The Goal of Tactical Allocation

March 15, 2016

What is the ultimate objective of any tactical asset allocation strategy?  It is to adapt, is it not?  Getting “all of the up and none of the down” is a fairy tale, but investors would like to see changes in the allocations in order to seek to capitalize on those asset classes that are in favor and to seek to minimize exposure to those asset classes that are out of favor.  The exact percentage of a client’s overall portfolio that should be allocated to a tactical allocation strategy will be up to each financial advisor and their client, but I would suggest that investors could benefit from making tactical allocation part of the mix.  Whether an advisor uses our Global Macro strategy, one of the other Dorsey Wright tactical allocation strategies, or a tactical allocation strategy of their own making, I believe that there will be some common themes as it relates to communicating the objectives of this type of strategy to clients and prospects.  Our goal with this article is to touch on some of those themes.  See below for a description of our Global Macro portfolio.

Global Macro strategy description:

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.  The strategy is constructed pursuant to Dorsey Wright’s proprietary basket ranking and rotation methodology.  This strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.  This allows for the flexible allocation of investments globally to opportunities where we believe potential returns are particularly compelling. 

As shown below, the Global Macro portfolio can invest in a broad range of asset classes.  The following table highlights the asset class exposure ranges for each asset class in the Global Macro portfolio.  There may be deviations outside the bands based on market fluctuations.

ranges

The allocations to this strategy are driven by relative strength (RS).  Over the nearly 7 years that we have been running this strategy, we have seen a variety of market environments and changes in asset class leadership.  The following chart highlights historical asset allocation exposure for the Global Macro portfolio.

gm_allocations

Period: 3/31/09 – 2/29/16

You will notice that there were times with very little U.S. equity exposure and times where U.S. equities constituted the bulk of the portfolio.  Again, those changes are driven by relative strength.

One of the interesting benefits of an asset class rotation strategy based on relative strength is how it manages volatility.  As investment themes come in and out of favor, an RS strategy rotates to themes that are currently in favor.  When volatile assets, such as stocks, are declining, an RS strategy might rotate into a much less volatile asset class, like bonds or currencies, that is holding up better.  This rotation helps make the portfolio more volatile when volatile asset classes are performing well, and less volatile when risky assets are out of favor.  The chart below shows the trailing-18 month beta of Global Macro and a 60/40 equity bond portfolio compared to the S&P 500.  The beta of the 60/40 strategy remains very stable over time.  The beta of the Global Macro strategy, however, changes dramatically.

changing volatility

Returns are total returns, inclusive of dividends.  Net returns were used for Global Macro.  The 60/40 portfolio is 60% S&P 500 and 40% Barclays Aggregate Bond Index.

More recently, the beta of the Global Macro strategy has been declining and is now approaching the beta of a 60/40 portfolio.

Current holdings (as of 3/10/16) of the Global Macro portfolio are shown below:

gm 03.10.16

Clients want adaptability in their asset allocation and Dorsey Wright provides the tools and solutions to empower financial advisors to be able to provide this to their clients — and to set them apart from the competition in the process.

Global Macro is available on the Masters and DMA platforms at Wells Fargo as well as on a number of other UMA and SMA platforms.

E-mail andy.hyer@dorseywright.com for more information.

The performance represented is based on monthly performance of the Systematic Relative Strength Global Macro Model.  Net performance shown is total return net of management fees, commissions, and expenses for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account.  All returns since inception reflect reinvestment of dividends and other earnings. Returns of Accounts, since inception, are a composite of all Accounts of that style that were managed for the full quarter. All returns since inception are compared against the Dow Jones Moderate Portfolio Index and the S&P 500 total return index.  The volatility of the Models and of actual Accounts may be different than the volatility of the Dow Jones Moderate Portfolio Index and the S&P 500 index.  The Dow Jones Moderate Portfolio Index is a global asset allocation benchmark.  60% of the benchmark is represented equally with nine Dow Jones equity indexes.  40% of the benchmark is represented with five Barclays Capital fixed income indexes.  The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s.  The Barclays Aggregate Bond Index is a broad base index, maintained by Barclays Capital, and is used to represent investment grade bonds being traded in the United States.  The MSCI EAFE Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada and is maintained by MSCI Barra.  The Dow Jones U.S. Real Estate Index invests in U.S. real estate stocks and real estate investment trusts (REITs).  The Reuters Commodity Index comprises 17 commodity futures that are continuously rebalanced.  Investors cannot invest directly in an index.  Indexes have no fees.  Dorsey, Wright’s advisory fees are described in Part 2A of its Form ADV.  Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  ETFs may result in the layering of fees as ETFs impose their own advisory and other fees.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov) There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.  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. The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.

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Optimal Allocation Between Stocks and Bonds

March 3, 2016

Daniel Morillo of BlackRock looks to see if the 60/40 allocation is the optimal mix of bonds and equities over time:

Since my last post on the merits of using equities to balance the risk of rising rates, I’ve been asked well, what is the right mix of equities and fixed income? Almost everyone’s top-of-mind answer is, of course, 60/40. It’s a portfolio that holds 60% equities and 40% bonds, and it’s widely used as a benchmark for numerous multi-asset or “balanced” allocation products. Financial professionals tend to use it as a reference point during portfolio allocation discussions with clients, and it’s widely quoted in the media.

So, does 60/40 hold up? I decided to sift through the numbers to see. What I found is that while, in general, a 60/40 portfolio may be a reasonable bet for long term investors, it might not always be the way to go for investors who hold strong convictions.

To come to this conclusion, I took equity and government bond returns from the DMS database[1], which includes annual return data for 19 countries since 1900. For each possible 10-year period in each country, I constructed the allocation that, over that particular 10-year period, would have delivered the best ratio of excess return to risk, aka the allocation with the best or “optimal” Sharpe ratio.

Figure 1 shows the average optimal bond allocation for each country, averaged across countries. Guess what? The overall average across countries and time is about 43% bonds (so, the remaining 57% would be in equities) — eerily close to the 60/40 rule.

Figure-1

So the answer is that,  yes, since 1900 the optimal mix of equities and bonds is approximately 60/40.

However, note the variability in the optimal allocation to bonds in the chart above.  In some 10-year periods it was best to have 90% allocation to bonds and in other 10-year periods it was best to have 0% allocation to bonds!  While some may look at this study and conclude that there is no need to be tactical, I look at this study and come to the exact opposite conclusion.

In fact, this is the very rationale behind giving ourselves so much flexibility in the amount of fixed income exposure that we can have in our Global Macro strategy.  See below for the ranges of exposure that we can have to fixed income (and other asset classes as well):

exposure ranges

See below for the historical fixed income exposure in our Global Macro portfolio:

fixed income

Inception of the Global Macro SMA was 3/31/09.

We believe that having a disciplined way to adapt is key to being able to generate good returns and good risk management in a tactical allocation strategy over time.  As shown below, Global Macro (also available as The Arrow DWA Tactical Fund, DWTFX) has been able to rise to the top of the Morningstar Tactical Allocation category over the past 3 and 5 years.  DWTFX has outperformed 95% of its peers over the past 3 years and has outperformed 73% of its peers over the past 5 years.

morningstar

Source: Morningstar, a/o 3/2/16

Investors don’t experience average.  Relying on long-term averages to come up with the optimal allocation to fixed income may be deeply problematic for investors who have a 10-30 year time horizon, rather than a 100 year time horizon.

Global Macro is available in the following:

  • Masters and DMA platforms at Wells Fargo Advisors
  • Envestnet
  • Numerous other firms (e-mail andy@dorseywright.com to find out if available at your firm)
  • The Arrow DWA Tactical Fund (DWTFX)
  • The Arrow DWA Tactical ETF (DWAT)

E-mail andy@dorseywright.com for a brochure.

The 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.

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The Dirty Little Secret of Efficient Frontiers

February 17, 2016

Daniel Sotiroff highlights a key point about strategic asset allocation:

The primary task in asset allocation strategy is to determine how much of a given asset should be included in a portfolio. Various combinations of different assets can and should be considered. For instance, the historic returns and volatility of US large company stocks and Treasury Notes can be combined in various proportions and charted in the following way.

ef1

The chart above is commonly referred to as the efficient frontier. In theory it shows the maximum return that was achieved for a given level of volatility (sometimes referred to as risk). A word of caution is required when working with models such as these. It would appear to be easy to optimize a portfolio around a precise rate of return and volatility. However, the chart above was generated using historic returns data and the future is unlikely to look like the past. Rates of return, volatility and correlation coefficients can all change over time. Using past data to forecast an ideal optimal allocation for the future can be disastrous. Here’s what the efficient frontier looks like decade-by-decade.

ef2

My emphasis added.  Every time I see this type of analysis, I think of the following image:

reality

Source: Twitter, @ThinkingIP

It is easy for a novice to look at an efficient frontier of stocks and bonds, constructed from long-term returns, correlations, and volatilities, see the associated return and risk of different combinations and come to the incorrect conclusion that achieving their financial goals will be a smooth ride.  It won’t.  Reality is full of peaks and valleys, extended bull and bear markets in different asset classes.  A strategic asset allocation is highly unlikely to give you an optimal allocation for every decade.  If a typical investor has 3 or maybe 4 decades that will largely comprise their personal investment time horizon, then a fairly static asset allocation may leave them wanting and may leave them well short of achieving their financial goals.

Is Tactical Asset Allocation the solution?  I think it can be an effective way to deal with the significant variability in asset class behavior from one decade to the next.  Is Tactical Allocation perfect?  Certainly not.  Furthermore, there are a million different flavors of Tactical Asset Allocation and many of the flavors that I have seen probably will underperform a strategic asset allocation.  Based on my experience and the experience/testing of Dorsey Wright, I am inclined to think that a disciplined relative strength-driven approach to Tactical Asset Allocation is likely to do very well over time.  Click here to read a white paper by John Lewis on how this might be accomplished.

Click here for important disclosures.  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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RS Charts of the Week

December 1, 2015

spy vs agg

spy vs iyr

spy vs gcc

spy vs eem

spy vs efa

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

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.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this 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.

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Addressing the Recency Bias Monster

September 17, 2015

Ben Carlson provides a nice summary of how recency bias causes investors to leave a lot of money on the table:

This is why we had Depression babies who were risk averse for decades after the Great Depression. Investors who came up during the 1970s expected interest rates and inflation to stay high forever. Almost everyone who invested in the 80s or 90s became complacent and assumed mid-double digit stock market gains were their birthright. The latest generation of investors have decided that the world is going to end once a week because we’ve lived through two huge crashes in the past 15 years.

This is where I think it can be instructive to review the landscape of managers in the Tactical Allocation space.  These are the managers who are seeking to adapt to different economic environments.

See the following definition of this category from Morningstar:

Tactical Allocation: Tactical Allocation portfolios seek to provide capital appreciation and income by actively shifting allocations between asset classes. These portfolios have material shifts across equity regions and bond sectors on a frequent basis. To qualify for the Tactical Allocation category, the fund must first meet the requirements to be considered in an allocation category. Next, the fund must historically demonstrate material shifts within the primary asset classes either through a gradual shift over three years or through a series of material shifts on a quarterly basis. The cumulative asset class exposure changes must exceed 10% over the measurement period.

How likely do you think it is that many Tactical Managers succumbed to recency bias and managed their portfolio over the past 5 years as if the “world is ending?”  Judging by the numbers, I suspect that the answer is quite a few.  However, note how our own Arrow DWA Tactical Fund (DWTFX) has outperformed 88 percent of our peers in the Tactical Allocation category over the past 5 years and has outperformed 92 percent of our peers over the past 3 years.

dwtfx

Source: Morningstar

Here are two key reasons why I believe this fund has stacked up well against its peer group over time:

  • Relative strength drives the allocations of the fund rather than human emotions.
  • We intentionally gave ourselves wide asset allocation flexibility.  You will note that this type of flexibility allows us to perform well in a variety of market environments.  See below for details:

exposure

Holdings of the fund as of 8/31/15 are shown below:

holdings

It is understandable that investors, most of whom have felt the pain of two major bear markets within the past 15 years, want a strategy that can play defense.  However, that objective need not be sought at the expense of also having a strategy that can make money in good markets!  Recency bias is a killer in the financial markets.  I believe a relative strength-driven approach to asset allocation is a good solution to that challenge.

This portfolio is available in a number of different investment vehicles:

  • The Arrow DWA Tactical Fund (DWTFX).  This fund adopted this strategy in 8/2009.
  • The Arrow DWA Tactical ETF (DWAT)
  • This strategy is also available as a separately managed account (called Global Macro).  E-mail andy@dorseywright for a brochure on the SMA.

The relative strength strategy  is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund and Arrow DWA Tactical ETF.  See arrowfunds.com for a prospectus.

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Normal Doesn’t Exist

August 5, 2015

Michael Batnick on “waiting for normal:”

These are not normal times investors are living in. The Fed has held short-term interest rates at zero for six years now, a policy experiment never seen before. This has many investors eager to see what happens if and when this returns to “normal.”

One of the biggest psychological challenges of investing is that there is always something out of the norm. Take a look at the table below which highlights different times investors had to live through and the extreme performances that accompanied them. I wonder at what point would somebody would have described the times as normal.

returns-decade1

Next, have a look at the chart below, which shows the S&P 500 return by decade. You’ll notice absolutely no pattern.

returns-decade

Understanding how different it always is should be a great reminder why no strategy will work in all market environments. Knowing the limitations to what you are doing- whatever you’re doing- is critical. The ability to stick with your plan during the bad times will determine if you’ll be around for the good ones.

So what is an investor to do?  I see a couple options:

  1. Employ some form of static asset allocation and hope for the best.  25% fixed income, 25% US Equity, 25% International Equity, and 25% Alternatives and rebalance annually.
  2. Employ some type of forecasting to try to be opportunistic in asset class exposure
  3. Employ some form of trend-following tactical approach to asset allocation

The static allocation approach may ultimately perform okay over long periods of time, but will investors have the risk tolerance to continue with long stretches of an asset class being out of favor / going through severe drawdowns?  Maybe.  Maybe not.  Chances are the forecasting approach will end very badly, as forecasting usually does.  The third option makes much more sense to me.  Simply systematically deal with trends as they unfold.  This is the approach we use with our Global Macro separately managed account, which happens to be our most popular SMA strategy.  Thank goodness we gave ourselves as much flexibility as we did with the way that this portfolio is constructed because this decade has been entirely different than the last decade.  As one example, consider how well commodities performed in the last decade compared to the trainwreck that they have been so far this decade.

Normal doesn’t exist.  A disciplined way to be flexible is the key to successfully navigating the ever-changing financial landscape.

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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Getting Behavioral Coaching Right

July 23, 2015

Interesting analysis by Vanguard estimating that a good financial advisor has the potential to add 3% annually (net) to their client’s portfolios.  See below for the breakdown of their estimate:

Vanguard Study

By their estimation, the area where a financial advisor has the most potential to add value for their clients is in Behavioral Coaching.  I would agree that “providing support to stay the course in times of market stress” is among the areas of greatest opportunities for advisors to add value.  I am sure we all know clients that made drastic asset allocation changes towards equities in the late 1990’s, arriving just in time for a bear market, or away from equities following the 2008-2009 financial crisis, and have been very slow to return.  Such changes can cripple the financial health of an individual and family.

There are all kinds of ways that an advisor could attempt to help their clients stay the course in times of market stress.  They could show their clients the data on historical returns of the stock market.  They could show their client data with the percentage of rolling 3, 5, and 10 year periods where the stock and bond markets have produced positive returns.  They could give reasons why they personally believe that it makes sense to be bullish over the coming year.  They could cite the views of a well-known “expert” who believes that the market is going to rise from here.  They could share behavioral finance research with the client to try to persuade them that they are being irrational.

Some of the above approaches may have their time and place, but ultimately, I believe they are insufficient to keep clients from making the big mistakes—the types of mistakes that alter their standard of living in retirement.

In my view, an absolutely critical component to helping clients stay the course in times of market stress is to have an asset allocation that can adapt to different, even scary, market environments.  Most strategic asset allocations won’t cut it.  They are too static and too dependent upon bull markets in the stock and bond markets.  I will be the first to admit that being a perma-bear has been a losing proposition over time.  However, there must be some portion of a client’s allocation invested in a tactical strategy that can play defense.   Take the following as a sample allocation:

  • 25% in fully-invested global equities
  • 25% in fixed income
  • 50% in a Global Tactical Allocation strategy driven by relative strength

What if that 50% in Global Tactical Allocation had the ability to be heavily focused on equities in favorable equity markets.  Then, the majority of the time the client is going to have a moderately aggressive allocation in order to participate in good markets.  However, the client has the peace of mind that a meaningful portion of their overall allocation can deal with major bear markets.  This peace of mind will minimize the chance that they will demand wholesale changes to their overall asset allocation at exactly the wrong time (because a portion of their asset allocation is already shifting as dictated by relative strength) .  The last two bear markets are always going to be top of mind for this generation of investors.  Permanently defensive strategies (like a constant allocation to gold) are not the answer.  Strategic asset allocation falls short.  However, a relative strength-driven global asset allocation strategy does a much better job at providing a robust long-term solution for clients.

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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Global Macro: The Role of a “Go Anywhere” Strategy

July 15, 2015

Global macro is among the least restricted of all the major investment styles and is often referred to as a ‘go anywhere’ strategy which can potentially create positive investment returns in a wide range of economic environments.  As shown in the diagram below, there is a rules-based process that we follow to manage our Global Macro portfolio (available on the Masters and DMA platforms at Wells Fargo Advisors and other SMA platforms, as a mutual fund (DWTFX), and as an ETF (DWAT).

Investment Process

We start with a broad investment universe of ETFs from the following asset classes: U.S. Equities, International Equities, Inverse Equities, Currencies, Commodities, Real Estate, and Fixed Income.  That broad universe of ETFs is categorized into ETF Baskets, allowing us to rank the baskets by their relative strength.  That top-down Basket Ranking part of the model seeks to guide the model to the strongest asset classes and to avoid the weakest asset classes.  There is no forecasting in any part of this model—it is purely a trend-following strategy.

There is also a bottom-up ranking of all of the ETFs in the investment universe.  That ranking allows us to score each ETF to determine exactly what we buy and when a position is sold.  10 ETF are held in the Global Macro portfolio and the positions will stay in the portfolio as long as they retain strong relative strength.  We’ve had some positions stay in the portfolio for years at a time and other positions that have been quickly removed.  Any position stays in the portfolio only as long as it retains is favorable relative strength.

process

Why Global Macro?

Asset classes go through bull and bear markets.  That goes for all asset classes.  It is easy for someone to look at any 30 year period of time in history and use that period to suggest that all that is needed for any investor is a buy and hold approach to asset allocation using a narrow universe of asset classes.  In one 30-year period, a 70% allocation to U.S. equities and a 30% allocation to U.S. fixed income would do the trick.  However, take a different 30 year stretch and it may make more sense to include a healthy allocation to Real Estate or International Equities or Commodities.  The ideal or optimal passive allocation for any 30 year stretch is only evident with the benefit of hindsight.

Real investors have no idea what the future will hold.  Rather than guess what asset mix might work best as they manage their retirement nest egg, a relative strength-driven Global Macro strategy relies on a strict trend-following approach to adapt to current markets.

Investors may like to think that if they guess right and select the right passive asset allocation then their investment experience will be similar to the guy on the bike below (top of the image)…smoothly accumulating and compounding their retirement nest egg as they glide towards their retirement years.  However, reality in the financial markets is anything but a smooth ride.  Without an adaptive investment strategy as part of their asset allocation many investors will guess wrong and pick the wrong passive asset allocation.  Furthermore, investor behavior being what it is, many investors will panic at the wrong times (and unwisely tinker with their asset allocations).  Global Macro has the potential to play a soothing role for an investor and has the potential to help investors stay the course with their overall asset allocation.

plan_thinkingip1

Source: @ThinkingIP

Current Holdings

As of 6/30/15, current holdings in our Global Macro portfolio were as follows:

gm_06.30.15

Performance

We are very proud of the fact that Global Macro has performed well compared to its peer group over time.  As shown below, The Arrow DWA Tactical Fund (DWTFX) has outperformed 95% of its peers in the Morningstar Tactical Allocation category over the past 3 and 5 years; outperformed 92% over the past year, and has outperformed 68% of its peers YTD.

morningstar

Fact Sheet

Click here for a fact sheet on our Global Macro portfolio.

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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Separating the Wheat from the Chaff

May 26, 2015

Vincent McCarthy, CFA makes the case for employing tactical asset allocation strategies:

In the active management world, increased volatility can actually create opportunities for active managers to outperform. Research by Standard & Poor’s has shown that during periods of high dispersion — measured as the average difference between the return of an index and the return of each of the index’s components — there is a wider spread of active manager returns. In other words, increased dispersion separates the wheat from the chaff…

…We do not live in a static world. Even the most sophisticated economic and financial models have their limitations. We are all part of the very world we try to model, and despite the assumptions of many of the models we use, we are not always rational. As investors, if we can accept that a significant amount of what actually happens is outside our control, we can better design portfolios that are more adaptive to the circumstances of the environment that prevails.

From the lows of 2009, the world’s major central banks have helped orchestrate a situation whereby any reasonable strategic asset allocation delivered exceptional returns. But as we get deeper into this bull market and as central banks begin to move in opposite directions, we are likely to see the divergence theme play out more across asset class returns, warranting a more dynamic approach to asset allocation that incorporates tactical decisions.

Of course, the vantage from which to assess this changing environment is firm specific, based on available resources, which will dictate how well positioned one is to make tactical asset allocation calls. For most investors, I believe a prudent approach is to allocate capital to an investment manager with a strong track record of dynamically allocating across and within asset classes, allowing the manager sufficient flexibility around the allocation parameters and the use of portfolio insurance.

I believe McCarthy’s description of “an investment manager with a strong track record of dynamically allocating across and within asset classes” would apply very well to the Arrow DWA Tactical Fund (DWTFX).  Over the past five years, the fund has outperformed 88% of its peers in the Morningstar Moderate Target Risk category:

dwtfx

Source: Morningstar, a/o 5/22/15

See www.arrowfunds.com for more information.

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.  Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).  See www.arrowfunds.com for a prospectus.

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State of the Market With 200 Day Moving Average

May 14, 2015

One well-recognized method of assessing the overall direction of the market is comparing the S&P 500’s current price to its 200 day moving average.  If the S&P 500 is above its 200 day moving average, it suggests a lower risk environment for the broad market.  If the S&P 500 is below its 200 day moving average, it suggests a higher risk environment for the broad market.  As the adage goes, the trend is your friend.  Being prepared to play defense when in a higher risk environment has the potential to help mitigate severe declines for investors.  Consider the following charts of the S&P 500 and its 200 day moving average since 1950 and the second chart showing it since 2000.

sp_lt

sp

Source: Yahoo! Finance.  *10/18/1950 – 5/12/2015.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  Investors cannot invest directly in an index.  Indexes have no fees.  

Since 1950, the S&P 500 has been above its 200 day moving average 70% of the time.  That means that 30% of the time it was below its 200 day moving average and there were some pretty hairy markets during those times.  Consider the range of trailing 12 month performance of the S&P 500 over this period of time:

12 month

Source: Yahoo! Finance.  10/18/1950 – 5/12/2015.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  Investors cannot invest directly in an index.  Indexes have no fees.  

During some 12 month periods, the S&P 500 had spectacular returns—even approaching and exceeding 60%.  However, there were also plenty of trips into negative territory, with a number of them falling 20+%.

What does this mean for your clients?  Well, it depends upon the client.  If a particular client’s time horizon is really long and their tolerance for draw downs is high, then a passive approach to investing may work just fine.  However, most clients would prefer to have the ability to play some defense, especially if they planning on tapping into their nest egg in the near future.

One of the nice features of the 5 Virtus funds that Dorsey Wright was recently hired to provide research for is that they all have the ability to play defense in a meaningful way.  Each of the funds implement defensive measures in a slightly different way, but the 200 day moving average is a key component in all 5 of the funds.

To learn more about each of the funds, please click here to access the fact sheets and accompanying How It Works sheets.

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 Diversification in Global Multi-Asset Portfolios

May 4, 2015

Dorsey Wright’s systematic macro approach to portfolio construction empowers momentum and relative strength versus forecasting and market timing. With tactical diversification and enhanced returns as the goal, advisor interest in these global strategies has surged. Join us for this webcast with on Tactical Diversification in Global Multi-Asset Portfolios.  Replay of this webcast is available here.

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Sponsors of this webcast may contact registrants. This webcast is for financial professionals only.

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Market Timing vs. Global Tactical Allocation

March 17, 2015

The Irrelevant Investor takes a look back at rolling 6 and 10-year returns for the U.S. stock market:

6

10

Where Do Stocks Go From Here?

After six years of virtually uninterrupted gains, people are wondering where we go from here.

Stocks are up more than 200% over the last six years which is the best six-year run since the tech bubble. Looking at the chart, we see that we are well above the 85% historical average. Once stocks have achieved this level of success, returns going forward have declined.

There have been 54 prior periods where six year returns were greater than 200%. The average return over the next three years was 9% (median 20%) compared with an average historical three-year return of 38%. Furthermore, following these strong runs, we have seen negative three-year returns 35% of the time compared with the 17% negative three-year returns that we have seen historically. So, three-year returns following such a strong run have been one quarter of the average three-year return with negative returns occurring twice as often as we have seen historically.

While there might be reason to be cautious looking back over the last six years, when we take a step back the picture starts to change. Over the last ten years, stocks have gained 115% which is just 60% of the historical average ten-year return of 192%.

This type of observation can lead an investor to believe that a choice needs to be made.  Given the run that we have had over the past 6 years, should we preemptively reduce equity exposure?  Or, should we view the future through the lens of having a sub-par decade and therefore stay exposed to equities with the expectation that they may continue to rise from here?

The advantage of using a global tactical asset allocation strategy for a healthy portion of a client’s allocation is that they can let relative strength make this decision for them rather than engage in the fruitless game of forecasting.  The stress of trying to make the right call is taken off the table.  Relative strength may not (and, in fact, will not) always be right.  However, it does allow an investor to participate in long-term trends and when it is wrong, it will not stay wrong.

Market timing is very different than global tactical allocation.  The former relies heavily on the luck of getting calls right and entails a large risk of devastating investment results.  The latter is pragmatic and disciplined and, we believe, likely to result in favorable investment results over time.

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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Market Timing with CAPE

March 5, 2015

How worried should you be when you hear someone say that the market is overvalued?

Wesley Gray at Alpha Architect takes a deep dive into the topic of timing the market using CAPE, Shiller’s Cyclically Adjusted PE ratio in a recent post.  His results should give pause to even he most strident market timing fundamentalist.  He also looked at market timing using simple trend following (trend following performed better!).  His methods are described below (study covered the period 1/1/1947 – 1/31/2015):

To create our “valuation-timing” indicator, every month we identify the 99 percentile valuations using rolling 5-, 10-, and 20-year look-back periods. Our trading rule is simple: if the current market valuation is greater or equal to the 99 percentile measure, we invest in the risk-free rate (short-term treasury bills), otherwise, we stay invested.

We compare the valuation-timing indicator to a monthly-assessed simple moving-average (MA) trading rule, and a buy-and-hold strategy. The buy-and-hold strategy is straightforward, and the MA indicator is simple: if the current market price is lower than the 12 month moving average, we invest in the risk-free rate (short-term treasury bills), otherwise, we stay invested.

Our conclusion is counterintuitive, but not entirely surprising:

Strategy Legend:
  • SP500 = S&P 500 Total Return Index
  • LTR = The Merrill Lynch 10-year U.S. Treasury Futures Total Return Index
  • Rolling 5 year 99perc CAPE= Timing signal uses the 99th percentile valuation metric using rolling 5 year look-back periods.
  • Rolling 10 year 99perc CAPE = Timing signal uses the 99th percentile valuation metric using rolling 10 year look-back periods.
  • Rolling 20 year 99perc CAPE= Timing signal uses the 99th percentile valuation metric using rolling 20 year look-back periods.
  • (1,12) MA= If last month’s price is above the past 12 month average, invest in the S&P 500; otherwise, buy U.S. Treasury Bills (RF).

alpha architect

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Conclusion

There is no evidence to support the use of “valuation-timing,” which performs similarly to buy-and-hold strategies (after costs it would we much worse). There is nothing magical about the 99th percentile. Trend-following, at least historically, seems to more effective.

Perhaps there are more convoluted, complex, and data-optimized ways in which we can leverage overall market valuations to help us time markets. We haven’t found any, but that doesn’t mean they don’t exist. Please share.

Pretty shocking results.  If you can’t even successfully identify overvalued markets when a market is in the 99th valuation percentile, then why even pay any attention to valuation measures at all?  If someone wants to be bearish, there is always some seemingly plausible reason and CAPE valuation measures are an often-cited reason.  However, Gray’s study is a solid takedown of the idea that CAPE can be effectively used as a way to get out of the market at the right time.  As pointed out in his study, a simple trend following method worked better.  Perhaps, an even more promising approach is a relative strength-driven Tactical Asset Allocation strategy as is detailed in this white paper by our own John Lewis.

I agree with a recent tweet by Cullen Roche:

FYI, no one knows how “expensive” the market really is or how “expensive” it really should be.

A reality that investors would do well to embrace.

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

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Global Macro: 2015 Market Outlook

February 18, 2015

The replay to the Global Macro 2015 Market Outlook webinar can be accessed by clicking here.  Andy Hyer of Dorsey Wright Money Management and Jake Griffith, President of Arrow Funds, present our Global Macro portfolio.  This strategy is now available as a separately managed account, UMA (Wells Fargo Masters and DMA platforms), mutual fund (Arrow DWA Tactical Fund, DWTFX), and as an ETF (Arrow DWA Tactical ETF, DWAT).  This strategy, now approaching 6 years since inception, continues to resonate with clients who are looking for flexible global asset allocation and who are looking to grow their money, but do so with an eye on risk management.

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The 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 and www.arrowshares.com for a prospectus.  Dorsey Wright is the signal provider for DWTFX and DWAT.  An investor should consider the Funds’ investment objective, risks, charges, and expenses carefully before investing. This and other information is contained in the Funds’ prospectus, which can be obtained by calling 1-877-Arrow-FD (877-277-6933). Please read the prospectus carefully before investing. Arrow Funds are distributed by Archer Distributors, LLC (member FINRA). ArrowShares are distributed by Northern Lights Distributors, LLC (member FINRA). Arrow Investment Advisors and Northern Lights Distributors are unaffiliated entities. This message is for the designated recipient only and may contain privileged, proprietary, or otherwise private information. If you have received it in error, please notify the sender immediately and delete the original. Any other use of the email by you is prohibited.   Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund.

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Why Tactical Asset Allocation?

February 18, 2015

From Ben Carlson, comes one reason:

Japanese stocks

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DWAT in the News

February 17, 2015

From ETF Trends:

A growing number of exchange traded funds launched over the past year are using the ETF of ETFs approach, meaning these funds are comprised of other ETFs.

The Arrow DWA Tactical ETF (DWAT) is one such fund. The Arrow DWA Tactical ETF is Arrow’s first actively managed ETF and second ETF after the popular Arrow Dow Jones Global Yield ETF (GYLD) .

Importantly, DWAT’s ETF of ETF approach is working for investors. The ETF has slightly outpaced the S&P 500 this year and touched a new high last Friday. The actively managed DWAT, which has an annual expense ratio of 1.52%, “seeks to achieve its investment objective by implementing a proprietary Relative Strength (RS) Global Macro model managed by Dorsey Wright & Associates (DWA),” according to ArrowShares. DWAT came to market last October. [ArrowShares Adds a Second ETF]

The combination of active management and a methodology rooted in relative strength allows DWAT to build a diversified portfolio of well-known, and more importantly, strong performing ETFs. For example, the Health Care Select Sector SPDR (XLV) , the largest health care ETF, is currently DWAT’s largest holding at a weight of nearly 13.7%.

With a combined 19.7% weight to the iShares Cohen & Steers Realty Majors (ICF) and the SPDR Dow Jones REIT ETF (RWR) , DWAT offers ample leverage to a low interest rate environment. However, that does not imply DWAT is vulnerable to rising interest rates.

The Technology Select Sector SPDR (XLK) and the Financial Select Sector SPDR (XLF) have been two of the sturdier performers at the sector level as 10 -year Treasury yields have recently jumped. Additionally, XLF and XLK give DWAT a bit of a value tilt because financials and technology are two of the more attractively valued sectors relative to the S&P 500. [High Beta ETFs Time to Shine]

Conversely, DWAT does not hold richly valued consumer staples, energy or utilities sector ETFs. DWAT has another advantage that makes the ETF worth considering if equity markets retreat: The fund can also invest up to 30% in inverse U.S. equity exposure in the event of a prolonged market drawdown,” according to a statement issued by ArrowShares.

The Vanguard Mid-Cap Value ETF (VOE) and the Materials Select Sector SPDR (XLB) were DWAT holdings when the ETF first came to market, but DWAT has since parted ways with those funds.

Arrow DWA Tactical ETF

dwat1

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowshares.com for more information.  Dorsey Wright is the signal provider for DWAT.

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The Move to Tactical Fixed Income

February 10, 2015

The WSJ recently took notice of the growing demand for unconstrained bond strategies:

Unconstrained, or “nontraditional,” bond funds took in $79 billion in new money in 2013 and 2014, or more than twice as much as all other bond funds combined, according to Morningstar, the investment research firm.

It isn’t hard to see why. With the 10-year U.S. Treasury yielding less than 2%, barely better than inflation, trying to invest for income nowadays is like trying to find a good plate of prime rib at a vegan food convention. And if the Fed stays true to its word and raises interest rates sometime this year, the future could be even worse. A one-percentage-point rise in rates would cause a 5.5% fall in the price of funds that track the Barclays Aggregate, based on the “duration,” or interest-rate sensitivity, of the index.

With unconstrained bond funds, say portfolio managers, you can do better.

At Dorsey Wright, we believe that this category of unconstrained bond strategies will continue to become more important to investors in the years ahead. In March of 2013, we introduced our “Tactical Fixed Income” separately managed account and we have been very happy with the results since inception. Performance and holdings are shown below:

tfi performance

Performance 3/31/13 – 1/31/15

tfi hldgs

Holdings as of 2/10/15

For more information about this strategy, please see the FAQ’s below:

Why is there a need for Tactical Fixed Income?

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

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

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

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

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

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

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

How does the strategy handle a rising rate environment?

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

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

Will the strategy invest in inverse bond ETFs?

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

What is the turnover of the Tactical Fixed Income strategy?

Adapting to different fixed income environments is the nature of the Tactical Fixed Income strategy. We built the strategy to be robust across the spectrum of bond market environments. The model typically has about twenty swaps a year. Our model selects approximately six ETFs to be held in the portfolio and each position remains in the portfolio only as long as it retains strong relative strength. We have a disciplined relative strength process in place to replace any positions that weaken beyond an acceptable level.

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

Net performance shown is total return net of management fees for all Dorsey, Wright & Associates accounts, managed for each complete quarter for each objective. The advisory fees are described in Part II of the adviser’s Form ADV. All returns since inception of actual Accounts are compared against the Barclays Aggregate Bond Index. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.

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Arrow DWA Tactical Receives 4 Star Morningstar Rating

February 6, 2015

The Arrow DWA Tactical Fund A-Share Load Waived and Institutional Share are now both 4 Star Morningstar Rated Overall with a 5 Star Rating for 3 Years and 4 Star Rating for 5 Years.

dwtfx

Source: Morningstar, 2/6/15

See www.arrowfunds.com for a prospectus.

An investor should consider the Funds’ investment objective, risks, charges, and expenses carefully before investing. This and other information is contained in the Funds’ prospectus, which can be obtained by calling 1-877-Arrow-FD (877-277-6933). Please read the prospectus carefully before investing. Arrow Funds are distributed by Archer Distributors, LLC (member FINRA). ArrowShares are distributed by Northern Lights Distributors, LLC (member FINRA). Arrow Investment Advisors and Northern Lights Distributors are unaffiliated entities. This message is for the designated recipient only and may contain privileged, proprietary, or otherwise private information. If you have received it in error, please notify the sender immediately and delete the original. Any other use of the email by you is prohibited.   Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund.

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Global Macro: Relative Strength-Driven Asset Allocation

January 27, 2015

In an ideal world, retirement planning could be simplified into the old saying “It’s not timing the market that makes all the difference, it’s time in the market.”  That seems like such a prudent statement, doesn’t it?  After all, timing the market conjures up images of undisciplined and emotion-driven allocation shifts in and out of the market, hopelessly trying to capture all of the up, but none of the down.  Since nobody can time the market, why not just build a nicely diversified portfolio, rebalance once a year, and be done with it?  Won’t that lead to fairly steady results and ultimately reaching your retirement goals?  That is a nice theory, but I don’t believe that it holds up to reality.  The problem with the static allocation approach, I believe, is as follow:  It is not clear what the appropriate asset mix should be for a static allocation.  One might look at 50 years worth of data and conclude that the static allocation should be 40% U.S. Equity, 20% International Equity, 30% Fixed Income, and 10% Commodity exposure.  However, looking at 50 years worth of data is one thing.  Having an appreciation for just how much variability there can be, decade to decade, in asset class returns, volatilities, and correlations can be an entirely different thing.  If asset classes go through bull and bear markets, and they do, will investors have enough patience and tolerance for losses to stay the course?  Some will, and over the course of 30 to 50 years, I suspect that some percentage of extremely patient clients will do just fine.  However, most investors will make emotion-driven changes to their allocations.  They will swear off Fixed Income in 1982.  They will get bullish on Commodities in June 2008.  They will give up on U.S. equities in March 2009.  They will give up on European equities in 2011….and on and on.  The Dalbar numbers are what they are for this very reason.

Less quantitatively, the problem with the static allocation approach can be seen in the following picture.  One would like to believe that an investor could adhere to a static allocation / annual rebalance approach (“Your plan”) and steadily make progress towards your financial goals–kind of like a bank making monthly interest payments to your savings account.  However, actual markets (“Reality”) are very different.  Asset classes go out of favor for years, and even decades, at a time.  There can be spectacular stretches of capital gains and there can be  excruciatingly painful periods of market losses.

plan_thinkingip1

Source: @ThinkingIP

Thus, the need for a tactical approach to asset allocation.  Let me be clear, I in no way advocate an undisciplined approach to asset allocation—what many think of when they think of market timing.  Such an approach is very likely to perform substantially worse that the static approach to asset allocation over time.  However, our research shows that relative strength can be an effective method of building an adaptive approach to asset allocation.

See: Tactical Asset Allocation Using Relative Strength, by John Lewis, CMT

A relative strength-driven approach to asset allocation basically allows the investor the possibility of investing in multiple asset classes, but allows for great flexibility.  When asset classes are relatively strong, they will receive exposure in the strategy.  When they are relatively weak, they will receive little or no exposure.  The exposure ranges for our Global Macro portfolio, for example, are as follows.

exposure-ranges

Global Macro is one of our most widely used approaches to asset allocation and it is available as a separately managed account, as a mutual fund, and an ETF:

  • Separately Managed Account and UMA: Available on the Masters and DMA platforms at Wells Fargo Advisors and some 20 other firms.  E-mail andy@dorseywright.com for a fact sheet.
  • Mutual Fund: Arrow DWA Tactical Fund (DWTFX).  See www.arrowfunds.com
  • ETF: Arrow DWA Tactical ETF (DWAT).  See www. arrowshares.com

This strategy was first launched as a separately managed account on March 31, 2009.  It was later adopted in the Arrow DWA Tactical Fund (DWTFX) in August 2009.  Through 1/26/15, the Arrow DWA Tactical Fund (DWTFX) is stacking up quite well against its peers in the Morningstar Tactical Allocation category:

dwtfx

Source: Morningstar

Over the past 5 years, it has outperformed 92% of its peers; 97% of its peers over the past 3 years, 91% of its peers over the last year, and 74% of its peers so far in 2015.

Asset allocation can be flexible without being erratic and undisciplined and we believe that relative strength is the right tool for the task.

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.  Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).  See www.arrowfunds.com for a prospectus.

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DWTFX vs. Tactical Allocation Peers

January 27, 2015

Through 1/26/15, the Arrow DWA Tactical Fund (DWTFX) is stacking up quite well against its peers in the Morningstar Tactical Allocation category:

dwtfx

Source: Morningstar

Over the past 5 years, it has outperformed 92% of its peers; 97% of its peers over the past 3 years, 91% of its peers over the last year, and 74% of its peers so far in 2015.

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.  Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).  See www.arrowfunds.com for a prospectus.

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Dorsey Wright Separately Managed Accounts

January 26, 2015

Picture1

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

Different Portfolios for Different Objectives: Descriptions of our seven managed accounts strategies are shown below.  All managed accounts use relative strength as the primary investment selection factor.

Aggressive:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  It invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.

Core:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This strategy tends to have lower turnover and higher tax efficiency than our Aggressive strategy.

Growth:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation with some degree of risk mitigation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This portfolio also has an equity exposure overlay that, when activated, allows the account to hold up to 50% cash if necessary.

International: This All-Cap International equity strategy seeks to achieve long-term capital appreciation through a portfolio of international companies in both developed and emerging markets.  This portfolio invests in those securities with powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  Exposure to international markets is achieved through American Depository Receipts (ADRs).

Global Macro: This global tactical asset allocation strategy seeks to achieve meaningful risk diversification and investment returns.  The strategy invests across multiple asset classes: Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Balanced: This strategy includes equities from our Core strategy (see above) and high-quality U.S. fixed income in approximately a 60% equity / 40% fixed income mix.  This strategy seeks to provide long-term capital appreciation and income with moderate volatility.

Tactical Fixed Income: This strategy seeks to provide current income and strong risk-adjusted fixed income returns.   The strategy invests across multiple sectors of the fixed income market:  U.S. government bonds, investment grade corporate bonds, high yield bonds, Treasury inflation protected securities (TIPS), convertible bonds, and international bonds.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Picture2

To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at 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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Global Macro: In Case Your Time Horizon Is Not 45 Years

December 12, 2014

Cliff Asness recently posted an excellent review of Modern Portfolio Theory (MPT) that included some very interesting charts of the return and volatility of stocks, bond, and commodities from 1970-November 2014.  Over this 45-year period of time the efficient frontier of those three asset classes was as follows:

1

Probably, what most would expect.  Stocks had higher returns than bonds and commodities, with more volatility than bonds, but less volatility than commodities.  Nothing too shocking in that picture.  However, the fun really starts when you look at the efficient frontier in 5-year increments:

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3

4

5

6

7

8

9

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Pretty shocking, huh!  The long-term (45-year in this case) average returns and volatility of stocks, bonds, and commodities tell you very little about their return and volatility characteristics in any 5-year period.  Stay the course, focus on the long term, don’t sweat the small stuff, don’t make knee-jerk reactions…all those maxims aren’t going to work with your clients.  Those aren’t calming to a client, they are offensive!  Imagine saying that to a 65-year old investor who has just retired.  This investor sits down with you, their trusted financial advisor, and takes a look at their entire portfolio.  This is all they have.  This client is not planning on going back to work.  They have worked hard to amass this money and they need it to work for them for the next few decades of their life.  If their portfolio has a devastating 5 or 10 years this is not just an inconvenience for them, this will degrade their standard of living in a major way.

This is why we are big advocates of global tactical asset allocation.  Expand the investment universe to include not just U.S. Stocks, U.S. Bonds, and Commodities, but also Real Estate, International Equities, Currencies, and even Inverse Equities.  The table below shows just how flexible our Global Macro portfolio can be.  We believe that this type of flexibility is prudent given the significant variability on display in the above efficient frontiers.

exposure-ranges

To learn more about this relative strength-driven approach to global asset allocation, click here for a fact sheet.  This portfolio is available on the Masters and DMA platforms at Wells Fargo Advisors and on SMA platforms at many other firms.  The strategy is also available as The Arrow DWA Tactical Fund (DWTFX and DWAT).

The 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 more information.  Click here for disclosures.

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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.

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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.

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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

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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).

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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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