Pound Pounded

November 11, 2009

The British pound took a beating when Fitch warned about U.K. government debt losing their AAA credit rating due to their large budget deficit. Of course the Brits immediately pointed out that their deficit reduction plan would solve this problem, so no worries.

If a credit downgrade can threaten British government debt, it can certainly happen here too, across the pond in the land of even bigger deficits. (Especially when our deficit reduction strategy seems to consist of more spending.) Although deficit spending can be very helpful to offset weak private demand in dire economic circumstances, it’s not wise as an ongoing policy. It could eventually catch up to the U.S. in the same way it has to the U.K. And it’s not like the weak dollar needs any help.

Leave a Comment » | Markets | Permalink
Posted by Mike Moody

The Mainstream is Greening Up

November 11, 2009

Robert Keane of Investment Advisor has a nice piece on the history and evolution of socially-responsible investing. As he points out, over the years SRI investing has shifted more toward a focus on positive qualitative criteria. Nowadays, most firms use positive scores on environmental, social, and corporate governance to form the basis of their screens.

Perhaps somewhat under the radar, one member of Dorsey, Wright’s family of Systematic Relative Strength accounts is an SRI account screened for us by KLD Research and Analytics. If you have clients with an interest, you can request more information here.

Leave a Comment » | SRI | Permalink
Posted by Mike Moody

Mark Twain’s Cat

November 11, 2009

The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won’t sit upon a cold stove lid, either.”-Mark Twain

Investors are responding to current market conditions much like Mark Twain’s cat. According to a survey done by Alix Partners recently that was discussed in Investment Advisor, 49% of previous investors have either stopped or reduced their level of investing. 26% of previous investors said they had no intention of buying either stocks or mutual funds in the next three years.

No doubt the market has recently been a rough place—but is that really the right response? I see two potential problems. First, if you completely stay away from stocks and mutual funds, you’re likely going to end up earning cash returns only. Cash returns, although steady, are always low, and right now they are incredibly low. It’s hard to imagine how anyone could meet their investing goals with current cash returns. Second, bailing out now just plays into the emotional asset allocation theme we have written about so much. With worldwide markets and numerous asset classes marked down from the recession, surely there are places to earn a return higher than cash, unless you think world economies will never recover. (I suppose that’s theoretically possible, but historically it’s been a pretty bad bet.)

I think investor reluctance to re-enter the financial markets is not so much due to aversion to risk as it is to aversion to being whacked upside the head with a shovel. They just don’t want to re-live 2008 again anytime soon. Given the significant flow of funds this year into global allocation funds, I think investors have shown a willingness to invest if they feel like a systematic plan is in place to tactically enter and exit positions. Right now, tactical asset allocation may be one of the few ways to get investors back off the sidelines and into the game.

Leave a Comment » | Investor Behavior, Tactical Asset Alloc | Permalink
Posted by Mike Moody

Global is the New Core

November 11, 2009

Consuelo Mack recently interviewed Blackrock Global Allocation Fund manager Dennis Stattman and asked him if global asset allocation funds are the new core. Click here to listen to the interview. Among the points discussed:

  • Emerging Markets are likely to continue to outperform developed markets for two main reasons: 1) Excessive savings rates found in the emerging markets and 2) Emerging markets are where there are the greatest unmet needs.
  • Emerging Markets are increasingly becoming consumer economies.
  • The dollar has ceased to be a reliable store of value.
  • Depressed interest rates in the United States are insuring that savers of dollars are not being rewarded.
  • Discussion of the need for great portfolio flexibility given the opposing forces of deflationary behavior in the private sector and inflationary behavior in the public sector.

The Blackrock Global Allocation Fund is a value approach to global asset allocation and it has a good long-term track record. We have frequently written about how value strategies can be a nice complement to momentum (or relative strength) strategies.

When you combine the Blackrock Global Allocation Fund (MDLOX) and our Global Macro strategy (available as a separately managed account and as DWTFX), the result is less volatility and more return than achieved by either one individually. Additionally, the correlation between the two strategies is only 0.44.

(Click to Enlarge)

MDLOX returns are taken from Yahoo! Finance. Please note that the Arrow DWA Tactical Fund (DWTFX) was converted to our Global Macro strategy on 8/3/09.

Click here to visit ArrowFunds.com for a prospectus & disclosures. Click here for disclosures from Dorsey Wright Money Management.

1 Comment | Markets, Tactical Asset Alloc | Permalink
Posted by Andy Hyer