More on the Endowment Model

February 2, 2012

David Swensen at Yale, due to his consistently excellent returns, made the endowment investing model famous. Basically, he put together a widely diversified, growth-oriented portfolio. In the case of Yale’s endowment, he used a significant amount of alternative investments as well. Because he was thoughtful about his allocations, remained diversified, and was willing to stay the course during difficult periods, Mr. Swensen did very well for Yale. Now the media reports endowment returns on a regular basis. Smart Money had an article with the most recent fiscal year returns:

The figures, from the National Association of College and University Business Officers and the Commonfund, show total returns for university endowments averaged about 19% during fiscal year 2011, which ended June 30…

I don’t know if the returns are calculated on a dollar-weighted or equal-weighted basis, but any way you cut it, that’s not a bad year for a broadly diversified account.

You may or may not be aware that Dorsey Wright Money Management acts as a sub-advisor for the Arrow DWA Balanced Fund, a fund that was designed with the endowment model in mind. It has dedicated sleeves for domestic equities, international equities, fixed income, and alternative assets. According to Morningstar, our returns were similar over the fiscal year, coming in at 20.9%.

The balanced fund is not designed to be a high-octane vehicle. It aims for steady performance in a wide variety of market environments and might be just the thing for clients who are looking for a little less volatility, while still having a chance for capital growth.

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

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

Momentum Travels

February 2, 2012

That’s the title of a Forbes article detailing research on relative strength in international markets. The research was done by the asset management firm Gerstein Fisher and encompassed 21 developed markets from 2004-2011. The summary:

Momentum works. Seminal research by Narasimhan Jegadeesh and Sheridan Titman in 1993 first identified momentum as a systematic source of risk for equity investors. Their research—corroborated by numerous subsequent academic studies—revealed that, historically, momentum investing had provided excess stock returns over a market index.

…..

Overall, momentum returns outperformed market returns by an average of 3.13 percentage points on an annualized basis.

You can see the results on a country-by-country basis below.

Source: Forbes/Gerstein Fisher

Leaving aside the ridiculous statement about momentum being first identified in 1993, their study is important because it shows that momentum returns are universal. Based on their study and others, we agree. Dorsey Wright has been running a Systematic RS International portfolio since 2006 and the results have been excellent. Our net returns have exceeded the EAFE benchmark by a similar amount to what Gerstein Fisher found-not surprising given the substantial overlap in time frames.

To receive the brochure for our Separately Managed Accounts, click here.

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

Leave a Comment » | Markets, Relative Strength Research | Permalink
Posted by Mike Moody

Nobody Knows How To Value Anything

February 2, 2012

Jerry Bowyer makes an interesting point about interest rates (which are a key input into valuation models):

The fact that interest rates tell us the truth about ourselves is intolerable to the political class. They don’t want us to be told the truth. They want low interest rates to foster the illusion that inflation is low in order to create the perception that capital is abundant, and to enable their governments to borrow more than they should by subsidizing the interest rates through money creation; the latter necessary to muffle the alarm bells of rising default risk.

But if the interest rate is the basis on which all investments, or for that matter, all spending decisions are made, and the interest rates are being distorted by central banks, then that means that all valuation is plunged into chaos. That is exactly what is happening right now. Nobody knows how to value anything. (emphasis added)

Valuation models are vulnerable to paradigm shifts. Interest rates are arguably being manipulated to a much greater degree than has been seen in the past. Price, on the other hand, will always be the intersection of supply and demand. Trend following models should do just fine in an era of highly manipulated interest rates and are likely to effectively capitalize on the resultant bubbles.

Leave a Comment » | Thought Process | Permalink
Posted by Andy Hyer

Fund Flows

February 2, 2012

The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.

Although early in the year, taxable bond funds are well in the lead-having already attracted over $18 billion in net new money.

Leave a Comment » | Markets | Permalink
Posted by Andy Hyer