro portfolio has been on the rise in recent years.  This global tactical asset allocation fund is driven by relative strength and as a result it dispassionately overweights those asset classes demonstrating the best performance.

Global Macro Two Sides of Risk Management

This Global Macro strategy is also used to manage The Arrow DWA Tactical Fund, which has outperformed 81 percent of its peers over the past 5 years—no doubt in large part because of its relatively high U.S. equity exposure.

morningstar Two Sides of Risk Management

Source: Morningstar, as of 6/24/14 

After experiencing two major bear markets in the last decade, investors big and small are demanding risk management.  However, it is important to remember that part of risk management is seeking to manage downside risk and part of it is seeking to capitalize in strong equity markets.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Click here for Appendix A.  This example is presented for illustrative purposes only and does not represent a past recommendation.   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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May Arrow DWA Funds Review

June 15, 2014

5/31/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of May, the fund had approximately 39% in U.S. equities, 26% in Fixed Income, 24% in International equities, and 11% in Alternatives.

We generally has positive returns in each of the different sleeves (U.S. equities, Fixed Income, International equities, and Alternatives) of the fund in May—something not always seen in a diversified balanced fund like DWAFX.  We had a number of trades in May: sold Large-Cap Growth, Small-Cap Growth, and Consumer Cyclicals and bought Mid-Cap Value, Small-Cap Value, and Basic Materials.  We also slightly reduced our U.S. Equity exposure and increased our Int’l Equity Exposure.  While there were relatively few trades in the fund in 2013, this year has brought a number of changes.

DWAFX gained 1.23% in May, and is up 1.57% YTD through 5/31/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx May Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of May, the fund had approximately 70% in U.S. equities, 19% in International equities, and 10% in Commodities.

Our U.S. equity exposure was reduced from 90% to 70% in May and we added another position to European equities and a position to Commodities.  U.S. equities continue to be the dominant asset class from a relative strength perspective, but we have seen better performance from other asset classes as well this year.  Relative strength in general had a strong month in May after pulling back in March and part of April.

DWTFX gained 0.87% in May, and is up 1.07% YTD through 5/31/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

dwtfx1 May Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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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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Maintaining Flexibility

May 23, 2014

Morgan Housel recently shared an excellent way to think about one of the biggest challenges facing investors—failure to think outside their own viewpoint:

Statistics genius Nate Silver spoke at a conference in Seattle a few weeks ago. He made a point that stuck with me. Radar technology was in its infancy in the early 1940s. To protect U.S. interests like the Pacific Fleet in Pearl Harbor, Navy planes circled the Hawaiian Islands, searching for threats. “You were just sending a couple of planes that would go around a circumference until they ran out of fuel and then head back to base,” Silver said.

Alas, the Japanese military knew exactly how large that circumference was, and in November, 1941, sent its aircraft carriers just beyond the range our reconnaissance planes could fly. On December 7th, it attacked.

“My point is that everyone has a viewpoint,” Silver said, and that viewpoint usually shows just a fraction of the whole picture. There are important events sitting outside your viewpoint that, if you knew about them, would totally change how you view the world.

There’s a similar problem with investors and history. Your view of history is heavily influenced by your own experiences. But just like the Navy, your own experiences are an incomplete view of the world, arbitrarily blocked by when and where you were born — the equivalent of reconnaissance planes with limited fuel range. There are important events sitting outside your viewpoint that, if you experienced them, would totally change how you view the world.

This has important implications for how to design an asset allocation.  If one looks at too narrow a slice of history when determining the exposure constraints for different asset classes an investor could easily optimize those constraints to fit just that last 20 or 30 years.  Depending on what 20 or 30 year period you look at you may wish you had more exposure to U.S. equities, International equities, Inverse Equities, Currencies, Commodities, Real Estate, or Fixed Income.  Since none of us have a crystal ball to know which asset classes will be most rewarding over the next 20-30 years, it makes sense to maintain flexibility.  This is precisely the reason that we have given ourselves so much flexibility in The Arrow DWA Tactical Fund (DWTFX), which we sub-advise.

The Arrow DWA Tactical Fund (DWTFX) invests in various asset classes and market segments exhibiting positive relative strength.  In essence, the model works by reallocating to various market segments in response to the changing patterns of returns available in the global markets.  The table below shows the Fund’s potential allocation ranges.

dwtfx Maintaining Flexibility

Source: Arrow Funds

Investors may greatly benefit by not painting themselves into a corner when it comes to asset allocation.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus for DWTFX.

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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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Adaptive Asset Allocation

May 14, 2014

Vitaliy Katsenelson in Institutional Investor doesn’t mince words when it comes to Modern Portfolio Theory (MPT):

Teachers will teach what is teachable; they’ll default to solving a mathematical equations (while stuffing it with arbitrary numbers for the most part), because that is what they know how to do.  They can learn MPT by reading their predecessors’ textbooks, and therefore that is what they’ll teach, too.  The beauty of MPT, at least from a teaching perspective, is that it turns investing into a math problem, with elegant equations that always spit out precise, albeit random numbers.

But please don’t tell anyone I said this, because as an investor I’d love for MPT to be taught starting in kindergarten.  It would make my job easier: I’d be competing against imbeciles who still believe the world is flat.  However, as a well-wishing person dispensing advice, I’d say, spend as little time as you can studying MPT.

Among the more dubious assumption in MPT are that correlations between assets are fixed and constant forever and that the volatility of an asset is known in advance and is also constant.  Yea, about that…  See below for a chart that is a couple years old, but the point should be pretty clear—correlations change!

rex2 Adaptive Asset Allocation

Source: Rex Macey, Investments & Wealth Monitor

The five-year correlation between domestic large stocks (Russell 1000) and the MSCI EAFE index varied but never exceeded 0.6 from the start of the dataset until the late 1990s.  Consultants used this data to argue for international diversification.  Who would have expected based on historical data that the correlation would rise to the 0.9 level matching the correlation of large U.S. stocks with small U.S. stocks?  I suspect those relying on international diversification were quite disappointed.

It has been estimated that there is some $7 trillion invested in accordance with the tenets of MPT, so this is far from being just an academic exercise.

So, what’s the alternative?  How about Tactical Asset Allocation for one.  Rather than relying on an approach to asset allocation that makes assumptions about how the future should look, why not embrace a tactical approach to asset allocation that is designed to adapt?  Correlations can change, variances can change, and returns can change and tactical asset allocation still has the potential to produce favorable returns over time.

Click here to read an FAQ on our Global Macro strategy, which provides a truly tactical alternative to MPT.

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Global Macro FAQ

May 14, 2014

Systematic RS Global Macro Strategy

Frequently Asked Questions

What is the investment objective of the strategy?  The strategy seeks to achieve meaningful risk diversification and investment returns.  The historical correlation of this strategy to every major asset class has been relatively low over time.  Our global macro strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.

What asset classes are represented in the strategy?  The strategy is designed to invest in the following asset classes:  Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through ETFs.

How are the investments selected?  The strategy holds approximately ten ETFs that demonstrate powerful relative strength characteristics.  The strategy is constructed pursuant to Dorsey Wright’s proprietary basket ranking and rotation methodology.

How is this different from strategic asset-allocation?  We do not approach the asset allocation from a strategic standpoint. Instead, we implement a tactical approach. Our tactical overlay is designed to own the areas of the market exhibiting the greatest relative performance and avoid or use inverse funds for the weakest areas. You can expect the weightings to change over time!  When, for example, domestic equities are performing poorly our tactical process will avoid or use inverse funds in these areas or favor an area with better relative performance, like fixed income.  We make changes to the investment mix as markets and leadership change. The portfolio is designed to be quite responsive to emerging strength.

How do all these processes come together?  The investment strategy is 100% systematic. We have designed our processes to remove the portfolio managers’ emotions and biases, which are detrimental to superior long-term performance.

How is risk managed in the portfolio?  Our investment process is designed to systematically rotate the portfolio into the strongest asset classes and individual alternatives within those asset classes. If an asset class is performing poorly the tactical asset allocation overlay will avoid or use inverse funds in that area and buy an asset class with better relative strength.  There is a stop, based on the relative strength ranking, on each holding. The asset classes used in the portfolio are not typically highly correlated, so that our investment guidelines provide enough latitude to deliver solid returns in a variety of market conditions.

Will the portfolio ever go to cash?  Our investment universe includes ETFs that represent the shorter-term sector of the United States Treasury market.  So, yes, we can effectively allocate a portion of the account to cash if that is where the best relative strength is found.

What is the average annual turnover?  The portfolio is designed to rapidly adapt to changing market conditions.  As a result, there might be more realized gains and losses during periods when asset class leadership is changing, and fewer realized gains and losses when there is stable leadership.  The average annual turnover has been approximately 250% over time.  With 10 positions in the portfolio, that represents an average of 25 swaps per year.

What is an ETF? An exchange-traded fund is an investment vehicle traded on a stock exchange, much like a stock.  ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds.  An ETF holds assets such as stocks, bonds, currencies, commodities, or futures contracts on commodities and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day.  ETFs are attractive investments because of their low costs, tax efficiency, and stock-like features.

Will you be investing in all of the ETFs?  We have a rigorous process to determine what ETFs we will evaluate for our portfolios. There are many ETFs that are duplicative or not suitable for the investment strategy we are using in this portfolio, and we do not consider these for purchase in the fund. As new ETFs come to market we are committed to evaluating their investment merits and the effect they might have on our investment strategy. Any new ETFs will need to meet the same stringent criteria as existing ETFs for consideration in the portfolio.

For more information about this strategy, please e-mail andy@dorseywright.com.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if neces­sary, seek professional advice.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

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.  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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April Arrow DWA Funds Review

May 8, 2014

4/30/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of April, the fund had approximately 45% in U.S. Equities, 25% in Fixed Income, 18% in International Equities, and 12% in Alternatives.

After a number of allocation changes in March, the fund had no changes in April.  One of the asset classes with the most changes in 2014 has been alternatives—commodities and real estate have been particularly strong after being quite weak in 2013.  Our position in MLP’s was our best performing holding in April.  We also generally had good performance from our European equity positions.  Interest rates fell in April, helping bonds also produce some positive gains.  The weakness in April came from our U.S. equity exposure—particularly our small cap exposure.  While 2013 tended to favor more concentrated asset allocation strategies, 2014 has been a year with more cross-currents and diversified asset allocation strategies, like this one, have been able to dampen much of the volatility.

DWAFX lost 0.20% in April, but is up 0.34% YTD through 4/30/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx April Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of April, the fund had approximately 90% in U.S. equities and 9% in International equities.

One of the dominant themes in 2013 was the outperformance of U.S. small cap stocks.  DWTFX had a lot of exposure to small caps last year and this was part of the reason that the fund performed well in 2013.  That trend continued through February of this year, but in March and April we have seen sharp underperformance of small caps.  While our buy and sell criteria for the fund are not based on short-term relative strength signals, small caps have dropped in our ranks and if this trend continues it is likely that we will see some changes to the fund in the coming weeks.  Our European equity exposure was a bright spot for the fund in April as it added to its gains for the year.  Asset classes like commodities and real estate continue to see improvement and, if it continues, may be areas where we add exposure in the coming weeks.

DWTFX lost 0.96% in April, but is up 0.19% YTD through 4/30/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

DWTFX April Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  See www.arrowfunds.com for a prospectus.

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Dorsey Wright Managed Accounts

May 2, 2014

Picture1 Dorsey Wright Managed Accounts

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 (Aggressive and Core are available on the MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel Nicolaus (Opportunity Platform)
  • Kovack Securities
  • Deutsche Bank
  • Charles Schwab Institutional (Marketplace Platform)
  • Sterne Agee
  • Scott & Stringfellow
  • Envestnet UMA
  • Placemark
  • Scottrade Institutional
  • Janney Montgomery Scott
  • Robert W. Baird
  • Prospera
  • Oppenheimer (Star Platform)
  • SunTrust
  • Lockwood

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 Dorsey Wright Managed Accounts

To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andy@dorseywright.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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