Dorsey Wright Managed Accounts

January 27, 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
  • Sterne Agee
  • Scott & Stringfellow
  • Envestnet
  • Placemark
  • Scottrade Institutional
  • Janney Montgomery Scott
  • Robert W. Baird
  • Wedbush Morgan
  • 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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Timeless Portfolio Lessons

February 1, 2013

The only thing new under the sun is the history you haven’t read yet.—-Mark Twain

Investors often have the conceit that they are living in a new era.  They often resort to new-fangled theories, without realizing that all of the old-fangled things are still around mainly because they’ve worked for a long time.  While circumstances often change, human nature doesn’t change much, or very quickly.  You can generally count on people to behave in similar ways every market cycle.  Most portfolio lessons are timeless.

As proof, I offer a compendium of quotations from an old New York Times article:

WHEN you check the performance of your fund portfolio after reading about the rally in stocks, you may feel as if there is  a great party going on and you weren’t invited. Perhaps a better way to look at it is that you were invited, but showed up at the wrong time or the wrong address.

It isn’t just you. Research, especially lately, shows that many investors don’t match market performance, often by a wide margin, because they are out of sync with downturns and rallies.

Christine Benz, director of personal finance at Morningstar, agrees. “It’s always hard to speak generally about what’s motivating investors,” she said, “but it’s emotions, basically,” resulting in “a pattern we see repeated over and over in market cycles.”

Those emotions are responsible not only for drawing investors in and out of the broad market at inopportune times, but also for poor allocations to its niches.

Where investors should be allocated, many professionals say, is in a broad range of assets. That will smooth overall returns and limit the likelihood of big  losses resulting from  an excessive concentration in a plunging market. It also limits the chances of panicking and selling at the bottom.

In investing, as in party-going, it’s often safer to  let someone else drive.

This is not ground-breaking stuff.  In fact, investors are probably bored to hear this sort of advice over and over—but it gets repeated because investors ignore the advice repeatedly!  This same article could be written today, or written 20 years from now.

You can increase your odds of becoming a successful investor by constructing a reasonable portfolio that is diversified by volatility, by asset class, and by complementary strategy.  Relative strength strategies, for example, complement value and low-volatility equity strategies very nicely because the excess returns tend to be uncorrelated.  Adding alternative asset classes like commodities or stodgy asset classes like bonds can often benefit a portfolio because they respond to different return drivers than stocks.

As always, the bottom line is not to get carried away with your emotions.  Although this is certainly easier said than done, a diversified portfolio and a competent advisor can help a lot.

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Durable Portfolio Construction

November 14, 2012

Durable portfolio construction comes from diversification, but diversification can mean a lot of different things.  Most investors, unfortunately, give portfolio construction very little thought.  As a result, their portfolios are not durable.  In fact, they tend to come unglued during every downturn.  Why does that happen?

I think there are a couple of inter-related problems.

  • Volatility tends to increase during downturns
  • Certain correlations tend to increase during declines

Volatility is an artifact of uncertainty.  Once a downturn starts, no one is sure where the bottom is.  That uncertainty often creates selling, which may cause the market to decline, which in turn may create more selling.  We’ve all seen this happen.  Eventually there is capitulation and the market bottoms, but it can be quite frightening in the middle of the move when no one knows where the bottom will be.

Research Affiliates had a recent article on diversification, and included in it was a table that showed the change in volatility that accompanied recessions.  The bump is typically pretty large.

Source: Research Affiliates, via RealClearMarkets  (click to enlarge image)

In general, riskier assets had the biggest jumps in volatility when the economy was under pressure.  Thus, it makes perfect sense how a relatively sedate portfolio under typical conditions becomes much more volatile when conditions are tough.

Correlations are also observed to rise during declines.  “Risk on” assets, especially, often have rising correlations among themselves as risk is shunned.  Similarly, “risk off” assets may see their internal correlations rise.  However, it may be the case that correlations between dissimilar asset classes don’t change nearly as much.  In other words, risk-on and risk-off assets might not have rising correlations during a period of market stress.  In fact, it wouldn’t be surprising to see those correlations actually fall.  So, one way to make portfolios more durable is to diversify by volatility.

There are probably multiple ways to do this.  You could use volatility buckets for low-volatility assets like bonds and high-volatility assets like stocks.  Or, you could just make sure that your portfolios have exposure to a broad range of asset classes, including asset classes with different responses to market stress.

Within an individual asset class, you are likely to see rising correlations between members of your investment universe.  For example, during a sharp market decline, you’re likely to see increasing correlations among stocks.  However, it’s possible to think about diversifying by return factor within an asset class.

AQR and others have shown, for example, that the excess returns of value and relative strength stocks are uncorrelated.  That means that years where relative strength outperforms the market are likely to be years when value lags, and vice versa.  Both types of stocks might go up in a rising market or fall in a declining market, but they will likely have different performance profiles.  Diversifying by using complementary strategies is another way to make portfolios more durable.

As Research Affiliates points out, simple diversification is not a panacea.  As their table shows, almost every asset class (possible exception: short-term bonds) has higher volatility in a bad economy.

Durable portfolio construction, then, might consist of multiple forms of diversification:

  • diversification by volatility
  • diversification by asset class
  • diversification by strategy

While there might be rising correlations between some types of assets, you are also likely to see falling correlations between others.  Although the entire portfolio might have an elevated level of volatility, an absence of surging cross-correlations might make tail events a little more manageable.  Good portfolio construction obviously won’t eliminate market risk, but it might make regular market volatility a little more palatable for a broad range of investors.

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Assets in Model ETF Portfolios up 43%

June 19, 2012

Investment News reports that assets in model ETF portfolios tracked by Morningstar Inc. grew to $46 billion by the end of the first quarter, up 43% from a year earlier.

The growing popularity of exchange-traded funds has led to a boom among money managers who specialize in using low-cost passive investments to build go-anywhere portfolios.

These model ETF portfolios typically use ETFs to invest globally across all asset classes, such as equities, fixed income and commodities, to shoot for a real return.

Financial advisers increasingly are outsourcing some of their client assets to these managers so that they can spend more time on clients and less time managing portfolios.

“As the ETF landscape has gotten more complicated, not all advisers feel comfortable building their own portfolios,” said Sue Thompson, head of iShares’ RIA Group. “Advisers have to either be the expert or find one.”

Managing go-anywhere portfolios is near and dear to our hearts here at Dorsey Wright.  Click here to view a video presentation on our Global Macro portfolio, which has become our most widely used separate account strategy.

To receive the brochure for our Global Macro strategy, click here.  For information about the Arrow DWA Tactical Fund (DWTFX), click here.

Click here and here for disclosures.  Past performance is no guarantee of future returns.

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From the Archives: Is Modern Portfolio Theory Obsolete?

May 29, 2012

It all depends on who you ask.  Apologists for MPT will say that diversification worked, but that it just didn’t work very well last go round.  That’s a judgment call, I suppose.  Correlations between assets are notoriously unstable and nearly went to 1.0 during the last decline, but not quite.  So I guess you could say that diversification “worked,” although it certainly didn’t deliver the kind of results that investors were expecting.

Now even Ibbotson Associates is saying that certain aspects of modern portfolio theory are flawed, in particular using standard deviation as a measurement of risk.  In a recent Morningstar interview, Peng Chen, the president of Ibbotsen Associates, addresses the problem.

It’s one thing to say modern portfolio theory, the principle, remained to work. It’s another thing to examine the measures. So when we started looking at the measures, we realized, and this has been documented by many academics and practitioners, we also realized that one of the traditional measures in modern portfolio theory, in particular on the risk side, standard deviation, does not work very well to measure and present the tail risks in the return distribution.

Meaning that, when you have really, really bad market outcomes, modern portfolio theory purely using standard deviation underestimates the probability and severity of those tail risks, especially in short frequency time periods, such as monthly or quarterly.

Leaving aside the issue of how the theory could work if the components do not, this is a pretty surprising admission.  Ibbotson is finally getting around to dealing with the “fat tails” problem.  It’s a known problem but it makes the math much less tractable.  Essentially, however, Mr. Chen is arguing that market risk is actually much higher than modern portfolio theory would have you believe.

In my view, the debate about modern portfolio theory is pretty much done.  Stick a fork in it.  Rather than grasping about for a new theory, why not look at tactical asset allocation, which has been in plain view the entire time?

Tactical asset allocation, when executed systematically, can generate good returns and acceptable volatility without regard to any of the tenets of modern portfolio theory.  It does not require standard deviation as the measure of risk, and it makes no assumptions regarding the correlations between assets.  Instead it makes realistic assumptions: some assets will perform better than others, and you ought to consider owning the good assets and ditching the bad ones.  It’s the ultimate pragmatic solution.

—-this article originally appeared 1/21/2010.  As we gain distance from the 2008 meltdown, investors are beginning to forget how badly their optimized portfolios performed and are beginning to climb back on the MPT bandwagon.  Combining uncorrelated strategies always makes for a better portfolio, but the problem of understated risk remains.  The tails are still fat.  Let’s hope that we don’t get another chance to experience fat tails with the Eurozone crisis.  Tactical asset allocation, I think, may still be the most viable solution to the problem.

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From the Archives: Inflation Rears Its Ugly Head

May 25, 2012

Howard Marks is chairman of Oaktree Capital, a large and well-known institutional alternative fixed income manager.  Mr. Marks’s memos are always thoughtful and worth reading.  This go round he has a discussion of all of the things that could go wrong with the world economy—essentially a list of all of the things that could go wrong.  One of the things that could go wrong is inflation.

He believes rates are more likely to go higher than lower, and that inflation, long forgotten as a risk factor, might return.  In addition, he has a list of suggestions on how to deal with inflation including TIPs, floating rate debt, gold, real assets like commodities, oil, and real estate, and foreign currencies.  His catalog of alternatives is even longer, but you get the idea.  (If you want to read the whole memo, you can find it here.)

That’s quite a list, but the first thing that I noticed about it is that not one of these items is generally considered as an investment option by retail investors.  Most investors are mentally stuck in the domestic stocks/domestic bonds arena.  Diversification consists of hitting more than one Morningstar style box.  If inflation does come back, that’s not going to cut it.  In fact, Mr. Marks asks investors, “How much of your portfolio are you willing to devote to protect against these macro forces?”  He says if the answer is 5%, or 10%, or 15% that those levels are pretty close to doing nothing.  He thinks a portfolio will need to devote at least 30-40% of assets toward inflation protection if it recurs.

Investment flexibility and risk diversification were the primary reasons that we launched the Systematic RS Global Macro account as a retail product last year.  Many of the inflation hedges in Mr. Marks’ list are asset classes that are available in the Global Macro portfolio, including TIPs, gold, commodities, oil, real estate, and foreign currencies.  Given our basket rotation strategy and our adherence to relative strength, the Global Macro portfolio could easily have 40% of its assets, or more, in inflation hedges if inflation were to recur.  I think the jury is still out about how the world economy will respond to decreased levels of fiscal stimulus, but it’s good to know that you have options.

—-this article originally appeared 1/25/2010.  We have not seen runaway inflation so far, but the point Howard Marks makes is valid.  If/when inflation does occur, you might need to devote a lot of your portfolio to inflation protection.  Is your investment process up for the challenge?

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